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الاثنين، 3 ديسمبر، 2012

Is Asymmetric Information Associated with UK Dividend Policy?



Is Asymmetric Information Associated with UK Dividend Policy?




Husam Basiddiq
Assistant Lecturer in Accounting
Salalah College of Technology
B.O 844, P.C 211, Salalah,  
Sultanate of Oman



Khaled Hussainey*
Senior Lecturer in Accounting
Accounting and Finance Division
Stirling Management School
Stirling University
Stirling FK9 4LA,
UK



Forthcoming
Journal of Applied Accounting Research
2010



* Corresponding author.

Abstract
Purpose: We investigate whether asymmetric information is associated with corporate dividend policy. Our proxy for asymmetric information is the number of analysts following UK firms

Methodology: We use a multiple regression model to investigate the relation between asymmetric information and dividend policy. Data is collected for a sample of 282 companies listed in the London Stock Exchange.

Findings: Consistent with our predictions, we find that there is a negative and statistically significant relation between UK dividend policy and information asymmetry. These results suggest that asymmetric information is an important factor in determining UK firms’ dividend policy. These findings are consistent with agency theory and pecking order theory and inconsistent with signaling theory.

Originality: We contribute to the literature by being the first study to examine in the UK to examine the association between corporate dividend policy and asymmetric information.

Classification: Research Paper

Keywords: Dividend payments, asymmetric information, analysts following, firm characteristics, United Kingdom.  






















1. Introduction
In spite of much literature on the determinants of corporate dividend policy, the dividend puzzle still exists. There is as yet no sole and satisfactory evidence explaining firms’ dividend decision and behavior (Naceur, et al, 2006). Prior finance literature provided some empirical evidence regarding the factors affecting firms’ dividend policy. Researchers in the United States provided evidence that asymmetric information is an important factor in determining firms’ dividend policy (Deshmukh, 2003, 2005; Li and Zhao, 2008).[1] These papers found that there is a negative relation between corporate dividend policy and asymmetric information.
In the United Kingdom, limited research has been undertaken to examine the association between dividend policy and asymmetric information. For example, in a recent study, Hussainey and Walker (2009) provided evidence that levels of corporate forward-looking information and dividend propensity are substitute forms for communicating value relevant information to the stock market participants (i.e. investors). Their results are consistent with signaling theory, but not consistent with pecking order theory (Deshmukh, 2005). Consequently, the association between these variables remains unclear and considers as a challenge and source of much debate. Hussainey and Walker (2009)’s study motivates Hussainey and Al-Najjar (2010) to directly examine if there is any association between levels of forward-looking information and corporate dividend policy. They found a statistically significant positive association between the two variables of interest suggesting that dividend policy is negatively associated with levels of corporate asymmetric information. However, it is clear that forward-looking information is only one component of corporate information environment. Companies voluntarily publish different types of information in their annual reports. For that reason, it is often not sensible to use this type of information only to proxy for the overall level of corporate disclosure quality.
We focus on companies in the United Kingdom for two reasons. First, the number of dividend-paying companies in the UK is significantly greater than the number of dividend-paying companies in the US (see Denis and Osobov, 2008 for more details). Therefore, it is worth revisiting the same research issue and examining the relation between asymmetric information and dividend policy for UK firms. Second, Vieira and Raposo, (2007) noted that the dividend propensity of UK firms has recently declined. We ask whether the change in the dividend propensity effect following a change in corporate information environment. 
Our study makes an important and novel contribution to the literature on the determinants of corporate dividend policy. So far as we are aware it is the first UK paper to examine the association between firms’ dividend policy and their information environment. By examining the relation between dividend policy and asymmetric information in a UK setting, we provide evidence on the extent to which extant UK findings can be generalised to a different governance and financial reporting regime (Beekes et al, 2004).

The reminder of the paper is organised as follows. The next section discusses dividend theories. Section 3 reviews prior literature and develops the research hypotheses. Sections 4 and 5 discuss the research design, sample and data. Section 6 discusses our empirical results. Section 7 concludes and suggests lines for future research.

