Dividend Payouts and Information Shocks

DOI: 10.1111/1475-679X.12040Journal of Accounting Research

Vol. 52 No. 2 May 2014Printed in U.S.A.

Dividend Payouts and InformationShocks

L U Z I H A I L ,∗ A H M E D T A H O U N ,† A N D C L A R E W A N G‡

Received 7 January 2013; accepted 18 December 2013

ABSTRACT

We examine changes in firms’ dividend payouts following an exogenousshock to the information asymmetry problem between managers and in-vestors. Agency theories predict a decrease in dividend payments to the ex-tent that improved public information lowers managers’ need to convey theircommitment to avoid overinvestment via costly dividend payouts. Conversely,dividends could increase if minority investors are in a better position to extractcash dividends. We test these predictions by analyzing the dividend paymentbehavior of a global sample of firms around the mandatory adoption of IFRSand the initial enforcement of new insider trading laws. Both events serveas proxies for a general improvement of the information environment and,hence, the corporate governance structure in the economy. We find that, fol-lowing the two events, firms are less likely to pay (increase) dividends, butmore likely to cut (stop) such payments. The changes occur around the timeof the informational shock, and only in countries and for firms subject to theregulatory change. They are more pronounced when the inherent agencyissues or the informational shocks are stronger. We further find that the

∗The Wharton School, University of Pennsylvania; †London Business School; ‡KelloggSchool of Management, Northwestern University.

Accepted by Douglas Skinner. We appreciate the helpful comments of an anonymous ref-eree, Paul Fischer, Joachim Gassen, Wayne Guay, Bob Holthausen, Mingyi Hung, Alon Kalay(the discussant), Yun Lou, Laurence van Lent, Ro Verrecchia, Beverly Walther, and workshopparticipants at the 2012 HKUST Accounting Research Symposium, 2013 Cherry Blossom Con-ference 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 Pennsylva-nia, and University of Zurich.

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Copyright C©, University of Chicago on behalf of the Accounting Research Center, 2014

404 L. HAIL, A. TAHOUN, AND C. WANG

information content of dividends decreases after the events. The results high-light the importance of the agency costs of free cash flows (and changestherein) for shaping firms’ payout policies.

1. Introduction

In perfect and complete financial markets, firm value is not affected bydividend policy (Miller and Modigliani [1961]). However, if markets areless than perfect, for instance, in the presence of asymmetric information,taxes, or incomplete contracts, dividend payouts can affect value. In thisstudy, we focus on the role of cash dividends as a means for managers andcontrolling shareholders to mitigate information problems with minorityinvestors. We examine whether a change in the information environment ofthe firm leads to changes in its dividend payouts. That is, we conduct a di-rect test of how the extent of the information asymmetry problem betweenmanagers and investors, which gives rise to agency cost-based incentives forfree cash flow (FCF) disbursement and retention, shapes firms’ dividendpayout practices.1

The intuition behind our empirical predictions follows directly fromthe FCF-centric theories of dividend policy (see, e.g., Allen and Michaely[2003], or DeAngelo, DeAngelo, and Skinner [2008], for an overview). Ina setting with information asymmetries, managers face the (time-varying)tradeoff between retaining FCF as a source of funds for future growth anddisbursing FCF to mitigate investor concerns about overinvestment. On theone hand, managers want to refrain from paying dividends because inter-nally generated funds provide a less costly, less risky source of capital thantapping into external capital markets (Myers and Majluf [1984]). This peck-ing order theory ties dividend payments to the firm’s investment policy andlife cycle (e.g., DeAngelo, DeAngelo, and Stulz [2006]). On the other hand,dividend payouts are used to reduce the agency costs of FCF and reassureminority investors of managers’ ongoing commitment to make diligent useof firm resources and as a sign that they steer clear of overinvestment (e.g.,Jensen [1986], Lang and Litzenberger [1989]). Such a commitment is es-pecially valuable in light of future external capital needs. Similarly, minorityshareholders could use their legal and market powers to force the firm todisgorge excess cash as dividends thereby reducing the risk of expropria-tion (e.g., La Porta et al. [2000], Shleifer and Wolfenzon [2002]).

1 In line with Bushman, Piotroski, and Smith [2004], the change to a firm’s informationenvironment can come through different channels, like improved disclosure rules, betterinformation acquisition and dissemination by financial analysts, or more informative stockprices. The same goals can be reached via a tightening of investor protection, for example,by increasing managers’ likelihood of being caught and fined for wrongdoing (Shleifer andWolfenzon [2002]). This latter channel likely affects information asymmetry by lowering in-formation risk. Our empirical setting does not allow us to disentangle the specific paths thatlead to a reduction in information asymmetries and we generically label them “informationshocks.”

