This article analyzes the factors underlying the dividend policy of lodging firms. In addition, it tests whether the market perceives changes in dividends as information about the value of the firm. In a world that is characterized by informational asymmetries between managers and investors, cash dividend payments may be used to convey information from corporate insiders to the company’s shareholders. For example, dividend initiations and increases may convey management’s confidence that the firm is profitable enough to fund its investment projects and to support the new dividend payment level. An alternative explanation is that dividend initiations and increases may reduce agency costs between managers and shareholders, resulting in an increase in the value of the firm. As a result of cash dividend payments, managers will not invest in negative net-present-value projects. Therefore, the announcement of a dividend initiation or increase should be associated with a stock price increase.
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