DIVIDEND POLICY AND THE BID‐ASK SPREAD: AN EMPIRICAL ANALYSIS

Extant theories of the bid‐ask spread posit a positive relationship between the level of information asymmetry and the magnitude of the spread. As suggested by dividend signaling and agency theories, the payment of dividends conveys information to the market, thereby reducing asymmetry. Thus, dividend policy may influence the bid‐ask spread. Based on this reasoning, we explore the empirical proposition that an inverse relation between dividend yield and bid‐ask spread exists, ceteris paribus. Evidence is consistent with this hypothesis.