DIVIDEND PAYOUTS AND INFORMATION SHOCKS 405

It follows that a change in the information asymmetry problem shouldlead to a change in firms’ payout policy. Specifically, a richer common infor-mation environment with more precise and useful information and bettercorporate governance should mitigate part of the information asymmetrybetween managers and investors, which, in turn, affects the role of divi-dends. Lower information asymmetries reduce the pressure on managers todemonstrate commitment and communicate private information throughcostly dividend payouts. Thus, firms are expected to pay fewer dividends fol-lowing the exogenous information shock, and dividend payments becomeless informative. Conversely, the reduction in information asymmetry couldimprove minority investors’ monitoring capabilities and enable them to gettheir hands on a larger piece of the pie, that is, to successfully alleviateoverinvestment and extract higher cash dividends from the firm.

In the present study, we empirically test the above predictions and exam-ine whether the frequency of dividend payouts increases or decreases after anexogenous shock to the firm’s information environment. To do so, we con-struct a large global data set with dividend payment information for firmsfrom 49 countries over the 1993–2008 period. We focus on dividend pay-outs as firms’ primary tool to mitigate agency problems of FCF, but at thesame time control for other means of cash distribution, namely share re-purchases. Using international data allows us to exploit the larger variationin information problems across countries, which, among other things, alsoreflects the institutional setup. In addition, we observe more exogenousshocks to firms’ information environment, and these shocks are not neces-sarily aligned in time, which often is the case in single-country studies. Thisapproach strengthens our identification strategy.

Specifically, we use two separate country-level events as proxies for a gen-eral improvement of the information environment in the economy. First,we consider the mandatory adoption of International Financial Report-ing Standards (IFRS) that took place in the mid 2000s around the globe.Several studies have shown capital-market benefits, improvements of ac-counting properties, and positive effects on financial analysts’ ability toforecast future performance around the time of mandatory IFRS adoption(e.g., Daske et al. [2008], Byard, Li, and Yu [2011], Landsman, Maydew,and Thornock [2012]).2 Our second informational event is a country’s ini-tial enforcement of newly introduced insider trading (IT) laws. As Bhat-tacharya and Daouk [2002] have shown, it is the first prosecution, rather

2 We do not stipulate that the improvement of firms’ information environment is drivenby the adoption of IFRS per se (as it has been shown that this is not necessarily the case; forexample, Christensen, Hail, and Leuz [2013], Daske et al. [2013]). We, rather, use this eventas proxy for generic changes in firms’ information environment, including changes in cor-porate governance. In line with this argument and prior literature, we show that our resultsare (1) largely unchanged if we use another institutional change affecting firms’ informationenvironment that occurs at around the time of mandatory IFRS adoption, (2) stronger in theEuropean Union, and (3) more pronounced around improvements of the general enforce-ment infrastructure. See also sections 4.2 and 4.4.


than the introduction of IT laws, that matters for capital market participantsupdating their priors. Consistently, evidence suggests that, following in-creases, analysts start forecasting a broader set of measures, financial report-ing quality improves, and stock prices become more informative upon therestriction of IT (Bushman, Piotroski, and Smith [2005], Hail [2007], Fer-nandes and Ferreira [2009], Jayaraman [2012], Zhang and Zhang [2012]).3

Thus, both events are associated with a general improvement of the infor-mation environment, which should reduce the information asymmetriesbetween managers and investors. Moreover, because the events occur atthe country level, they are largely exogenous to the individual firm.4

We start our analyses with descriptive evidence on firms’ payout policies.For our global sample contained in Worldscope we find that the propor-tion of dividend paying firms decreases from about 78% to 56% over the1993–2008 period. At the same time, the proportion of firms with share re-purchases increases from 13% to 28%. In terms of nominal amounts, bothaggregate dividend payments and share repurchases more than quadrupleover time, suggesting that relatively fewer firms distribute more cash to theirshareholders in the form of dividends (DeAngelo, DeAngelo, and Skinner[2004]). When we zoom in on the two informational events and distinguishbetween treatment and benchmark firms, a distinct pattern appears. Whilethe proportion of dividend-paying firms after the IFRS mandate decreasessharply, the same number decreases only slightly and with a delay in coun-tries with no change in accounting standards. At the same time, aggregatedividend payments continue to grow throughout, but less so and with a de-lay in IFRS countries. Similar trends appear around the first prosecution ofIT laws.

