The distribution of liquidity in the form of dividends, I believe that it can find the connection with the theory of free cash flow proposed by Jensen (1986). If managers (or controlling shareholders) pay dividends, they reduce the cash flow "discretionary" at their disposal. Such action could reduce information asymmetries, and in particular could represent a measure of "containment" of agency costs. This reasoning is also in line with La Porta et al (2000). However, the market reaction may not be positive. The distribution of the dividend could justify the lack of investment opportunities. Thus, the empirical analysis (Kenneth Khang and Tao-Hsien Dolly King, 2006) is consistent with the reasoning above and with other studies (eg Allen and Michaely, 2004). Allen and Michaely (2004, p. 32) about the information asymmetries argue: “If managers know more about the true worth of their firm, dividends can be used to convey that information to the market, despite the costs associated with paying those dividends (However, we note that with asymmetric information, dividends can also be viewed as bad news Firms that pay dividends are the ones that have no positive NPV projects in which to invest)”.

I agree that the dividend payments can be considered as a proof for the interest for shareholders' protection. Indeed, also, the lack of investment opportunities can totally change the conclusions. 

Moreover, let's suppose we are interested in finding if dividend policy is determined by the level of information asymmetry. What can we do if we are measure information asymmetry through one indicator connected to dividend policy?

Accuracy of analyst predictions over the earning per share (EPS) and prediction of analysts can measure the asymmetric information. It can be measured by using the variance of the idyosicratic risk standardized by firms total variance. Moreover, number of analyst covering the firm and the standard deviation in analyst forecast can also help in measuring it.

Another standard proxy for information asymmetry is the bid-ask spread for the stock prices. If the investor is willing (bidding) to pay an amount that is less than what the owner is asking to sell it for, it must be because the owner/seller and the potential buyer/shareholder have different information endowments. This leads to information asymmetry.

INFORMATION ASYMMETRY: The subject of information asymmetry is generally treated under Signaling Game Theory. Under SGT, two approaches to information asymmetry merge: (i) intuitive criterion refinement; and (ii) undefeated criterion refinement. The general idea is that information asymmetry creates a condition of uncertain in the decision process; the decision makers looks for the best condition in order to make decision. This "best" condition may be obtained through refinement of "whatever information has been received and is available."

HOW TO MEASURE ASYMMETRY:  In order to find the measurement for the asymmetry, we would need to construct a pay-off set up for the insiders and investors. in so doing, we must classify firms: (a) big opportunity firm that would yield large returns, or (b) small opportunity firm that would yield smaller return. Schmidt and Buell (2014) quantified this into probability where g = big opportunity firm and 1 - g = small opportunity firm. The insider maximize payoff under:

(1)   U = ar(q) + (1 + a)π(t,q)

... where U = firm's pay off; π = profit; t = opportunity type; q = perceived demand by firm; and a = valuation of firm. There is only one objective of firm: maximum pay-off. Whereas investors have three possible perceived models about firm: (i) big opportunity firm to invest in, (ii) weighted average opportunity firm to invest in, and (iii) small opportunity firm to invest in.

No matter which model the investor may select, but for one firm there could be only one model to select, the investor's pay-off must be as close as possible to the firm's actual value (V):

(2)   V = -[π(t,q) - r(q)]2

 There lies the asymmetry: The firm's model is U; investors have three options. The asymmetry occurs when these do not match well: U(i), U(ii), and U(iii) where:

(i) = r(q) = π(tbig, q)

(ii) = r(q) = gπ(tsmall,q) + (1 - g)π(tbig,q)

(iii) = r(q) = π(tsmall,q)

How to measure? The first method is Intuitive Criterion refinement: big opportunity firm would produce big returns by intuition. Here compare the expected to the actual values. The second method is Undefeated Refinement. Under the second method, look for the model among (i), (ii) and (iii) above and find which yields Pareto-optimization; once found pareto eliminated that one. What is left should be non-Pareto-optimized model. This is our asymmetry quantity. From here then ... is the asymmetry statistically significant?

CAN INFORMATION ASYMMETRY BE LINKED TO DIVIDENDS: the relationship may not be a simple linear form. The answer may not depend only on information asymmetry. Other factors may also play a role: market condition, investor sentiment, diversity in investor's investment philosophy, etc. If a positive link is found, we should not be surprise because (i) firm knows itself best and would not mis-classify itself, i.e. big or small opportunity firm; and (ii) out of three possible models, investor could eliminate at least 1 as error and with the remaining 2 models, the chance of mis-classification should be smaller.

When we use the concept of "information" we must be aware that there are two quite different reference systems for its definition:

a) Classical Shannonian information theory, where information has no meaning and has a statistical nature.

b) Knowledge Management perspective where information means processed data, i.e. data with meaning.

When you would like to measure asymmetrical information gap it is important to have in mind both perspectives since they yield different interpretations. More than that, in business we use the knowledge concept which means processed information. In decision making it is important to consider also the knowledge perspective. Finally, one should accept the idea that decision making is not a pure rational process.

