Can Disclosure Quality Explain Dividend Payouts?

Abstract

This study investigates how a firm's disclosure quality affects its dividend policy. Using a sample of Canadian firms with disclosure data from The Globe and Mail, we empirically test the outcome hypothesis and the substitution hypothesis. The outcome hypothesis posits that dividends are an outcome of an effective governance regime and complements other governance mechanisms while the substitution hypothesis argues that dividend payout is a substitute for other forms of governance. Since disclosure quality can reflect the severeness of agency problems between outsiders and insiders, the outcome hypothesis predicts that higher disclosure quality would lead to higher dividend payouts while the substitution hypothesis predicts that lower disclosure quality is associated with higher payouts. This study contributes to the ongoing debate on the relationship between disclosure quality and dividend policy. Our results provide support for the outcome hypothesis; specifically, better disclosure quality is associated with both a stronger propensity to pay dividends and among dividend payers, with larger dividends.

Disclosure Quality and Dividend Payout in Saudi Firms

“…Previous research in developed countries like the US, the UK and Canada, where investor protection is strong, has established a direct positive relationship between disclosure quality and dividend payouts (La Porta et al, 2000, Healy andPalepu, 2001;DeAngelo et al, 2006;Adjaoud and Ben-Amar, 2010). Studies by Kowalewski et al (2008), Lin, Kuo and Wang (2014) and Lin, Kuo and Wang (2016) have also confirmed that a higher level of corporate governance practices in an environment with greater transparent disclosure would result in higher dividend payouts. In countries where investor protection is strong, insiders find it much more difficult to exploit outsiders when asset values, liabilities, and operating performance are reported in a transparent disclosure environment.…”

“…A number of studies, including Al-Malkawi (2008), Osman & Mohammed (2010), and Al-Ajmi & Abo Hussain (2011) have used panel data because it provides "more informative data, more variability, less collinearity among the variables, more degrees of freedom and more efficiency" (Baltagi, 2001, p.6). Similar to the argument made by Osman & Mohammed (2010), and Lin et al (2014), this study includes both dividend paying firms and non-dividend paying firms to avoid selection bias. Deshmukh (2003) highlights that the exclusion of non-dividend paying firms from any empirical analysis may result in biased and inconsistent estimates of the underlying parameters.…”

“…Similar to the studies by Al-Ajmi & Abo Hussain (2011), Lin et al (2014), and Lin et al (2016) the dependent variable of the logit regression model in Model 1 is the likelihood of the firm paying dividends (DIVD) and is set to 1 if the firm pays dividend, and 0 otherwise. The logit function is where the probability of DIVD is estimated using the functional form π(x) = e g(x) /1+e g (x) .…”

“…Similar to that used by Fama & French (2002), and Lin et al (2014), the dependent variable in the panel regression model (Model 2) is the ratio of dividend to total assets (DIV). We also use an alternative measure of dividend to sales ratio, similar to that used by Liu (2002).…”

“…To reduce concerns over endogeneity, we lag disclosure quality by one period (t-1). Based on the existing literature concerning the determinants of dividends (for example : Fama & French, 2001;Liu, 2002;Lin et al, 2014), we include the following firm-level control variables that have an impact on the dividend payout: (1) investment opportunity (MB), (2) growth opportunity (Capital Expenditure), (3) profitability (ROE), (4) firm size (LnTA), (5) financial leverage (Leverage), and (6) free cash flow (FCF).…”