CHAPTER 4:
ASYMMETRIC INFORMATION AND DIVIDEND POLICY

The study of dividend policy is an especially active area of debate both in the world of finance as well as in the academic arena. Such interest is fully justified. In view of the relationship between dividends and stock prices, the topic is crucial to understand both the primary stock market -where new issues of shares are carried out-, and the secondary stock market -in which shares already in circulation are negotiated-. From the perspective of the finance manager, a false impression could be created that the only relevant market is the primary one, ignoring that liquidity -the ability to transfer an asset at any moment- encourages demand for all financial instruments. Last …ver más…

The previous data takes into account cash dividends omitting, for lack of statistical information, share repurchases. At any rate, share repurchases have experienced explosive growth in the last two decades, becoming a form of cash distribution comparable to the most traditional dividends. The following table shows, for the 1,000 largest companies in the United States, a significant increase in dividends payments, and an even more impressive jump in share repurchases:

Dividends and share repurchases in 1,000 largest companies in the United States
(in percentage)

|Period |Dividends over |Repurchases over |Repurchases over |
| |Earnings(*) |Earnings(*) |Dividends |
| | | | |
|1973-1980 |37.8 |4.3 |11.5 |
|1981-1991 |51.4 |27.5 |53.3 |
| | | | |

(*) Earnings before extraordinary items
Source: Allen y Michaely (1995).

4.2 The irrelevance of dividend policy

In absence of taxes and information problems, dividend policy is irrelevant. This conclusion is undoubtedly controversial. The