Dividend Policy under Asymmetric Information

Dividend Policy under Asymmetric Information

  • MERTON H. MILLER
  • KEVIN ROCK

Article first published online: 30th April 2012 DOI: 10.1111/j.1540-6261.1985.tb02362.x

Abstract


We extend the standard finance model of the firm's dividend/investment/financing decisions by allowing the firm's managers to know more than outside investors about the true state of the firm's current earnings. The extension endogenizes the dividend (and financing) announcement effects amply documented in recent research. But once trading of shares is admitted to the model along with asymmetric information, the familiar Fisherian criterion for optimal investment becomes time inconsistent: the market's belief that the firm is following the Fisher rule creates incentives to violate the rule.

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