Growth Opportunities, Information Asymmetry, and Dividend Payout: Evidence from Mandatory IFRS Adoption

Abstract

We study how the relationship between a firm’s growth opportunities and its dividend policies shifts in response to a reduction in information asymmetry between investors and firms. Existing literature suggests a negative relationship between growth opportunities and dividend payouts in the presence of information asymmetry. Using the mandatory adoption of IFRS (International Financial Reporting Standards) as an exogenous shock to the information environment of a firm, we document that the negative relationship between growth opportunities and dividend payout strengthens. This suggests IFRS adoption improves capital allocation by shifting dividend demand towards low-growth firms and reducing dividend demand from high-growth firms.

Keywords: Information asymmetry; dividend; growth opportunities; IFRS

JEL Classification: M41, G35