THE EFFECT OF ASYSMATIC INFORMATION ON THE DIVIDEND POLICY

THE EFFECT OF ASYSMATIC INFORMATION ON THE DIVIDEND POLICY

INTRODUCTION
Based an empirical research about the dividendàwe know little about how firm set the policy àcan be classified into at least three categories about market imperfection:
Agency cost: arise from a cost associated with monitoring managers and/or from risk aversion on the part of managers
asymmetric information: provide a signaling rationale (signaling literature suggest that dividend convey information about current and future earning) for dividend
Transaction cost: can be minimizing with new capital issue by restricting dividend to fund not requires for investment purposes.
This paper--.empirically examine an alternative explanation of dividend policy based on asymmetric informationàthe alternative explanation is based on implication of the pecking order theory.
ASYSMATIC INFORMATION, TESTABLE HYPHOTHESES, AND CONTROL VARIABLES
Pecking order theory
Firm can reduce underinvestment and resulting ex-ante loss in firm valueà accumulating slack through retentionàby decreasing its dividend
“Dividend policy has power to control”
Signaling theory
“A substantial part of the theoretical literature on asymmetric information and dividend policy provides a signaling rationale for dividend:à higher dividend=higher earning. --> Dividend indirectly serves as a signal of future earning of the firm
Note: the pecking order theory and the signaling theory provide opposite prediction regarding the effect of the level of asymmetric information on dividend policy and thus provide a basis to distinguish between them.
Control variables
Several effects that identified, from other model on dividend policy
Agency cost of (External) equity
Dividend payment may serve as a mechanism to reduce agency cost of external equity
Dividend payment as bonding device used to reduce agency cost
Growth of investment opportunities
The higher the growth opportunities of the firm, the lower of dividends.
Note: the growth measure (MTOB), defined as the ratio of the market value of assets to the book value of the assets, is used as a proxy for growth opportunities.
Cash flow
à Residual theory: firm higher cash flow will pay higher dividends (firm with higher earning will pay higher dividend
à Pecking order theory: a higher cash flow from existing assets will translate into higher dividends as the need for slack is now lower.
Agency cost of Debt and Financing Distress
“Dividend also can see become a source of conflict between the stockholder and the debt holder of the firm and may give rise to agency cost of debt”.
“firm with likelihood higher of financial distress may pa lower dividends”
EMPIRICAL SPECIFICATION, METHODOLOGY, and MEASURES FOR THE DEPENDEND VARIABLES
Dependent Variables measures
Conventional dividend yield (DIVYLD) that equal the ratio of dividend per share to price per shareà dependent data à that measured dividend yield for dividend-paying firm and equal zero for non-dividend-paying firms [not use dividend payout ratio as dependent data]
Data
Dataà get from the industrial annual COMPUSTAT database for period 1988-1992
Sample à manufacturing firm (SIC 2000-3999) that trade on either the NYSE or the AMEX
Empirical result
à Estimating using the a Tobit model
à Dependent variable is Dividend yield
Independent variable used is insider ownership variable
à Analysis:
o The positive coefficient on analyst following (LOGANAL) suggest firm with less asymmetric information pay higher dividend (consistent with pecking order theory but not to signaling theory)
o The negative coefficient on growth measure (MTOB) and also positive coefficient on the cash flow measure – consistent with pecking order theory
o The positive coefficient on DIST suggest that firm with low cahflow and growth will pay higher dividend
Dividend policy and insider ownership
“Dividends are unrelated to the insider ownership variables”à pervious studies document a negative relation between dividend and insider ownership
à In other world, the previous findings on the role of insider ownership in determining dividend policy appear to be more strongly related to asymmetric information than to agency cost.
Dividend policy and Equity issue: A further test of the pecking order theory
Pecking order theory suggest: that firm should exhaust their internal fund before resorting to external financing
These result suggest that firm that resort to external resources for funds attempt to first exhaust their internal funds by paying lower dividend
Dividend policy and firm size
“There is a positive correlation between size and dividend policy”, logic think that firm size may serve as a proxy for asymmetric information where larger firm have less asymmetric information
Dividend policy, Asymmetric information, and issue cost

CONCLUSSION
àConssitent with pecking order theory:
· The positive relation between dividend and analyst
· Positive relation between dividend and cash flow and the negative realtion between dividend and growth opportunities
This paper provideà direct evidence à even though the implications of the pecking order theory for dividend policy are often discussed.