Dividend Payouts and Information Shocks

Abstract

This paper examines changes in firms' dividend payouts following an exogenous shock to the information environment. Traditional signaling, agency, and voluntary disclosure models predict that the more is commonly known about a firm and its competitors in the marketplace, the less private information managers will have to reveal themselves via costly signals or cash disbursements. To test these predictions, we analyze the dividend payment behavior for a global sample of firms around the mandatory adoption of IFRS and around the initial enforcement of new insider trading laws. Both events have the potential to improve the general information environment in the economy. We find that following the two events firms are less likely to pay (or increase) cash dividends, but more likely to cut (or stop) such payments. The changes in dividend policy occur around the time of the informational shock and only in countries and for firms subject to the regulatory change. In further analyses we find that the information content of dividends, measured as threeday absolute announcement returns, is lower after the informational events. The findings underscore that firms' payout policies, among other things, depend on the extent of information about all firms in the economy. AbstractThis paper examines changes in firms' dividend payouts following an exogenous shock to the information environment. Traditional signaling, agency, and voluntary disclosure models predict that the more is commonly known about a firm and its competitors in the marketplace, the less private information managers will have to reveal themselves via costly signals or cash disbursements. To test these predictions, we analyze the dividend payment behavior for a global sample of firms around the mandatory adoption of IFRS and around the initial enforcement of new insider trading laws. Both events have the potential to improve the general information environment in the economy. We find that following the two events firms are less likely to pay (or increase) cash dividends, but more likely to cut (or stop) such payments. The changes in dividend policy occur around the time of the informational shock and only in countries and for firms subject to the regulatory change. In further analyses we find that the information content of dividends, measured as three-day absolute announcement returns, is lower after the informational events. The findings underscore that firms' payout policies, among other things, depend on the extent of information about all firms in the economy. JEL classification:G14, G15, G35, K22, M41 with the signal fall below the additional valuation premium from escaping the pooling equilibrium. If the firms' information environment improves, for instance, because firms are required to adopt a more transparent set of accounting standards or existing reporting and disclosure rules are more tightly enforced, outside investors should be better able to assess each individual firm's type a priori. As a result, the expected valuation premium for the ...

Analyzing the problems with the current adoption of IFRS in the companies among India, China, Germany, Russia and Kenya

“…The major difference between IFRS and National GAAP is that IFRS requires more discretion and National GAAP is much more detailed (Hail et al, 2014). For the median company, profits jumped by 11%.…”

“…Another disadvantage of adopting IFRS is that the Country's power over accounting would diminish. While switching to IFRS may "signal willingness by the country to cooperate internationally" (Hail, 2014), it would also give "monopoly status to London-based IASB" (Hail et al, 2014). This could pose several problems.…”

“…Conversely many jurisdictions have adopted or are in the process of adopting IFRS for SMEs. Hail et al (2014) examined changes in firms' dividend pay-outs following an exogenous shock to the information asymmetry problem between managers and investors. Agency theories predict a decrease in dividend payments to the extent that improved public information lowers managers' need to convey their commitment to avoid overinvestment via costly dividend pay-outs.…”

A Review of the IFRS-Adoption Literature

“…Studies should ideally focus on both shorter and longer event windows to show whether observed effects are persistent or temporary and provide useful evidence related to inter-temporal trends. (See Table 4 in a study by Hail et al [2014] as an example.) This approach would also help researchers better link evidence across various studies.…”

Does Reporting Transparency Affect Industry Coordination? Evidence from the Duration of International Cartels

“…This evidence is consistent with the enhanced ability of cartel members to detect cheating by their fellow members when their reports are more transparent. As our sample includes voluntary IFRS adopters, we use the identification strategy in Hail et al (2014) to shed some light on the causal relationship between reporting transparency and cartel duration. Specifically, we follow Daouk (2002) andJayaraman (2012) and employ the first prosecution under insider trading laws as an exogenous country-level event that increases reporting quality.…”