External finance and the signaling potential of dividends: Evidence from a developing country.

摘要

Manufacturing firms in India rely heavily on external funds, yet they continue to pay dividends. Although this behavior contradicts the standard financial hierarchy hypothesis, it is consistent with a signaling motive for paying dividends. I investigate the signaling explanation by examining whether dividend behavior differs among groups of Indian firms with heterogeneous access to external funds and by examining the determinants of Indian firms' dividend decisions. Using a panel of firm-level data, I divide my sample into two groups: small firms, which rely almost exclusively on loans for external funds, and large firms, which obtain forty percent of their external funds through debentures and equity capital. My results indicate that small firms pay dividends less frequently than large firms and that their dividend payments are relatively smaller and less stable. In addition, I divide my sample of large firms into two groups based on firms' ability to mitigate the effects of asymmetric information. Large firms that are hypothesized to have better access to external funds receive a larger percentage of these funds through debentures, pay out a larger portion of earnings, and exhibit more stability in dividend payments. The observed differences in dividend policy may be associated with large firms using dividends to signal their future earnings to potential providers of external funds.;To examine the determinants of Indian firms' dividend decisions, I estimate the Lintner dividend model as well as alternative models that assume dividends are based on expected future earnings and compare the ability of the models to explain dividend behavior. As an additional test, I compare various accounting measures of the earnings variable. The evidence for my large firms, including those firms that are generally believed to be able to mitigate the effects of asymmetric information, is consistent with the notion that large firms in India pay dividends as a signal of future earnings. Such evidence does not exist for my small firms.