2. Dividend theories
2.1 Agency theory
Jensen and Meckling (1976) defined agency theory as an engagement between two or more people, namely, the principals (or owners) and the agent (or manager), whereby principals grant an agent authority to perform services on their behalf, including decision-making. Al-Najjar and Hussainey (2010) stated that agency theory assumes that inherent conflicts of interests exist between the principal/owner and manager/agent, resulting in an agency-cost problem. In order to mitigate this problem, Rozeff (1982), Easterbrook (1984), Jensen et al. (1992), and Bhaduri (2002) maintained that it can be alleviated by distributing dividends to the shareholders. Hence, a negative association between UK dividends and asymmetric information is anticipated. In addition, Al-Najjar and Hussainey (2010) argued that asset tangibility may explain firms’ dividend policies from an agency theory perspective; in other words, a negative relationship between tangible assets and dividend policy is also expected.
2.2 Signaling theory
Bhattacharya (1979), John and Williams (1985), and Miller and Rock (1985)  revealed that signalling theory assumes that, in comparison with investors,  managers have superior information about their firm’s value. Hence, investors carefully review changes in dividend policy as signals regarding management’s valuation of the firm’s future performance (Li and Zhao, 2008; Al-Najjar and Hussainey, 2010). As an extreme example, an entity that announces a huge increase in a dividend payment would be regarded as financially healthy, but a firm that announces the elimination of a dividend is usually regarded negatively by investors. Furthermore, Deshmukh (2003, 2005) argued that, in the presence of a higher level of asymmetric information in the firm, the level of dividend payment will be relatively higher to signal similar level of earnings, and vice versa. Given that dividend policy is assumed to be used as a signal of the firm’s future performance, a positive sign in the relationship between UK dividend policy and information asymmetry is expected. Similarly, a positive association between dividend policy and profitability is anticipated.
2.3 Pecking order theory
This theory originated from Myers (1984) and Myers and Majluf (1984). It assumes that firm managers hold private information, which the investors do not have. Furthermore, firms prefer to finance their investment through the lowest-cost avenue (i.e., retained earnings), and only secondarily through debt. Finally, the source of financing least utilised, i.e., the highest cost source, is through the issue of new stock (Al-Yahyaee, 2006; Faulkender, et al. 2007; Al-Najjar and Hussainey, 2010). The amount of distributed dividends, therefore, decreases firms’ retained earnings, which can result in a need for debt financing (Al-Yahyaee, 2006). Based on this theory, a positive relationship between dividend payout and both profitability and the debt ratio is expected. In addition, Myers and Majluf (1984) argued that, when information asymmetry exists in a firm, it is highly likely to have underinvestment, which occurs from the association of lemons problem in the issue of new capital (Deshmukh 2003, 2005)[2]. This problem can be mitigated by retaining the amount of slack by reducing the level of dividends (Myers and Majluf, 1984). Therefore, pecking order theory anticipates a negative association between dividend payment and information asymmetry. Furthermore, more profitable firms are expected to depend heavily on retained earnings, thus meaning that a positive relationship between dividend policy and profitability is expected.
2.4 Transaction cost theory
On one hand, a higher dividend payout mitigates agency cost but, on the other, a higher dividend payment would increase the transaction costs that constrain external sources of financing (Rozeff, 1982). Al-Najjar and Husainey (2010) argued that larger firms have an incentive to reduce transaction costs. Hence, larger firms are expected to have higher dividend payout ratios and, simultaneously, are more likely to rely on equity financing than debt. Given that large firms are presumed to have an incentive to lessen transaction costs, a positive relationship between dividend payments and firm size is expected, and it is plausible to suggest a positive association between profitability and dividend payment under transaction cost theory.

