The Relationship Between Information Asymmetry and Dividend Policy

56 Pages Posted: 4 May 2012

See all articles by Cindy M. Vojtech

Cindy M. Vojtech

Board of Governors of the Federal Reserve System

Date Written: March 3, 2012

Abstract

This paper examines how the quality of firm information disclosure affects shareholders' use of dividends to mitigate agency problems. Managerial compensation is linked to firm value. However, because the manager and shareholders are asymmetrically informed, the manager can manipulate the firm's accounting information to increase perceived firm value. Dividends can limit such practices by adding to the cost faced by a manager manipulating earnings. Empirical tests match model predictions. Dividend-paying firms show less evidence of earnings management. Furthermore, nondividend payers changed earnings announcement behavior more than dividend payers following the Sarbanes-Oxley Act, a law that increased financial disclosures.

Keywords: Dividends, earnings management, information asymmetry, Sarbanes-Oxley Act, financial disclosure

JEL Classification: G30, G35, K22, M41, M43

Suggested Citation

Vojtech, Cindy M., The Relationship Between Information Asymmetry and Dividend Policy (March 3, 2012). FEDS Working Paper No. 2012-13, Available at SSRN: https://ssrn.com/abstract=2051018 or http://dx.doi.org/10.2139/ssrn.2051018

Cindy M. Vojtech (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

HOME PAGE: http://https://www.federalreserve.gov/econres/cindy-m-vojtech.htm

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