Information Asymmetry and Dividend Payout Policy: A Critical Literature Review

Abstract

This study is a critical review of the literature that seeks to establish the effects of information asymmetry on the dividend payout policy. For this review, information asymmetry is assessed as adverse selection, moral hazard, and earning’s disclosure. Whereas dividend policy is evaluated using dividend per share, profitability, growth, and the size of the firm. The reviewed literature includes both theoretical and empirical data. The methodology used reviewed various empirical literature, articles, publications, and conceptual studies where descriptive and quantitative analysis were applied. According to various publications reviewed, there are positive, negative, and contradictory outcomes amid the asymmetry of information and the dividend payout policy. Based on research, dividend payout policy can be enhanced or improved by decreasing the information asymmetry between agents and principals. It is suggested that a similar study should be done, where future researchers may introduce other variables other than; adverse selection, moral hazard, earning’s disclosure, and the number of analysts following firms, to examine the relationship of information asymmetry and dividend payout policy.

Key Words: Information Asymmetry, Dividend Payout Policy, Agency Theory, Size of the Firm