Dividend announcements and double inefficiency of production: the implications of uncertainty and asymmetric information

Abstract

A two-period model of the firm is constructed in a world which is characterised by uncertainty
regarding earnings and production possibilities and by asymmetric information between insiders and
outsiders. It is then shown that dividend announcements reveal more about the firm's value than earnings
announcements do and that the two together reveal information about the investment policy of the firm
that each one can not reveal. Moreover, Fisher-optimum investment policy is not sustainable through
time. A solution to the problem of declaring dividends that fulfill the rational expectations criterion is
proposed leading to double (allocative and X-) inefficiency of production.