3. Literature review and hypotheses development
3.1 Dividend policy and information asymmetry
Studies from the United States found evidence suggesting that there is an association between dividend policy and information asymmetry (Deshmukh, 2003; 2005; Li and Zhao, 2008). Deshmukh (2003) investigated the initiation of firms to pay dividends based on the pecking order theory and tested the associations between asymmetric information and dividend changes using firm size as a proxy for asymmetric information by computing the logarithm of market value of equity. The author also examined this relationship based on young start-up firms that recently went public. Therefore, these companies were, on the one hand, highly likely to have a high level of information asymmetry and growth period, while on the other, they would most likely face a low level of cash flow, thus depending on external sources of finance. Similarly, Deshmukh (2005)’s examination focused mainly on the impact of asymmetric information on dividend policy, based on the pecking order explanation using the logarithm of an analyst following a firm as a measure of information asymmetry. He investigated the association between issue costs, which arise from the information asymmetry problem, and dividend policy. Notably, these articles included both dividend payers and non-dividends paying firms. Furthermore, Li and Zhao (2008) investigated the information environment’s role in dividend policy through the use of analyst coverage as a proxy for asymmetric information. Their results demonstrated the significance of information in determining firms’ dividend policy, also in addition to indicating firms’ consideration regarding asymmetric information when choosing their dividend policies. Li and Zhao (2008) also examined the association between dividend policy and information asymmetry and the influence of the latter on the former, based on the quality of firms’ information environment under the signaling models.

Deshmukh (2003, 2005), and Li and Zhao (2008), found a negative relationship between asymmetric information and dividend policy. In other words, firms that are subject to low levels of information asymmetry prefer to distribute greater amounts of dividends, whereas firms that are subject to high levels of asymmetric information disburse lower amounts of dividends. Deshmukh (2003, 2005) concluded that the association between dividend policy and information asymmetry is consistent with pecking order theory and inconsistent with signaling theory. Similarly, Li and Zhao (2008) confirmed the prediction of the inconsistency of the relationship between asymmetric information and dividend policy with signaling theory. In summary, prior papers indicate that dividend policy is inversely related to asymmetric information. Based on the above reviewed articles, we formulate the following hypothesis:
H1.There is a negative association between dividend payout and information         asymmetry.

3.2 Dividend policy and firm characteristics
Al-Najjar and Hussainey (2009) examined the factors that drive firms’ decisions to disburse or not to distribute dividends. In terms of firm characteristics, they investigated a set of firm characteristics, such as firms’ liquidity, size, growth opportunities, profitability, asset structure, and firm risk. These characteristics have witnessed pivotal role in determining dividend policy in preceding literature. For instance, Fama and French (2001), and Li and Zhao (2008), addressed the significant position of three characteristics - firms’ profitability, investment opportunities, and size - in determining firms’ decision to pay dividends. They posited that firms with more investment opportunity have fewer propensities to disburse dividends, while large firms and firms with high profits are highly likely to distribute dividends. Benito and Young (2001) looked at the associated factors in the omission of UK dividend payments. They revealed that firm characteristics such as gearing, investment opportunities, and cash flow play a major role in the omission of UK dividends. They observed that UK firms’ propensity to cut dividends stems from insufficient cash flow, high levels of investment opportunities, and gearing. Consistent with prior literature, Ferris et al. (2006) found profitability, investments opportunities, and firm size to be the most effective factors in determining dividend policy of UK firms.

Dividend policy and profitability
Jensen et al. (1992), Aivazian et al. (2003a) and Al-Najjar and Hussainey (2009), among others, examined empirically the relationship between dividend payments and profitability. They found that profitable firms are more likely to pay dividends than non-profitable firms. In addition, their findings demonstrated a significant and positive correlation between these two variables.  Based on the above reviewed articles, we formulate the following hypothesis:
H2. A positive relationship between dividend payout and firms’ profitability exists.

