Accepted by Douglas Skinner. We appreciate the helpful comments of an anonymous referee, Paul Fischer, Joachim Gassen, Wayne Guay, Bob Holthausen, Mingyi Hung, Alon Kalay (the discussant), Yun Lou, Laurence van Lent, Ro Verrecchia, Beverly Walther, and workshop participants at the 2012 HKUST Accounting Research Symposium, 2013 Cherry Blossom Conference at George Washington University, 2013 European Accounting Association meeting, 2013 Journal of Accounting Research Conference, 2013 Swiss Economists Abroad Conference, Columbia University, Humboldt University, Northwestern University, University of Pennsylvania, and University of Zurich.
Dividend Payouts and Information Shocks
Version of Record online: 8 MAR 2014
Copyright ©, University of Chicago on behalf of the Accounting Research Center, 2014
Journal of Accounting Research
Volume 52, Issue 2, pages 403–456, May 2014
How to Cite
HAIL, L., TAHOUN, A. and WANG, C. (2014), Dividend Payouts and Information Shocks. Journal of Accounting Research, 52: 403–456. doi: 10.1111/1475-679X.12040
- Issue online: 1 APR 2014
- Version of Record online: 8 MAR 2014
- Accepted manuscript online: 15 JAN 2014 11:33AM EST
- Manuscript Accepted: 18 DEC 2013
- Manuscript Received: 7 JAN 2013
We examine changes in firms’ dividend payouts 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 payouts. Conversely, dividends could increase if minority investors are in a better position to extract cash dividends. We test these predictions by analyzing the dividend payment behavior of a global sample of firms around the mandatory adoption of IFRS and the initial enforcement of new insider trading laws. Both events serve as proxies for a general improvement of the information environment and, hence, the corporate governance structure in the economy. We find that, following the two events, firms are less likely to pay (increase) dividends, but more likely to cut (stop) such payments. The changes occur around the time of the informational shock, and only in countries and for firms subject to the regulatory change. They are more pronounced when the inherent agency issues or the informational shocks are stronger. We further find that the information content of dividends decreases after the events. The results highlight the importance of the agency costs of free cash flows (and changes therein) for shaping firms’ payout policies.