Three essays on corporate dividend policies

This dissertation consists of three essays on topics related to corporate dividend policies. Essay one provides a theoretical model of dividend signaling in a credit market context. We show that dividends can be used to signal the type of the borrowing firm to the lender when the conditions for a separating equilibrium are met. In the separating equilibrium, higher quality firms pay higher dividends and borrow funds at a lower interest rate. We test the empirical predictions of the model with data in essay two. The data show some support for our dividend signaling hypothesis. Dividends are generally found to be significantly negatively related to the average interest rate on short-term borrowings. Essay three studies the relationship between the dividend policy and the method of payment in acquisitions. We find that a higher degree of similarity in the dividend policy between two firms before they merge increases the likelihood of the use of stock as the method of payment in acquisitions.