Dividend Policy and Information Content

Dividend policy and information content
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The information content approach holds that dividend changes signal management forecast, such that higher dividends reflect positive outlook on increase in future earnings. Dividends are the corporate earnings distributed to the shareholders. The dividend policy consists of the amount paid and frequency of the dividend distribution. There is no obligation to pay dividends, and there are higher taxes on dividends compared to capital gains, but dividends represent cash in hand unlike capital gains (Baker, 2009). Higher dividend payments are not necessary when they decrease the retained earnings, and market participants react to new information in an efficient way.
Typically, companies establish regular dividend payout patterns, and there is more certainty regarding cash flows (Strong, 2009). There is increased investor confidence when there is announcement of higher dividend payments. This is because it signals that the company has positive cash flows, and the increase is hence justified. Since a...