Do market differences matter on dividend policy?

We investigate the dividend policies of firms in the United Kingdom to understand whether firms in different markets use dividends as a signaling or disciplining device. The sample consists of 1247 firms from the highly regulated Main Market (MAIN) and relatively unregulated Alternative Investment Market (AIM) for the period 2002–2017. We find that firms in AIM pay lower dividends than their MAIN counterparts. However, during turbulence, AIM firms decrease dividends lower than MAIN firms. In line with the signaling hypothesis, AIM firms with increased profitability are more likely to increase dividends. These results suggest that AIM firms depend more on the signaling feature of the dividends, whereas MAIN firms use dividends as a disciplining device to limit managerial discretion. Specifically, we find that AIM firms facing bigger agency problems pay lower dividends compared to other AIM firms, in line with the outcome view of agency theory.