Show Me the Money! Dividend Policy in Countries with Weak Institutions

Journal of Accounting Research · 2021 · Volume 59 · Issue 2

Abstract

We hypothesize that, in weak-institution countries, firms adjust the ‘timing’ of dividend payments by committing to distribute a percentage of current earnings as dividends, revealing the extent of firm-level agency conflicts to future investors and facilitating the raising of external capital. Consistent with this hypothesis, we find that, on average, firms in weak-institution countries have a higher speed of adjustment (SOA) to their target payout ratio, pay dividends earlier in the life cycle, and are more likely to disclose a dividend policy committing to pay a minimum percentage of earnings. Within-country tests show that, in weak-institution countries, the firms with the highestSOAdividend policies have fewer agency problems and an increased ability to raise external capital. Finally, returns tests around earnings announcements show that high-SOAdividend policies are associated with larger market reactions to earnings in weak-institution countries. Collectively, our findings suggest that dividend policy helps to alleviate agency conflicts in weak-institution countries between firms and (future) investors.

Keywords

dividend policy, payout policy, earnings, institutional quality

Enable JavaScript for citation tools and additional paper interactions.