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

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.

Are female CFOs more ethical to the occurrences of financial reporting fraud? Theoretical and empirical evidence from cross-listed firms in the US

“…Additionally, Ellahie and Kaplan (2021) find that a firm within non-strong institutions is often associated with a higher speed of adjustment to the dividend payment. In this respect, future investors can sceptically view the delay of dividend payment.…”

“…Second , many institutional features in the US market are not really mature yet. For example, the recent Ellahie and Kaplan's (2021) study highlights that the nature of the US capital market and, in some senses, reflects political goals. They examine the association between dividend smoothing and agency conflicts by differentiating it in terms of institutional qualities.…”

“…It involves monetary and ethical dilemmas for executives. Indeed, smooth dividends or manipulative documents can be an alternative to attract future shareholders (Ellahie and Kaplan, 2021). In effect, the work atmosphere in the boardroom tends to create a decision that reflects a self‐serving decision that represents the self‐interest of the board members.…”

Shrinking the capital costs and beta risk impediments through ESG: study of an emerging market

“…This is supported by the work of Julian and Ofori-dankwa (2013), where they state that the institutional difference hypothesis which acknowledges the embedded legal, cultural, social, and economic institutional environment differences across countries and state that these institutional differences are likely to have an impact on ESG implications. Emerging economies are also characterized by weak institutions and the same has been found to exacerbate firm-level agency problems, information frictions, and higher cost of external finance and its link with internal COC (Ellahie and Kaplan, 2021;Leuz et al, 2003). This institutional void puts a unique type of governance pressure on an emerging market.…”

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“…Like pre‐revenue firms seeking venture capital funding, ICO ventures appear to be reticent about disclosing detailed financial projections (Mohamed and Schwienbacher [2016]). Only 14% of white papers contain information on future dividends or distributions, which is lower than the frequency of such disclosures in the international market for traditional IPOs (Ellahie and Kaplan [2021]). Finally, 6% of white papers are purely technical documents that contain no marketing information.…”