OPACITY AND DIVIDEND SIGNALING OF FUTURE PROFITABILITY

Abstract

This thesis examines the relation between dividend changes and future profitability in respect of the degree of information asymmetry faced by U.S. firms during 1990 to 2013. As the information asymmetry is the theoretical incentive for firms to signal via dividends, firms with a high level of information asymmetry should be those that have the most incentives in taking such action. Contrary to this prediction, no conclusive evidence is found to support such hypothesis. Specifically, the results tend towards suggesting no evidence of dividend signaling. Additionally, the lack of the significance when testing the difference between high and low asymmetry firms greatly indicates that the difference in the level of asymmetry faced by firms has no impact on their decision to use dividend signaling. Hence, the findings of this thesis taken together suggest that dividends contain no information of future profitability, and plausibly that dividends are not the common means of signaling.