ASYMMETRIC INFORMATION AND DIVIDEND PAYOUT POLICY: EVIDENCE FROM BANGLADESH

Abstract

This study aims to explore the relationship between information asymmetry and dividend payout policy in the context of Bangladesh's capital market. The study used the trade volume ratio as a proxy for information asymmetry (independent variable) and the cash dividend to book value of total assets ratio as the dependent variable. Fixed effects model and panel corrected standard error (PCSE) model have been used to check the hypothesis. The final sample size of the study comprises 1638 firm years which means total 117 companies traded on Dhaka Stock Exchange from 2010 to 2023. The results reveal compelling evidence of a significant association between asymmetric information and dividend payout policy in Bangladesh. This study documents that dividend payments are negatively influenced by information asymmetry. That means firms facing higher levels of information asymmetry tend to adopt more conservative dividend policies, characterized by lower dividend payout ratios. In the context of this study, we used the payout ratio as a proxy for dividend policy due to its widespread use in previous literature and its ability to capture firms' immediate cash distribution decisions. Thus, the findings align with the agency theory and pecking order theory but contradict the signaling theory. Due to limitations in the available data, this study could not incorporate alternative proxies for information asymmetry. Additionally, this study excludes financial firms, which could be considered in future studies. Results of the study contribute to the existing literature on corporate finance and provide valuable insights for policymakers, investors, and corporate managers navigating the challenges of information asymmetry in capital markets. To the best of the authors' knowledge, research on the relationship between information asymmetry and dividend policy within the context of Bangladesh's capital market remains scarce. Notably, no prior studies have employed the trade volume ratio as a proxy for information asymmetry to rigorously examine the dynamics between information asymmetry and dividend payout policy in this market.