ABSTRACT
In the presence of asymmetric information, a firm’s dividend policy is hypothesized to convey information about its future prospects only observed by insiders. This dividend signaling hypothesis has been theoretically developed by numerous researchers. The dividend signaling hypothesis suggests that, for a firm with a high level of information asymmetry, dividends have a more stable relationship with earnings. Therefore, under the hypothesis, if dividends continue to separate from earnings in the longrun, there will be a force that begins to bring them together again. The main implication of the dividend signaling hypothesis is that the difference in dividend payout policy is caused by the different information environments which each firm faces. Firms in a high level of information asymmetry are likely to maintain a more stable relationship between earnings and dividends so that market investors successfully infer the future earnings by observing the paid dividends.
