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Abstract: An Exploration of Nondissipative Dividend-Signaling Structures

Published online by Cambridge University Press:  06 April 2009

Sudipto Bhattacharya
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Extract

What I have attempted to do in this paper and a companion paper [1] on dividend-signaling is to delineate two “polar cases” of signaling in which firms either can or cannot (at all) directly communicate the ex-post profitability of their business without moral hazard. In this paper, we assume that they can, and signaling through dividends or earnings forecasts “merely” serves to bring forward the timing of communication of insiders' expectation of profitability to the outside market. The model is “nondissipative” because the incentivestructure that leads to self-selection using the signal is based on market value revisions which are themselves based on the discrepancy between the signal and the ex-post indicator, not on any exogenous or “third party” costs, unlike the model in the companion paper [1].

Type
I. Incentive Signaling Models and Rational Expectations
Information
Journal of Financial and Quantitative Analysis , Volume 14 , Issue 4 , November 1979 , pp. 667 - 668
Copyright
Copyright © School of Business Administration, University of Washington 1979

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References

REFERENCES

[1]Bhattacharya, S. “Imperfect Information, Dividend Policy, and the ‘Bird in the Hand’ Fallacy”. Bell Journal of Economics (Spring 1979).Google Scholar
[2]Ross, S. A. “The Determination of Financial Structure: the Incentive-Signaling Approach”. Bell Journal of Economics (Spring 1977).Google Scholar
[3]Salop, J., and Salop, S.. “Self-Selection and Turnover in the Labor Market”. Quarterly Journal of Economics (11 1976).Google Scholar
[4]Spence, A. M. “Competitive and Optimal Response to Signals: Analysis of Efficiency and Distribution”. Journal of Economic Theory (03 1974).CrossRefGoogle Scholar