Dividends as a signalling mechanism: the case of illiquid stock markets

^** Email: maximiliano.gonzalez{at}iesa.edu.ve Dividends payment is an important signalling device used bycorporations. Through the dividend policy, firms can ‘separate’themselves and let the market, in an environment of asymmetricinformation, correctly assess their value. However, it is notclear that this mechanism is effective in markets subject toliquidity shocks. We addressed this problem by developing amodel where liquidity shocks occur with a certain probabilityand the stockholder must sell some illiquid assets at a discountin order to cover his cash needs. The results show that undercertain conditions and except for the very extreme cases, dividendsin fact can still be used as a signalling mechanism by companiesin illiquid markets.