Dividend policy and liquidity
Strikingly, Al-Najjar and Hussainey (2009) documented an insignificant relationship between liquidity position and UK firms’ dividend policies. However, Ho (2003) found a positive association between dividend policy and liquidity level in Japan when comparing the factors associated with determining dividend policies of Australia and Japan. In contrast, in Pakistan, Mehar (2005) investigated the association between dividend policy and liquidity position, and observed a negative relationship between the former and the latter. Because of the above mixed evidence, the next hypothesis is formulated as follows:
H3.     An association between dividend payout and liquidity position is anticipated.
Dividend policy and growth opportunities
The examination of the association between dividend policy and growth opportunities in the UK, US, Canada, France, Japan, and Germany by Denis and Osobov (2008) showed contradictory relationships in the investigated counties. As an extreme example, firms that pay dividends in Canada, the UK and US are shown to have worthless growth opportunities, while in France, Germany and Japan, growth opportunities provide mixed evidence. However, Al-Najjar and Hussainey (2009) documented an insignificant relationship between growth opportunities and payments of dividends. In contrast, Jensen et al. (1992) found a significantly negative relationship between the former and dividend payments. Given the above discussion of the mixed evidence, the next hypothesis is formulated as follows:
H4.     There is a relationship between dividend payout and growth opportunities.

Dividend policy and firm size
Benito and Young (2001) found a negative association between UK firms’ size and their tendency to omit dividends, which indicates a positive relationship between dividend payments and firm size. Furthermore, Ferris et al. (2006) found size of UK dividend-paying firms to be ten times larger than non-dividend-paying firms. In addition, Al-Najjar and Hussainey (2009)’s study concluded that large firms are less vulnerable than small firms to suffering financial distress, and have a higher ability to distribute dividends. Therefore, the following hypothesis is formulated as follows:
H5.    A positive association between dividend payout and firm size is predicted.

Dividend policy and asset structure
Aivazian et al. (2003a), and Al-Najjar and Hussainey (2009), found a negative association between dividend policy and asset structure, which implies that firms with more tangible assets disburse lower amounts of dividends. This is due to the assumption that, in the existence of a large size of tangible assets in the firm, the size of short-term assets’ tends to be low. As a result, the reliance on the source of debt financing will be used least as firms will depend on retained earnings, triggering firms to have lower propensity to pay dividends.  Based on the evidence from prior research, the following hypothesis is formulated as follows:
H6.    There is an expectation of a negative relationship between UK dividend payout and asset structure.  

Dividend policy and debt level
Kowalewski et al. (2007) investigated the determinants of dividend policy in Poland. The empirical results indicated a negative association between dividend policy and debt level. Conversely, a positive association between dividend policy and leverage was found by Chang and Rhee (1990, cited by Al-Najjar and Hussainey, 2009). Moreover, Al-Najjar and Hussainey (2009) observed an insignificant negative relationship between UK dividend policy and borrowing ratio. Given the mixed evidence, we formulate the following hypothesis:
H7.     There is a relationship between dividend payout and level of debt. 
Table 1 shows the combined expectation for the association between dividend payout and the investigated variables based on dividend theories and prior literature.  
Insert Table 1 here
4. Research design

4.1 Sample selection
All UK companies in the 2007 FTSE all shares constitute the sampling population, where the FactSet database formed the sampling frame. FactSet database provide information on the number of analyst following for 530 UK firms in 2007. Following Deshmukh (2003) we exclude companies related to financial and utility sectors because of their unique reporting and regulatory requirements. We also exclude firms that are categorised as unassigned companies in the FactSet dataset because it is not clear for us to which sectors are these companies belong to. This reduces the sample size to 320 firms. We lose further observations because of unavailable data in 2007. This results in a sample of 282 firms.
4.2 Data collection
The research sample of 282 firms is collected from variety of sources. Data on firms’ dividend per share for the year 2007 and on firms’ profitability, liquidity, size, asset structure, and growth opportunity, are collected from the FAME and Thomson One Banker databases. In addition, data on the level of asymmetric information (number of analysts following a firm) is collected from FactSet.
4.3 Regression model
In light of the collection of the above, defined and discussed data, an archival analysis is used through a running regression model. A multiple regression model is applied using dividend per share as a dependent variable, whereas number of analysts following UK firms and the above discussed firm characteristics are all used as independent variables. The following is the main research model:
Dividend = α + β1 Assy Info+ β2 PROF + β3 LIQU + β4 GROPP + β5 SIZE + β6 ASSTRU + β7 DL + e
Where Dividend = dividend per share, α = intercept, Assy Info= asymmetric information measured by number of analysts following a firm, PROF = profitability measured by return on shareholders funds, LIQU = liquidity measured by current ratio, GROPP = growth opportunities measured by price to book value ratio, SIZE = LOG of total assets, ASSTRU = tangibility and DL = debt level measured by gearing ratio.
5. Variables definitions

