Dividend Payouts and Information Shocks

68 Pages Posted: 6 May 2013 Last revised: 26 Feb 2014

See all articles by Luzi Hail

Luzi Hail

University of Pennsylvania - The Wharton School

Ahmed Tahoun

London Business School

Clare Wang

University of Colorado at Boulder - Leeds School of Business

Multiple version iconThere are 3 versions of this paper

Date Written: January 6, 2014

Abstract

We examine changes in firms’ dividend payouts following an exogenous shock to the information asymmetry problem between managers and investors. Agency theories predict a decrease in dividend payments to the extent that improved public information lowers managers’ need to convey their commitment to avoid overinvestment via costly dividend payouts. Conversely, dividends could increase if minority investors are in a better position to extract cash dividends. We test these predictions by analyzing the dividend payment behavior of a global sample of firms around the mandatory adoption of IFRS and the initial enforcement of new insider trading laws. Both events serve as proxies for a general improvement of the information environment and hence, the corporate governance structure in the economy. We find that following the two events firms are less likely to pay (increase) dividends, but more likely to cut (stop) such payments. The changes occur around the time of the informational shock, and only in countries and for firms subject to the regulatory change. They are more pronounced when the inherent agency issues or the informational shocks are stronger. We further find that the information content of dividends decreases after the events. The results highlight the importance of the agency costs of free cash flows (and changes therein) for shaping firms’ payout policies.

Keywords: Dividend policy, Payout policy, International accounting, Information environment, IFRS, Insider trading laws

JEL Classification: G14, G15, G35, K22, M41

Suggested Citation

Hail, Luzi and Tahoun, Ahmed and Wang, Clare, Dividend Payouts and Information Shocks (January 6, 2014). European Corporate Governance Institute (ECGI) - Finance Working Paper No. 409/2014. Available at SSRN: https://ssrn.com/abstract=2260957 or http://dx.doi.org/10.2139/ssrn.2260957

Luzi Hail (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-8205 (Phone)
215-573-2054 (Fax)

Ahmed Tahoun

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Clare Wang

University of Colorado at Boulder - Leeds School of Business ( email )

Boulder, CO 80309-0419
United States

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