Abstract
This note discusses the significance of the information content of dividends, which is reflected through the market price reactions to a firm’s dividend decisions. Informational asymmetries are the main reason for signaling whereby firm managers are likely to have better information than external participants, implying that their financial decisions will tend to convey the firm’s future prospects to the market. An efficient signaling equilibrium is that optimal combination of signaling costs and agency costs that minimizes any dissipative costs. An important consideration is the preference of the investor for dividend income versus capital gains due to the higher tax differential in the case of dividends.
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