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

Journal of Accounting Research, Volume 59, Issue 2

Posted: 22 Jun 2021

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

Multiple version iconThere are 2 versions of this paper

Date Written: May 1, 2021

Abstract

We hypothesize that, in weak-institution countries, firms adjust the ‘timing’ of dividend payments by committing to distribute a percentage of current earnings as dividends, revealing the extent of firm-level agency conflicts to future investors and facilitating the raising of external capital. Consistent with this hypothesis, we find that, on average, firms in weak-institution countries have a higher speed of adjustment (SOA) to their target payout ratio, pay dividends earlier in the life cycle, and are more likely to disclose a dividend policy committing to pay a minimum percentage of earnings. Within-country tests show that, in weak-institution countries, the firms with the highest SOA dividend policies have fewer agency problems and an increased ability to raise external capital. Finally, returns tests around earnings announcements show that high-SOA dividend policies are associated with larger market reactions to earnings in weak-institution countries. Collectively, our findings suggest that dividend policy helps to alleviate agency conflicts in weak-institution countries between firms and (future) investors.

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 (May 1, 2021). Journal of Accounting Research, Volume 59, Issue 2, Available at SSRN: https://ssrn.com/abstract=3850362

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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