Agency, information asymmetry, and corporate policy

This series of three dissertation papers examine the impact of large abnormal changes in cash balances (liquidity shocks) on payout policies at the firm, industry, and macroeconomic level. These papers test the ability of the payout ratio to predict future earnings growth within the framework of prior-period liquidity shocks. The results from firm-specific analysis confirm that informational asymmetry (agency) problems are more severe for high (low) market-to-book firms that face a relatively greater (smaller) array of intangible investment growth opportunities. First, in positive (negative) shock events, high market-to-book firms increase (maintain) dividend payouts to signal improved (unchanged) profitability in future periods. In contrast, low market-to-book firms decrease dividend payouts in response to negative liquidity shocks, and distribute excess cash in positive liquidity shock events only through share repurchases which have no informational content. Industry and macroeconomic analysis finds that payout ratios predict future earnings for up to 5 years. Furthermore, payout ratio increases induced by positive liquidity shocks provide the strongest signal of higher future industry and aggregate earnings growth.