Imperfect Information, Dividend Policy, and "The Bird in the Hand" Fallacy
Volume: Volume 10, No. 1
Issue: Spring 1979
Pages: pp. 259-270
Authors: Sudipto Bhattacharya
Title: Imperfect Information, Dividend Policy, and "The Bird in the Hand" Fallacy
Abstract: 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.
JEL Classification
Business Finance (5210)
Capital Markets: Theory, Including Portfolio Selection, and Empirical Studies Illustrating Theory (3131)