Show Me the Money! Dividend Policy in Countries with Weak Institutions

70 Pages Posted: 27 May 2020 Last revised: 4 Sep 2020

See all articles by Atif Ellahie

Atif Ellahie

University of Utah - David Eccles School of Business

Zachary Kaplan

Washington University in St. Louis - John M. Olin Business School

Date Written: September 2020

Abstract

Minority shareholders in countries with weak institutions face greater agency conflicts related to the separation of ownership and control. To mitigate these agency conflicts, we hypothesize that firms will return more of current earnings to investors as dividends, leaving fewer resources to be depleted due to these conflicts. Specifically, we show that firms in weak institution countries (i) have higher speed of adjustment (SOA) to their target payout ratio, (ii) are more likely to disclose a dividend policy specifying a minimum payout ratio, and (iii) pay dividends earlier in their life-cycle. Tests examining earnings announcement returns are consistent with these differences in dividend policy affecting the pricing of earnings. Finally, in within-country analyses, we find that firms benefit from high SOA dividend policies through greater ability to raise equity and investors are less likely to view these equity raises as expropriation.

Keywords: dividend policy, payout policy, earnings, institutional quality

JEL Classification: G15, G32, G35

Suggested Citation

Ellahie, Atif and Kaplan, Zachary, Show Me the Money! Dividend Policy in Countries with Weak Institutions (September 2020). Available at SSRN: https://ssrn.com/abstract=3601931 or http://dx.doi.org/10.2139/ssrn.3601931

Atif Ellahie (Contact Author)

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States

Zachary Kaplan

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

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