Shareholder-manager conflict and the information content of dividends

In a model of the firm in which insiders are privately informedof the firm's prospects and investment is endogenous, this articleshows the existence of coarse dividend-signaling equilibria:Dividends partition the space of possible prospects of the firm,and changes in dividends reflect 'broad', or nonincremental,changes in these prospects. These equilibria are shown to existunder general preference and technology structures, and it isargued that they closely match the following 'anomalous' empiricalfeatures of corporate dividend payouts: Dividend changes havenontrivial information effects, yet dividends are smoothed (ina world with cyclic prospects), and dividends are poor predictorsof future earnings. Furthermore, in performing comparative statics,this article derives cross-sectional and time-series restrictionson the relation of dividend smoothing to observable firm attributes.