5.1 Dependent variable
Dividend payments: This study follows Aivazian et al. (2003b), and Naceur et al. (2006), by employing dividend per share (DPS) as a dependent variable.  Dividend per share is defined as the amount of dividend received by a stockholder in 2007 divided by total shares outstanding for the same period.
5.2 Independent variable

Asymmetric information: The number of analysts following UK firms in 2007 is used in the regression model as a proxy for asymmetric information to determine the level of asymmetric information. A noticeable number of papers in the literature, as noted by Li and Zhao (2008), used the number of analysts following a firm as a proxy for asymmetric information. It would seem necessary to clarify the use the number of analyst following a firm as a proxy for the level of asymmetric information. Lang and Lundholm (1993) documented how having number of analysts following a firm increases as corporate voluntary disclosure increases. In other words, the numbers of analysts following a firm should increase accordingly with the amount of information available about the firm. Furthermore, in the absence of information asymmetry, managers increase the level of voluntary disclosure so as to make information available for analysts following a firm. A high number of analysts following a firm suggest, therefore, less information asymmetry in the firm. 

5.3 Control variables

Profitability: Similar to Hutchinson and Gul (2002), this study use return on equity (ROE) as a proxy for firms’ profitability. Liquidity: Liquidity ratio is considered in this paper because it reflects the ability of the firm to meet its short-term payments and it may influence a firm’s decision to pay a cash dividend (Al-Najjar and Hussainey, 2009). In this research, current ratio is introduced as a measure for firms’ liquidity as recommended by Aivazian et al. (2003b). Growth opportunities: Firms’ dividend policies are highly likely to be influenced by growth or investment opportunities when firms are facing high-growth opportunity (Jensen, et al., 1992). Consistent with the previous studies, price -to book value ratio is employed in the research as a proxy for growth opportunities. Firm size: Following Al-Najjar and Hussainey (2009), we use the natural logarithm of total assets a a proxy for firm size. Asset structure: Asset structure is defined as the tangible assets, namely, total assets minus current assets divided by total assets (Aivazian et al., 2003; Al-Najjar and Hussainey, 2009), and is calculated to assess long-term assets’ proportion in the firm’s asset structure (Aivazian et al. 2003a). Debt level: Gearing or leverage ratio is the ratio that explains the level of debt in the firm compared with shareholders’ funds. Following prior research, the present study introduced gearing ratio as a measure for firms’ debt level (Al-Najjar and Husainey, 2009). Table 2 shows the definition and the measurement of dependent, independent and the control variables.
 Insert Table 2 here
6. Empirical results and analysis
6.1 Descriptive analysis
Table 3 shows the descriptive analysis. It shows that the total number of listed firms in the sample is 282 firms. The maximum number of analysts following a firm is 45, with an approximate mean of 11. However, the sample holds some firms that had no analysts following them in 2007. Similarly, the sample contains firms with zero dividends per share, while the highest firm with dividend per share in the sample is £2.58 being paid, with an average of £0.16. With respect to firm size, the maximum, minimum, and average firm’s size is worth £132,426,000, £48, and £3,847,662, respectively, suggesting an influence on firms’ dividend payments by firm size. The least profitable firm shows a negative profitability with –£55.55 in return on shareholders’ funds, with an average profitability of £36.76 and a maximum of £833.33, indicating a likelihood of an effect on firms’ dividend policies. 
  Insert Table 3 here


