dividend policy under asymmetric information

Dividend Policy under Asymmetric Information

Merton H. Miller, Kevin RockJournal of Finance, Sep,1985

G916431 簡士龍G906422 曾智揚G906426 許超駿

Outline of the study

Introduction Section1:Announcement effects Section2:Consistent dividend and

investment policy under asymmetric information

Conclusion

Introduction

Information asymmetric: Insider & Outsider

資訊多與寡，正確與否， Dividend policy:Dividend Future earning Stock price

signal 股利折現

Explanation

investor

Financial assetReal assetIRR = R

Fisherian criterion:invest in real assets until the marginal internal rate of return equals the risk-adjusted rate on securities.

Time inconsistent:the market’s belief that the firm is following the Fisher rule creates incentives to violate the rule.

Section1:Announcement effects

Evolution of the earnings stream The firm’s decision problem The earnings announcement effect The dividend announcement effect The financing announcement effect

Evolution of the earnings stream

Suppose: two-period, one-decision, no tax,uncertainty model.

T=1 作決策T=0 T=2 解散

Evolution of the earnings stream

1 0 1

2 1

1 1 1 2

( )

( )

( )

X F I

X F I

F X B D

2

ε

ε

0 1 0 2

0 2 1 1

( ) ( ) 0

( | )

E E

E

ε ε

ε ε γ ε

1X

2

第一期期末產出

X 第二期期末產出

Define the notation:X: Firm’s earningsI: InvestmentD: Dividend payment:ε: random incrementB: additional funds raised

The firm’s decision problem At the start of period 1， the value

of the firm

Subject to the firm’s budget

1 1 2 1

1 1 1 1

1( )

11

= D [ ( ) ]1

V D E X Bi

F I Bi

γ ε

1 1 1 1

1 1 1 1

1 1 1 10

X B I D

X I D B

B X I D

1V假設 將 帶入

The firm’s decision problem The value of the shares

Given on MM theory the value of the firm is independent

of its dividend decision D

1 1 1 1 1

1[ ( ) ]

1V X I F I

i

γ ε

The earnings announcement effect

Preannouncement value of the firm

Postannouncemnet value

0 1 1 0 1 1

* *0 1 1

1( ) ( ) ( ) [ ( )]

11

= ( ) [ ( )]1

E V E X E I F Ii

F I I F Ii

*1 1 1 1 2

* *0 1 1 1 1

1[ ( )]

11

( ) [ ( ) ]1

V X I E Xi

F I I F Ii

ε γ ε

The earning announcement effect

1 0 1 1 1 0 1( ) [1 ] ( ( ))[1 ]V E V X E X γ γε

1+i 1+i

Preannouncement value of the firm

Postannouncemnet value

0 1 1 0 1 1

* *0 1 1

1( ) ( ) ( ) [ ( )]

11

= ( ) [ ( )]1

E V E X E I F Ii

F I I F Ii

*1 1 1 1 2

* *0 1 1 1 1

1[ ( )]

11

( ) [ ( ) ]1

V X I E Xi

F I I F Ii

ε γ ε

1 0 1

2 1

1 1 1 2

( )

( )

( )

X F I

X F I

F X B D

2

ε

ε

The dividend announcement effect The difference between actual and

expected net dividends

Dividend announcement effect

1 1 0 1 1 1 0 1 1( ) ( ) ( )D B E D B X E X ε

1 0 1 1 1 0 1 1

1

( ) (( ) ( ))[1 ]

[1 ]

V E V D B E D B

γ1+i

γε

1+i

The financing announcement effect Merely the dividend announcement

effect, but sign reversed

Information Asymmetric and the Firm’s Objective Function

1, 1 1 0 1 1 1, , , , dX I D I I D

0 1, mI D

Valued by director and market outsider

1 1 1 1

1( )

1dV D F I

i

1 1 1 1 1

1( ( ) |

1m m mV D E F I

i

Social welfare function

1 1, 1 1 1

1 1 1 1

1 1 1

max (1 )

1( ( ) ) |

1

1(1 ) ( )

1

m dD I

m m

W kV k V

k D E F Ii

k D F Ii

1 1 1D I X

1 1

1 1

(1 ) 0m dV V

k kD D

Subject to

F.O.C with respect to D1

The Interaction of Expectations and Decisions The directors’ valuation depends

both on the publicly announced dividend, D and unannounced earning, X

If X(D) is single-valued and if the market is rational

max ( ; , ( )) ( ) (1 ) ( , )m m dDW X D V D kV D k V X D

( ) ( ( ), ) ( , )m d dV D V X D D V X D

The Interaction of Expectations and Decisions

F.O.C=0

S.O.C<0

( ( ), ) '( ) ( ( ), ) (1 ) ( ( ), ) 0

( ( ), ) '( ) ( ( ), ) 0

d d dx d d

d dx d

kV X D D X D kV X D D k V X D D

kV X D D X D V X D D

max ( ; , ( )) ( ( ), ) (1 ) ( , )m d dDW X D V D kV X D D k V X D

( ( ), ) '( ) ( ( ), ) (1 ) ( ( ), ) 0d d dx d dkV X D D X D kV X D D k V X D D

D

The solution to the signalling equation

Less than Fisherian optimum of Investment

(Time inconsistency)

Dividends as Signals The cost of signaling any specified level

of earnings will be higher, the lower the level of earnings actually achieved.

The cost of signaling may were not bearing to avoid giving the market the false impression that earnings were not good enough to justify a dividend.

The best place for empirical firms falling into adversity, not because they then start signaling, but because they stop.

Alternative Routes to Restoring Consistency Statutory proscriptions Eliminating the profit from trades by

“insiders” was in fact precisely the purpose of Section 16(b) of the Securities Exchange Act.

Section 16(b) requires officers, directors, and major stockholders of registered companies to turn back to the corporation any profits on purchases and sales within six months of each other.

Appendix 證券交易法 ( 民國 91 年 06 月 12 日 修正 ) 第 157-1 條 左列各款之人，獲悉發行股票公司有重大

影響其股票價格之消息時，在該 消息未公開前，不得對該公司之上市或在證券商營業處所買賣之股票或其 他具有股權性質之有價證券，買入或賣出：

( 一 ) 該公司之董事、監察人及經理人。 ( 二 ) 持有該公司股份超過百分之十之股東。 ( 三 ) 基於職業或控制關係獲悉消息之人。 ( 四 ) 從前三款所列之人獲悉消息者。

Appendix 違反前項規定者，應就消息未公開前其買入或賣出該證券之價格，

與消息 公開後十個營業日收盤平均價格之差額限度內，對善意從事相反買賣之人 負損害賠償責任；其情節重大者，法院得依善意從事相反買賣之人之請求 ，將責任限額提高至三倍。

第一項第四款之人，對於前項損害賠償，應與第一項第一款至第三款提供 消息之人，負連帶賠償責任。但第一項第一款至第三款提供消息之人有正 當理由相信消息已公開者，不負賠償責任。

第一項所稱有重大影響其股票價格之消息，指涉及公司之財務、業務或該 證券之市場供求、公開收購，對其股票價格有重大影響，或對正當投資人 之投資決定有重要影響之消息。

第二十二條之二第三項之規定，於第一項第一款、第二款準用之；第二十 條第四項之規定，於第二項從事相反買賣之人準用之。

Conclusion Inability of the standard full

information model to accommodate dividend announcement effect

Future empirical research