Dividends and Corporate Financial Policy

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This research consists of several projects that are designed to address two puzzles concerning corporate dividend policy. The first is why do companies pay dividends at all. Most of the previous research falls into two categories. One explains dividends as a consequence of information asymmetries, while the other emphasizes the consequences of investor heterogeneity. Objections have been raised to both types of explanations. This project is aimed at modifying and testing these two theories, taking into account the current criticisms. The second puzzle is why are dividend payments so smooth. It is suggested that dividend smoothing can be explained within the context of signaling models. The premise that bunching arises naturally in signaling contexts and explains the microeconomic, time-series properties of dividends will be explored. This part of the research will focus on refinements of signaling equilibria and applications of these refinements to models of dividends. This project is important because it will improve our understanding of corporate policies regarding cash distributions to shareholders. On the basis of this work, it should be possible to make more reliable judgments about the likelihood that dividend payouts will decline over time. The analysis should also shed considerable light on the extent to which dividend policy is used to communicate information to shareholders. In addition, the effect of dividend taxation on the informativeness of corporate financial policy will be measured. Attention will also be focused on analyzing the desirability of various tax proposals that alter the tax treatment of dividends and the repurchase of stock by corporations.