The Information Content of Dividend and Capital Structure Policies

We reexamine signaling and agency theories and argue that the free-cashflow hypothesis implies a stronger information effect for both over- and underinvesting firms than for value-maximizing firms. Our results indicate that dividend and capital structure policies interact to provide significant predictive information about future cash flow. We also find a U-shaped relation between the amount of information and Tobin’s q. The minimum of this relation occurs near a q value of one. This outcome implies a stronger information effect for both over- and underinvesting firms than for value-maximizing firms.