Dmm

Signalling

Bhattacharya (1979):

• Theoretical study.

• Cash dividends function as a signal of expected cash flows of firms in an imperfect-information setting.

• As signalling is not cost free (i.e. tax on personal income), the study suggests an equilibrium payout level with consideration of signalling costs.

• Existing shareholders have shorter planning horizon than the time span over which the firms' assets generate cash flows.

• Dividends as signals of the profitability of firms' assets

• The shorter the planning horizon of shareholders, the higher the equilibrium dividends level

Catering Theory (additional)

Li and Lie (2006 )

Li and Lie (2006 ) argue that Baker and Wurgler (2004a)'s model only take initiation and omission of dividend into consideration, while managers commonly face the decision of not only whether or not pay dividend but whether or not increase or decrease the existing dividend level. By extending Baker and Wurgler (2004a)'s model, Li and Lie (2006) find that corporate dividend decisions largely depend on dividend premium, and market rewards such managers' behaviour of catering shareholders' dividend demand by inflating firm's stock price. According to the catering argument of dividend policy, if firm hoards cash to meeting shareholders' time-varying demand, i.e. rationally cater the shareholders' and boost firm's stock price, market would evaluate such managerial behaviour as rational behaviour.

Li, Wei, and Erik