See if this paper can help you.

http://www.federalreserve.gov/pubs/feds/2012/201213/201213pap.pdf

See if also this other paper can help you.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=251938

@Aon Waqas Awan.

Thank you very much for the response. I think these measures are very interesting.

Unfortunately, data regarding these indicators are not always available, especially if we analyze the phenomenon in an international context. 

Moreover, another problem can appear.  If we discuss about the difference between the effective level of indicators, it can be due, also, to some unexpected factors that can occur after the predictions are made. Also, the quality of the analyst's reports can determine a bias in this indicator (a poor quality induces an artificial level of asymmetrical information).

Regarding the bid / ask spread, I think that some conditions on the market (for instance, a low number of brokers, a high level of taxes and fees) can determine also a bias in evaluating the asymmetrical information.

Hi, Victor:

Interesting question. A recent research study (Bohren, Josefsen & Steen, 2012) compared the dividend policy of owner-controlled firms with that of firms where the owners are a minority relative to non-owner employees, customers, and community citizens.

The authors found that regardless of whether owners or non-owners control the firm, the strong stakeholder uses the dividend payout decision to mitigate rather than to intensify the conflict of interest with the weak stakeholder. Hence, the higher the potential agency cost as reflected in the firm’s stakeholder structure, the more the actual agency cost is reduced by the strong stakeholder’s dividend payout decision. These findings are consistent with a dividend policy in which opportunistic power abuse in stakeholder conflicts is discouraged by costly consequences for the abuser at a later stage. Indirect evidence supports this interpretation!

• Bøhren, Ø., Josefsen, M. G., & Steen, P. E. (2012). Stakeholder conflicts and dividend policy. Journal Of Banking & Finance, 36(10), 2852-2864.

Hope this helps!

Nadeem

Hi Victor

The proxies offered by Aon Waqas Awan are very popular. However these proxies make some issue. First, analysts' forecasts aren't available in all markets. For example, in some economies there aren't suitable mechanisms which make conditions to analysts forecasting (e.g. Middle East).

Second, using the bid-ask spread needs good conditions and some legal limitations make it mistake. For example, in Iran, Tehran Securities Exchange Organization (TSEO) determined stock pricing boundaries (e.g. daily variation in stock prices couldn't be upper than +4% and downer than -4%). Hence when the researcher examines a hypothesis like your one, he or she needs to know the special complexities that originate from Local Features.

One might use the theory of the bid-ask spread to capture the percent of informed versus the percent of uninformed traders that are active in a given security.  Wider bid-ask spreads indicate a high percentage of better informed traders.  I believe that there is a paper by Roll, written in the mid 1990's that used this theory.  Also see Copeland. And Gala on the topic.

Regard,

Tom Copeland

It's known that there is a inverse relation between asymmetric information and corporate governance mechanisms. Also, greater ownership concentration is associated with increased information asymmetry. Controller shareholders are not interested in the level of dividends and because of that the minority shareholders are affected. (see Elbadry, Ahmed; Gounopoulos, Dimitrios and Frank S. Skinner, "Governance Quality and Information Alignment" -2010). Although giving a minimum dividend might solve the problem of protection will not solve the problem  of asymmetric information. Controller shareholders will take advantages by their power anyway.

Simply, search for bid-ask spread

i will concur with the bid-ask-spread. Simply, the spread will be a good theory to measure information asymmetry

Speaking of information symmetry in terms of symmetric valuations:if a company is public-listed, one could use the book-to-market ratio (BTM) as proxy metric for information asymmetry. Its inverse, price-to-book ratio is a more commonly known valuation ratio. As the BTM approaches 1, information asymmetry between management and external stakeholders approaches zero. The closer the valuation is to the efficient market pricing. For BTM1, the management values the business more than the market. For these inferences to hold we need two assumptions to be met:

Yes, indeed. But it is also possible that price of listed companies to integrate some perspectives regarding the future performance, too,  which are not taken into account in the book value of equity.

Information asymmetry is interestingly influenced by 1.competition, 2. market behavior, 3. attitude, 4. eagerness to perform better than others, 5. draw satisfaction by hoarding information in monopolistic environment.....  etc. This asymmetry leads to stratification in society, organizations and even in a family. Perhaps this stratification promotes divides "haves" and have-nots". This approach would help define the ecosystem followed by metrics. 

dividend policy is basically the distribution of income among the shareholders.There are other ways through which firm can distribute its income. dividend policy may vary depending on the nature of the firm and its ownership structure. if the firm is a growing firm or in simple words a firm is expanding its business or a firm is already at its maturity stage or firms having different financing needs may affect their dividend policy  decision. And may also affect the expectations of the investors. If there is a difference between the expectations and the actual dividend then there is a possibility of information asymmetry. Event study analysis might help you in this regard.