Imperfect Information, Dividend Policy, and "The Bird in the Hand" Fallacy
This paper assumes that outside investors have imperfect information about firms' profitability and that cash dividends are taxed at a higher rate than capital gains. It is shown that under these conditions, such dividends function as a signal of expected cash flows. By structuring the model so that finite-lived investors turn over continuing projects to succeeding generations of investors, we derive a comparative static result that relates the equilibrium level of dividend payout to the length of investors' planning horizons.
Volume (Year): 10 (1979)
Issue (Month): 1 (Spring)
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