Information Asymmetry and Dividend Policy around the Sarbanes-Oxley Act

Journal of Economic Studies

Posted: 17 Dec 2019 Last revised: 22 Jan 2021

See all articles by Mostafa Harakeh

Mostafa Harakeh

Lebanese American University

Ghida Matar

Lebanese American University

Nagham Sayour

Lebanese American University

Date Written: December 15, 2019

Abstract

The literature of financial economics documents a causal relationship between the level of information asymmetry in the firm and its dividend policy. The agency theory and the pecking order theory show that the problem of cash over-retention inside the firm exacerbates in the presence of high asymmetric information. At the same time, when managers increase dividend payments, the level of asymmetric information decreases. This reverse causality between information asymmetry and dividend policy has been a challenge for financial economists. To overcome this econometric issue, we employ the enactment of the Sarbanes-Oxley Act (SOX) in the US in 2002 as a source of an exogenous variation in the level of information asymmetry to study the potential effect that this variation might have on the dividend policy. In doing so, we utilize a difference-in-differences research design, in which the treatment group is US publicly traded firms that were exposed to the policy and the control group is publicly traded companies in the UK where SOX was not enacted. Both countries have similar institutional settings and enforcement of laws, which makes them comparable in our research context. Our findings show that, compared to UK companies, US firms increase their dividend payments following a reduction in asymmetric information as a result of the SOX enactment. Our study contributes to the literature of financial economics by showing that policy makers can mitigate agency conflicts and protect shareholders by improving the corporate information environment and reducing asymmetric information.

Keywords: Information Shocks, Information Asymmetry, Dividend Policy, Corporate Financial Decisions, Sarbanes-Oxley Act

JEL Classification: M40, G30

Suggested Citation

Harakeh, Mostafa and Matar, Ghida and Sayour, Nagham, Information Asymmetry and Dividend Policy around the Sarbanes-Oxley Act (December 15, 2019). Journal of Economic Studies, Available at SSRN: https://ssrn.com/abstract=3504200

Mostafa Harakeh (Contact Author)

Lebanese American University ( email )

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

Ghida Matar

Lebanese American University ( email )

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

Nagham Sayour

Lebanese American University ( email )

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

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