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DIVIDENDS, UNCERTAINTY, AND UNDERWRITING COSTS UNDER ASYMMETRIC INFORMATION
Author(s) -
Kale Jayant R.,
Noe Thomas H.
Publication year - 1990
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.1990.tb00631.x
Subject(s) - underwriting , ceteris paribus , dividend , equity (law) , cash flow , economics , dividend policy , financial economics , business , free cash flow , econometrics , cash , monetary economics , actuarial science , microeconomics , finance , political science , law
This paper presents a two‐period model in which dividends act as a signal of the stability of the firm's future cash flows. It is demonstrated that firms with more stable future cash flows pay a higher dividend. Dividends are a credible signal because the promise of a higher dividend, ceteris paribus , increases the probability that the firm will have to issue equity and pay underwriting costs. Empirically testable implications of the model relating to the cross‐sectional determinants of the level of dividends are also discussed.