The Effect of Information Shocks on Dividend Payout and Dividend Value Relevance

Posted: 24 Aug 2019 Last revised: 16 Dec 2019

See all articles by Mostafa Harakeh

Mostafa Harakeh

Lebanese American University

Edward Lee

University of Manchester - Alliance Manchester Business School

Martin Walker

University of Manchester - Manchester Business School

Date Written: October 31, 2018

Abstract

We exploit the mandatory adoption of International Financial Reporting Standards (IFRS) as a source of exogenous shock to the corporate financial information environment to study the potential effect that this information shock might have on the dividend payout policy and dividend value relevance in the UK and France. We employ a difference-in-differences research design, in which our choice of the control and treatment groups is mainly based on the divergence between domestic accounting standards and IFRS, while holding institutional factors constant. The UK domestic accounting standards slightly diverge from IFRS (low-divergence firms), whereas French domestic accounting standards substantially diverge from IFRS (high-divergence firms). Nevertheless, both countries have similar institutional factors that might confound the effect of IFRS adoption. Our theoretical argument is that IFRS adoption is expected to mitigate information asymmetry, a major reason for the free cash flow problem (Jensen, 1986) and cash over-retention (Myers and Majluf, 1984). Our findings suggest that IFRS adoption is a major contributor in increasing dividend payouts among high-divergence firms via reduction of asymmetric information. Moreover, improving the information environment helps investors become more confident about using accounting numbers to assess firm financial performance, which causes a significant reduction in dividend value relevance among high-divergence firms.

Keywords: Information Shocks, Information Asymmetry, IFRS, Dividend Payout, Dividend Value Relevance

JEL Classification: M40, G30

Suggested Citation

Harakeh, Mostafa and Lee, Edward and Walker, Martin, The Effect of Information Shocks on Dividend Payout and Dividend Value Relevance (October 31, 2018). International Review of Financial Analysis, Vol. 61, No. 1, 2019, Available at SSRN: https://ssrn.com/abstract=3442232

Mostafa Harakeh (Contact Author)

Lebanese American University ( email )

P.O.Box 36
Chouran-Beirut 1102 2801
Beirut
Lebanon

Edward Lee

University of Manchester - Alliance Manchester Business School ( email )

Booth St. West (Crawford House)
Manchester, M15 6PB
United Kingdom

Martin Walker

University of Manchester - Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

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