6.2 Correlation analysis
Table 4 shows the correlation analysis. It shows that the number of analyst following is positively correlated with dividend per share. The correlation between these variables is significant at the 1 percent level. This suggests that an increase in number of analyst following a firm when a firm pays more dividends. The least significant correlation is between dividend per share and tangibility (0.141), respectively, whereas the latter shows a significant and positive relationship with (p = .018), suggesting that firms with greater size of tangibility pay higher level of dividends to their shareholders. Furthermore, the natural logarithm of total asset (size) is shown to be positively and linearly correlated with the dependent variable with correlation is (r = .306, p= .000), indicating that large firms pay more dividends than their smaller counterparts. Similarly, return on shareholders funds is positively (.230) and strongly (p-value = .000) correlated with dividend per share. This suggests that more profitable firms disburse more dividends than do less profitable firms. On the other hand, there was no significant correlation between current ratio, price to book value, and gearing ratio with dividend per share, suggesting liquidity, growth opportunities, and debt level to be insignificantly correlated with dividend per share. Furthermore, Table 4 shows a high correlation between price to book value and gearing ratio. This high correlation between the former and the latter - .875 ≈ 87.5% - has given rise to the problem of multicollinearity[3], thus, gearing ratio has been eliminated.
  Insert Table 4 here

6.3 Regression results
Table 5 shows the empirical findings. It shows that the coefficient of determination (R-Square) between dividend per share and the independent variables is .189 ≈ 19%. It indicates that 19% of the variance in dividend policy can be predicted from asymmetric information, profitability, liquidity, size, growth opportunities, and asset structure. More importantly, the model specification (F = 10.666 and the associated P-value with F = 0.000) shows a statistically significant relationship between dividend policy and the group of independent variables, suggesting that the explanatory variables can be utilised reliably to determine UK dividend policy.
Dividends and asymmetric information         
Interestingly, Table 5 shows a statistically significant positive relationship between dividend payments and the number of analysts following a firm (t = 3.232, p value = 0.001). In other words, as the number of analysts following a firm increases, so does the dividend payment. The coefficient (parameter estimate) for analysts following a firm is 0.007, predicting an increase of 0.007 in dividend payments for every the increase in the number of analysts following a firm. As discussed earlier, a positive relation between dividend payout and number of analysts suggests a negative association between dividend policy and information asymmetry. The regression output indicates, therefore, a strong significant negative relationship between UK dividend policy and asymmetric information. These results suggest that UK firms that have lower levels of asymmetric information tend to disburse higher amount of dividends, whereas in the presence of high levels of information asymmetry, the likelihood of dividend payment decreases. This negative coefficient between dividend payments and information asymmetry is consistent with US literature (Deshmukh, 2003, 2005; Li and Zhao, 2008). Furthermore, this evidence is in line with agency and pecking order theories and is inconsistent with signaling theory. Given the above supporting empirical evidence on the determination of UK dividend policy by information asymmetry, the first hypothesis (H1) is accepted.
Dividends and profitability
Consistent with prior studies, firms’ profitability has a significantly positive association with dividend policy (t = 3.599 and p value = .000). This finding implies that highly profitable UK firms disburse a higher payment of dividends compared with less profitable firms. Holding other variables constant, the coefficient for profitability is expecting a higher dividend per share by .001 for every increase in the return of shareholders’ funds. This empirical result provides supportive evidence for signaling theory, pecking order theory, and transaction cost theory. Thus, the second hypothesis (H2) is accepted.
Dividends and liquidity
Based on the research sample, regression output has showed no statistically significant relationship between UK dividend policy and liquidity. The positive insignificant association between dividend payments and liquidity positions suggests that firms with a healthy liquidity position pay out higher amounts of dividends. However, since no significant evidence has been documented, therefore, the formulated third hypothesis (H3) is rejected.
Dividends and growth opportunities
Table 5 shows a marginally significant association between growth opportunities and UK dividend policy. More precisely, a weakly significant positive relationship between those two variables is found (t = 1.689, p value = 0.092). The result reveals that firms with higher growth opportunities tend to disburse higher dividend payments. It can be plausibly argued that those firms are expected to be high and large in terms of profitability and size. Since a marginally significant positive relationship has been observed, the fourth hypothesis (H4) is accepted.
Dividends and firm size
Table 5 shows a significantly positive association between firm size and dividend per share. This suggests that large firms distribute more dividends to their shareholders than do their smaller counterparts. Furthermore, for every increase in total assets (size), a higher dividend payment by .043 is predicted, based on the coefficients estimate. This result is in line with transaction cost theory. Thus, the fifth hypothesis (H5) is accepted.
Dividends and asset structure
Table 5 shows that there is no significant relationship between asset structure and UK dividend policy. In addition, this insignificant positive association is inconsistent with the discussed explanation of agency cost theory. Therefore, hypothesis (H6) is rejected.
  Insert Table 5 here
 Table 6 shows a summary of the present’s paper empirical findings on the association of           dividend payments with other independent variables.
 Insert Table 6 here

