Unit 7

Question 1

Miller and Rocj=k 1985

Answer 1

• Firms differ in current cashflow
• Managers observe true cashflows, shareholders don’t.
• Manager have an incentive scheme that weights current market value and future earnings
• When paying dividents firms sacrifice investment
  *

Question 2

A tax-based signalling model (Bhattacharya and Williams)

Implications

Answer 2

• Better firms announce higher dividends
• Dividend anouncements contain information about future cashflows
• The higher the announcee dividends, the higher the market value
• Dividends go up when
  
  • Adverse selection worsen (a goes down)
  • Taxes are lowered
  • Liquidity need of the share holders rise
• Value-dividend function slope is increasing in tau
• Signalling disappears without taxes