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Imperfect Information, Dividend Policy, and "The Bird in the Hand" Fallacy

Sudipto Bhattacharya
The Bell Journal of Economics
Vol. 10, No. 1 (Spring, 1979), pp. 259-270
Published by: RAND Corporation
DOI: 10.2307/3003330
Stable URL: http://www.jstor.org/stable/3003330
Page Count: 12
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Imperfect Information, Dividend Policy, and "The Bird in the Hand" Fallacy
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Abstract

This paper assumes that outside investors have imperfect information about firms' profitability and that cash dividends are taxed at a higher rate than capital gains. It is shown that under these conditions, such dividends function as a signal of expected cash flows. By structuring the model so that finite-lived investors turn over continuing projects to succeeding generations of investors, we derive a comparative static result that relates the equilibrium level of dividend payout to the length of investors' planning horizons.

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