The information content of dividend and capital structure policies

We reexamine signaling and agency theories and argue that the free-cash-flo w hypothesis implies a stronger information effect for both over- and under investing firms than for value-maximizing firms. Our results indicate that dividend and capital structure policies interact to provide significant pre dictive information about future cash flow. We also find a U-shaped relatio n between the amount of information and Tobin's q. The minimum of this rela tion occurs near a q value of one. This outcome implies a stronger informat ion effect for both over- and underinvesting firms than for value-maximizin g firms.