Dividend Policy and Corporate Investment under Information Shocks

Posted: 18 Mar 2020

Date Written: February 22, 2020

Abstract

This study exploits the mandatory adoption of International Financial Reporting Standards (IFRS) as an exogenous shock to the corporate information environment to examine how the constraining effect of dividend policy on corporate investment changes under lower levels of information asymmetry. To identify the treatment effect of the information shock, I employ a difference-in-differences research design using an international sample of 25 countries that spans the period 2000-2010. I first show that the information shock mitigates information asymmetry. Then, I find that the constraining effect of dividends on investments declines following the information shock, especially among firms with higher levels of information asymmetry ex-ante. Finally, I show that less constrained investments contribute to maximizing firm value. Overall, I show how reducing information asymmetry mitigates agency conflicts over dividend policy and thereby decreases the probability of forgoing valuable investments to pay dividends, which is found to maximize shareholders’ wealth.

Keywords: Information Shocks, Information Asymmetry, Dividend Policy, Corporate Investment, Firm Value

JEL Classification: M40, G30

Suggested Citation

Harakeh, Mostafa, Dividend Policy and Corporate Investment under Information Shocks (February 22, 2020). Journal of International Financial Markets, Institutions and Money, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3542770

Mostafa Harakeh (Contact Author)

Lebanese American University ( email )

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

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