Hostname: page-component-78c5997874-4rdpn Total loading time: 0 Render date: 2024-11-15T04:28:15.162Z Has data issue: false hasContentIssue false
  • English
  • Français

Financial Signalling by Committing to Cash Outflows

Published online by Cambridge University Press:  06 April 2009

S. Abraham Ravid  and
Oded H. Sarig
Get access Rights & Permissions [Opens in a new window]

Abstract

We analyze a model in which firms signal their quality by using financial policies to commit to cash outflows. Two financial policies may be used: dividend and debt-service obligations. We find sufficient conditions for the informational equilibrium to entail concommitant use of both dividends and leverage in the cost-minimizing combination of the commitment signal. In this equilibrium, better firms pay higher dividends and are more highly levered than lower quality firms.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 26 , Issue 2 , June 1991 , pp. 165 - 180
Copyright
Copyright © School of Business Administration, University of Washington 1991

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Aharony, J., and Swary, I.. “Quarterly Dividend and Earnings Announcements and Stockholder Return: An Empirical Analysis.” Journal of Finance, 35 (03 1980), 1–12.CrossRefGoogle Scholar
Altman, E. I. “A Further Empirical Investigation of the Bankruptcy Cost Question.” Journal of Finance, 39 (09 1984), 1067–1089.CrossRefGoogle Scholar
Ambarish, R.; John, K.; and William, J.. “Efficient Signalling with Dividends and Investments.” Journal of Finance, 42 (06 1987), 321–343.CrossRefGoogle Scholar
Bhattacharya, S. “Imperfect Information, Dividend Policy, and ‘The Bird in Hand’ Fallacy.” Bell Journal of Economics, 10 (Spring 1979), 259–270.CrossRefGoogle Scholar
Brick, I., and Friedman, M.. “Signalling and the Observed Neutrality of Debt.” Working Paper, Rutgers Univ. (1989).Google Scholar
Brickley, J. A. “Shareholders Wealth, Information Signalling and the Specially Designated Dividend: An Empirical Study.” Journal of Financial Economics, 12 (08 1983), 187–209.CrossRefGoogle Scholar
Dann, L. Y. “Common Stock Repurchases: An Analysis of Returns to Stockholders and Bond Holders.” Journal of Financial Economics, 9 (06 1981), 113–138.CrossRefGoogle Scholar
De Angelo, H. “Dividend Policy and Personal Taxes.” Working Paper, Univ. of Michigan (1988).Google Scholar
De Angelo, H., and Masulis, R.. “Optimal Capital Structure under Corporate and Personal Taxation.” Journal of Financial Economics, 8 (03 1980), 3–29.CrossRefGoogle Scholar
Dotan, A., and Ravid, S. A.. “On the Interaction of the Real and Financial Decisions of Firms under Uncertainty.” Journal of Finance, 40 (06 1985), 501–517.CrossRefGoogle Scholar
Haugen, R., and Senbet, L.. “The Insignificance of Bankruptcy Costs to the Theory of Optimal Capital Structure.” Journal of Finance, 33 (05 1978), 383–394.CrossRefGoogle Scholar
Haugen, R., and Senbet, L.. “New Perspectives on Informational Asymmetry and Agency Relations.” Journal of Financial and Quantitative Analysis, 14 (11 1979), 671–694.CrossRefGoogle Scholar
Israel, R.; Ofer, A.; and Siegel, D.. “The Information Content of Equity-for-Debt Swaps: An Investigation of Analyst Forecasts of Firm Cash Flows.” Working Paper, Northwestern Univ. (1989).CrossRefGoogle Scholar
Jensen, M. C. “Agency Costs of Free Cash Flow, Corporate Finance and Takeovers.” American Economic Review, 78 (05 1986), 323–329.Google Scholar
John, K., and Williams, J.. “Dividends, Dilution and Taxes: A Signalling Equilibrium.” Journal of Finance, 35 (09 1985), 1053–1070.CrossRefGoogle Scholar
Kalay, A. “Signalling, Information Content, and the Reluctance to Cut Dividends.” Journal of Financial and Quantitative Analysis, 15 (12 1980), 855–869.CrossRefGoogle Scholar
Leland, H. E., and Pyle, D. H.. “Informational Asymmetry, Financial Structure and Financial Intermediation.” Journal of Finance, 32 (05 1977), 371–387.CrossRefGoogle Scholar
Lintner, J. “Distribution of Incomes of Corporations among Dividends, Retained Earnings and Taxes.” American Economic Review, 46 (05 1956), 97–113.Google Scholar
Litzenberger, R. H., and Ramaswamy, K.. “The Effects of Personal Taxes and Dividends on Capital Asset Prices: Theory and Empirical Evidence.” Journal of Financial Economics, 7 (06 1979), 163–195.CrossRefGoogle Scholar
Long, J. B. “Efficient Portfolio Choice with Differential Taxation of Dividends and Capital Gains.” Journal of Financial Economics, 5 (08 1977), 25–53.CrossRefGoogle Scholar
Mailath, G. J. “Incentive Compatibility in Signalling Games with a Continuum of Types.” Econometrica, 5 (11 1987), 1349–1365.CrossRefGoogle Scholar
Masulis, R. “The Effect of Capital Structure Change on Security Prices: A Study of Exchange Offers.” Journal of Financial Economics, 8 (06 1980), 139–178.CrossRefGoogle Scholar
Masulis, R., and Trueman, B.. “Corporate Investment and Dividend Decisions under Differential Personal Taxation.” Journal of Financial and Quantitative Analysis, 23 (12 1988), 369–385.CrossRefGoogle Scholar
Miller, M. H. “Debt and Taxes.” Journal of Finance, 32 (05 1977), 261–275.Google Scholar
Miller, M. H. “The Information Content of Dividends.” In Macroeconomics: Essays in Honor of Franco Modigliani. Boston, MA: MIT Press (1986).Google Scholar
Miller, M. H., and Rock, K.. “Dividend Policy under Asymmetric Information.” Journal of Finance, 40 (09 1985), 1031–1051.CrossRefGoogle Scholar
Miller, M. H, and Scholes, M. S.. “Dividends and Taxes.” Journal of Financial Economics, 6 (12 1978), 333–364.CrossRefGoogle Scholar
Myers, S., and Majluf, N.. “Corporate Financing and Investment Decisions when Firms Have Information that Investors Do Not Have.” Journal of Financial Economics, 13 (06 1984), 187–222.CrossRefGoogle Scholar
Ofer, A. R., and Thakor, A. V.. “A Theory of Stock Price Responses to Alternative Corporate Cash Disbursement Methods.” Journal of Finance, 42 (06 1987), 365–396.CrossRefGoogle Scholar
Pettit, R. R. “Taxes, Transaction Costs and the Clientele Effect of Dividends.” Journal of Financial Economics, 5 (12 1977), 419–436.CrossRefGoogle Scholar
Riley, J. “Informational Equilibrium.” Econometrica, 47 (03 1979), 331–359.CrossRefGoogle Scholar
Ross, S. “The Determination of Financial Structure: The Incentive Signalling Approach.” Bell Journal of Economics, 8 (Spring 1977), 23–40.CrossRefGoogle Scholar
Talmor, E. “Asymmetric Information, Signalling, and Optimal Financial Decisions.” Journal of Financial and Quantitative Analysis, 16 (11 1981), 413–435.CrossRefGoogle Scholar
Taggart, R. A. “Taxes and Corporate Capital Structure in an Incomplete Market.” Journal of Finance, 35 (06 1980), 645–660.CrossRefGoogle Scholar