7. Conclusion
In summary, a multiple regression model has been employed to identify the effect of information asymmetry on UK dividend policy and to examine the determinants of the latter by firm characteristics, such as profitability, liquidity, growth opportunities, size, and asset structure, based on a sample consisting of 282 listed firms in 2007. Consistent with prior literature, asymmetric information is found to be significantly and negatively associated with UK dividend payments. Furthermore, this is in line with agency cost theory and pecking order theory, but inconsistent with signaling theory. With regard to firm characteristics, profitability, size and growth opportunities are found to determine dividend payments in the UK. The former and the latter are strongly significant and positively associated with UK dividend payments, whereas growth opportunities are found to be marginally significant and positively related to the propensity of firms to pay dividends. The empirical finding on profitability provides further supportive evidence for signaling, pecking order, and transaction cost theories. Similarly, firm size documents a supplementary empirical result for transaction cost theory, whereas asset structure is inconsistent with the assumption of agency theory.
There are many reasons for undertaking this study. The most important is the fact that this type of research has potential implications. It helps to inform regulators about the benefits of improving firms’ information environment to investors and firms.  Our study provides evidence that firms with lower levels of asymmetric information are more likely to pay more dividends. This might help in attracting more investors to invest in these companies. The findings have also managerial implications. They show that for an effective financial communication with the stock market, managers should give high priority to develop appropriate and complete disclosure practices to reduce the information asymmetry. Then, dividends can be used to reward current investors and attract new investors to their firms.  Finally, the findings of the study have important implications for small investors who may not have access to information through other sources in the same way that financial analysts or large institutional investors do. Our study suggests that paying dividends alone may be insufficient for an investor to make an investment decision. The study suggests that paying dividends and reducing information asymmetry may help small investors as well in their investment decision-making process.
The present study suggests a number of other avenues for future research.  First, it would be interesting to re-examine the association between dividend policy and asymmetric information by using different proxy for asymmetric information such as the quality and the quantity of corporate disclosure. Second, it would be interesting to extend the present study by testing the degree to which other corporate governance mechanisms (i.e. board and audit committee characteristics) affect the association between asymmetric information and corporate dividend policy. Finally additional research could be undertaken to examine the association between asymmetric information and financing decisions (i.e. corporate capital structure). 







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Table 1: The combined expectation for the association between dividend payout and                 the investigated variables in the current paper based on dividend theories              and prior literature.  

