Does Asymmetric Information Drive UK Dividends Propensity?

Purpose: We extend and contribute to prior UK research on the association between information asymmetry and dividends propensity. We investigate the impact of the number of analysts following firms, a proxy for information asymmetry, on dividends propensity. Methodology: Using a 282 UK FTSE-All Share non-financial/non-utilities firms with fiscal year ends on 2007, we use a multiple regression model to investigate the association between dividends and analysts following. Findings: We find that after controlling for firm-specific characteristics, there is a significant negative association between the number of analysts following firms and dividend propensity. Our finding suggest that higher coverage of financial analysts for UK firms reduces levels of information asymmetry between managers and shareholders which results in lower dividend propensity. These findings are consistent with agency theory and pecking order theory, but inconsistent with signaling theory. Originality: We contribute to prior research related to the determinants of dividend propensity by being the first UK study to examine the association between dividend propensity and information asymmetry