ISBN: 0-03-031529-8
NEWSWIRE - October 11, 2001
Topic: Asymmetric Information and Dividend Policy
Source: "Three Americans Win Nobel for Economics," by Jon E. Hilsenrath, Wall Street Journal, October 11, 2001, page A3; and "Ford Cuts Stock Dividend by 50% In Move to Save $1 Billion a Year," by Norihiko Shirouzu, Wall Street Journal, October 11, 2001, page A4.
Synopsis of Article: The first article announces the awarding of this year's Nobel Prize in Economic Sciences to George Akerlof, Michael Spence, and Joseph Stiglitz for their work related to asymmetric information. Interestingly, on the day that the Nobel was announced, Ford also announced a dividend cut. Since the theory of asymmetric information is an important factor in explaining the market's reaction to dividend cuts, these articles provide an opportunity to relate this year's Nobel prize in economics to dividend policy. The impact of asymmetric information on investors and their responses to corporate financial policy decisions can be discussed and related to the current Nobel prize.
Questions:
- What is asymmetric information? What is signaling?
- To a rational investor, concerned only with earning the best risk-adjusted return, a firm's dividend policy should be irrelevant (think Modigliani and Miller, dividend irrelevance). Yet when companies announce dividend cuts (increases) investors tend to experience decreases (increases) in the value of the stock. How can we explain this phenomenon?
- What are some other corporate financial policy decisions that investors may take as signals in the presence of asymmetric information?
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