­­­­­­­­­­­­­­­­­­­­­­­­­­­­Asymmetric        Profitability          Liquidity          Growth           Size                  Asset         Debt level
information                                                             opportunities                         structure                                             
Negative               Positive                 Mixed             Mixed              Positive              Negative           Positive

Agency theory     Signaling  theory                                                   Transaction          Agency        
                                                                                                            cost theory            theory
Pecking order       Pecking order
theory                    theory
                              
                              Transaction cost
                               theory










Table 2: The measurement and definition of the present research variables.


Variables                                                Measurement                                 Definition

1. Dividend payments                           Dividend per share                      Dividend   /   total
                                                                                                                 shares outstanding

2. Asymmetric information              Financial analyst following             No. of financial
                                                                                                                  analysts following
                                                                                                                    UK firms (2007)

3. Profitability                                      Return on equity                           Net income   /
                                                                                                              Shareholders’ equity

4. Liquidity                                           Current ratio                                Current assets    /
                                                                                                                   Current liabilities

5. Growth opportunity                     Price to book value ratio           Market price per share
                                                                                                            / Book price per share

6. Size                                          Logarithm of total asset             Log of firm’s total assets


7. Asset structure                              Tangibility                                (Total assets – current
                                                                                                                assets) / total assets 

8. Debt level                                     Gearing ratio                        Total debt / shareholders’
                                                                                                                           funds 








Table 3: Descriptive statistics analysis

N
Minimum
Maximum
Mean
Std. Deviation
Analysts following a firm
282
0
45
11.30
7.737
Size
282
48
132426000
3847662
13891030
Tangibility
282
.017
.97
.57
.22
Price to book value
282
-370.11
246.18
3.59
27.42
Liquidity
282
.27
45.14
1.64
2.81
Profitability
282
-55.56
833.33
36.76
73.42
Debt Level
282
-5294.10
5168.09
115.11
5.43E2
DPS
282
.00
2.59
.17
.25
Valid N (listwise)
282






                                                                                   










Table 4: The correlation between dividend per share (dependent variable) and                   the independent variables

Independent Variables
Correlation
P-value

Analyst Following

.355**

.000

Return on Shareholders Funds

                   
                   .230**


.000

Current Ratio

-.059

.324

Price to Book Value

.070

.243

Log of Total Assets

.306**

.000

Tangibility

.141*

.018

Gearing Ratio

.104

.082
Problem type
Between
Correlation
Multiculinearity
Price to Book Value and Gearing ratio
.875

 ** = Correlation is significant at the 0.01 level (2-tailed) and * = Correlation is significant at the 0.05 level (2tailed)





Table 5: Regression output
R-Square
.189
Observation
282
F-Test
10.666
Significance
.000
Independent Variables
Coefficients
T-statistic
P-value
Analyst Following
.007
3.232
.001***
Profitability
.001
3.599
.000***
Liquidity
1.821 E-5
.004
.997
Growth Opportunities
.001
1.689
.092*
Size
.043
2.653
.008***
Asset Structure
.059
.904
.367

The significance levels (two-tailed test) are * = 10 per cent, and *** = 1 per cent













Table 6: A summary of the present’s paper empirical findings on the association of dividend payments with other independent variables.
Explanatory variables                              Type of relationship                            Significance                              

  1. Asymmetric information                       Negative                                     Strong

  1. Profitability                                            Positive                                      Strong


  1. Liquidity                                                Positive                                Not significant

  1. Growth opportunities                             Positive                                 Margin/Weak


  1. Firm size                                                Positive                                      Strong 

  1. Asset structure                                      Positive                                 Not significant









[1] Information asymmetry suggests that firms’ managers are more acquainted with the current situation of the firm and know more concerning the firm’s realistic value than do investors, which will be transmitted to the market by different means, such as distributing dividends to firms’ shareholders.
[2]Lemons problem is a jargon used to discuss information asymmetry. This terminology was first introduced by Akerlof (1970). He explained that lemons problem is the problem of existing informaiton asymmetry in a market which occurs when the seller knows more about a product than the buyer.
[3] Multicolliearity problem exists when the correlation between two independent variables is equal to or greater than 70% (Drury, 2008).

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