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DIVIDEND POLICY. Nia Christina 16598. Article from CRP. Title: The Effect of Asymmetric Information on Dividend Policy Theory used by the article / research: Pecking order theory , in the presence of asymmetric information, a firm may underinvest in certain state of nature.

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dividend policy


Nia Christina


article from crp
Article from CRP
  • Title: The Effect of Asymmetric Information on Dividend Policy
  • Theory used by the article / research:
    • Pecking order theory, in the presence of asymmetric information, a firm may underinvest in certain state of nature.
    • Signaling theory, the information asymmetry pertains to current earnings and the level of investment.

Hypothesis of research:

    • The pecking order theory predicts that the higher the analyst following, the higher the dividend
    • The signaling predicts that the higher the analyst following, the lower the dividend.

Variable use in research:

  • Dependent variable
    • Conventional dividend yield (DIVYLD)
  • Independent variable
    • Insider ownership
    • Analyst following
    • Growth opportunities (MTOB)
    • Cash flow (CFTOB)

Method of analysis: Censored regression or Tobit model, apply both dividend-paying and non-dividend paying firms.


Result of analysis :

    • Dividend policy and insider ownership, indicate that dividends are related to the insider ownership variable. This finding do not support for the monitoring role of dividends in reducing agency costs of equity.
    • Dividend policy and equity issues, the amount paid as dividends is negatively related to the amount raised through the equity offering.
    • Dividend Policy and Firm Size, find positive relationship between dividend yield and size. Firm size may serve as a proxy for asymmetric information where larger firms have less asymmetric information.
    • Dividend Policy, Asymmetric Information and Issue Cost, indicates that after controlling for firm size, issue costs are negatively related to analyst following.


    • Dividends are positively related to both analyst following and cash flow, but negatively related to growth opportunities.
    • The positive relation between dividends and analyst following is consistent with pecking order theory and inconsistent with the signaling theory.
    • Dividends are unrelated to the insider ownership variable when the level of asymmetric information is explicitly controlled.
    • The relation among dividends, asymmetric information, and issue costs also rules out a size-based explanation of dividend policy and established that analyst following has a separate effect on dividend policy apart from firm size.
article from student
Article from Student
  • Title: Insurance company dividend policy decisions
  • Theory used by the article / research:

Agency cost-transaction cost trade-off model, the payment of dividends forces the firm more frequently to the external capital markets and the subsequent external security serves as a bonding or monitoring function thus reducing agency cost.


Hypothesis of research:

Firms with stronger internal corporate governance mechanisms also “use dividend payouts more intensely


Variable use in research:

  • Dependent variable
    • DY (Dividend Yield)
  • Other variable
    • BETA
    • REV 5
    • IBES5
    • INSIDE
    • CSLN
    • PropCas

Method of analysis: Utilizing prior testing methodology, allows us to see if the new Corporate Governance Quotient (CGQ) plays a role as a substitution mechanism for dividend payouts.


The Result:

    • The insurance organization on average have lower IndCGQ score and higher inside ownership.
    • From table 1 show that the overall DY of the insurance organizations is lower than in previous research, but there is wider dispersion of stock among market participant.
    • IndCGQ is not significant, IBES5, REV5 and CSLN are highly significant
    • For highly regulated firms, the industry CGQ variable is significant and therefore cannot substitute as a bonding mechanism in lieu of a DY.


    • Inconsistent with the theory that strong corporate governance supplants the need to subject the firm to the external monitoring of capital market forced due to dividend distribution.
    • Strong corporate governance appears to be unrelated to dividend payout in the insurance industry.
    • The more highly regulated property and casualty insurers do appear to pay out more in dividends.