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Does Dividend Policy Relate to Cross‐Sectional Variation in Information Asymmetry? Evidence from Returns to Insider Trades

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  • Kenneth Khang
  • Tao‐Hsien Dolly King

Abstract

We examine the relation between dividends and information asymmetry by using insider returns as a proxy for information asymmetry. We find that dividends are negatively related to returns to insider trades across firms. Firms that pay consistently high dividends have lower insider returns than do firms that pay consistently low dividends. These results do not support traditional dividend signaling models. Rather, they are consistent with the proposition that firms with the highest dividends have the lowest levels of information asymmetry.

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  • Kenneth Khang & Tao‐Hsien Dolly King, 2006. "Does Dividend Policy Relate to Cross‐Sectional Variation in Information Asymmetry? Evidence from Returns to Insider Trades," Financial Management, Financial Management Association International, vol. 35(4), pages 71-94, December.
    • Handle: RePEc:bla:finmgt:v:35:y:2006:i:4:p:71-94
    DOI: 10.1111/j.1755-053X.2006.tb00160.x
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    16. Cheng, Louis T.W. & Davidson III, Wallace N. & Leung, T.Y., 2011. "Insider trading returns and dividend signals," International Review of Economics & Finance, Elsevier, vol. 20(3), pages 421-429, June.
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    18. Borisova, Ginka & Yadav, Pradeep K., 2015. "Government ownership, informed trading, and private information," Journal of Corporate Finance, Elsevier, vol. 33(C), pages 196-211.
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    20. Kim, JooMan & Yang, Insun & Yang, Taeyong & Koveos, Peter, 2021. "The impact of R&D intensity, financial constraints, and dividend payout policy on firm value," Finance Research Letters, Elsevier, vol. 40(C).
    21. Liao, Hsien-Hsing & Chen, Tsung-Kang & Lu, Chia-Wu, 2009. "Bank credit risk and structural credit models: Agency and information asymmetry perspectives," Journal of Banking & Finance, Elsevier, vol. 33(8), pages 1520-1530, August.
    22. Li, Leon & Miu, Peter, 2023. "Are cryptocurrencies a safe haven for stock investors? A regime-switching approach," Journal of Empirical Finance, Elsevier, vol. 70(C), pages 367-385.
    23. Harjeet S. Bhabra & Ashrafee T. Hossain, 2015. "Market conditions, governance and the information content of insider trades," Review of Financial Economics, John Wiley & Sons, vol. 24(1), pages 1-11, January.
    24. Joseph, Kissan & Wintoki, M. Babajide, 2013. "Advertising investments, information asymmetry, and insider gains," Journal of Empirical Finance, Elsevier, vol. 22(C), pages 1-15.

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