To formally test the differential time-series among treatment and bench-mark firms, we next conduct a difference-in-differences analysis, and es-timate changes in the propensity of dividend payments following thetwo informational events using logit regressions. We find that, after themandatory adoption of IFRS and the first enforcement of IT laws, firmsare less likely to pay cash dividends and undertake fewer dividend-per-share increases (or dividend initiations) but more frequent dividend-per-share decreases (or stop paying dividends altogether). The magnitude of

3 The impact of IT on the information environment is not a priori clear. On the one hand,the presence of insiders can crowd out the information collection of outside investors. Onthe other hand, IT can contribute to the timely incorporation of new information into stockprices. Fernandes and Ferreira [2009] find that, in their global sample of firms, tighteningIT laws improves the information environment via both more informative stock prices andincreased public information collection.

4 This assumption might not hold if, for instance, a firm decides to avoid IFRS reportingor IT enforcement by going private or moving the trading of its shares to an unregulatedmarket. In addition, we conduct a falsification test in the spirit of Altonji, Elder, and Taber[2005]. That is, we show that observable local market and macroeconomic forces, which mayinfluence the timing of the two informational events, do not explain the estimated treatmenteffects.


the changes is economically meaningful, and, evaluated at the means ofthe independent variables, amounts to a reduction in the propensity to paydividends on the order of 9% (IFRS) to 11% (IT enforcement). This find-ing holds in the full sample, a constant sample, after including numerouscontrols like the use of share repurchases, the wedge between dividend andcapital gains tax rates, or the proportion of retained earnings over total eq-uity, as well as in a specification with firm-fixed effects. The finding alsoholds when we explicitly control for an alternative channel through whichthe information shock could affect dividend payouts, namely by loweringcost of capital and in turn transforming negative NPV projects into prof-itable ones.

In an attempt to assess our identification strategy, we show that thechange in dividend-paying behavior starts around the time of the infor-mational event, and is not present in countries that did not adopt IFRS orin which there was no change in IT enforcement over the sample period.The effect also does not extend to a subset of firms that presumably wasalready more transparent and, hence, less likely to rely on dividend payoutsto mitigate agency problems, namely firms that voluntarily switched to IFRSbefore the mandate and firms cross-listed on a U.S. exchange.5 Becausedividend cuts are particularly costly (e.g., Brav et al. [2005]), we pick a ran-dom subset of firms pre- and post-IFRS adoption and examine in detail thereasoning management provides when reducing dividend payments. Whilecurrent performance problems or future growth prospects are the primaryjustifications before the IFRS mandate (and remain important thereafter),management increasingly remains mum or nonspecific in the post-IFRSperiod. This behavior is consistent with information asymmetry playing alesser role.

To further corroborate our main results, we next examine changes to theinformation content of dividend announcements. If dividends become lessvaluable because there exists more common information to begin with andbecause there is less of a need to show commitment via costly cash disburse-ments, we expect investors to make smaller revisions to their priors uponthe release of the dividend signal. Results from OLS regressions supportthis argument and indicate a reduction in the three-day absolute abnormalreturns around the announcement of dividends following the mandatoryadoption of IFRS and the first enforcement of IT laws. The finding of lowerinformation content applies to all dividend payments, and separately fordividend-per-share increases and decreases.6 At the same time, it does not

5 Note that, in line with Daske et al. [2013], we only find no reduction in dividend payouts forvoluntary IFRS-adopting firms that were serious about changing to more transparent reportingat the time of the switch, but not for the rest of the voluntary IFRS firms.

6 The reduction in information content is larger in magnitude for dividend decreases thanincreases (even though not statistically different). This asymmetric reaction is consistent witha Bayesian view that puts more weight on an (unexpected) increase in dividend payouts thanan (expected) decrease after the information shock.


extend to the subset of voluntary IFRS firms and firms with a U.S. cross-listing (following our two information events), as one would expect if thesefirms already have more transparent reporting beforehand.

Finally, we provide cross-sectional evidence along the two dimensions “ex-tent of the agency problem” and “strength of the information shock” in sup-port of our main results. We find a more pronounced reduction in dividendpayouts in code law countries, and for firms with substantial inside owner-ship or a history of tapping into external capital markets, consistent with theagency costs of FCF being more of a concern in these settings. Moreover,the results around mandatory IFRS adoption are stronger in the EuropeanUnion (EU) when there is an improvement in the general enforcementinfrastructure in a country (Christensen, Hail, and Leuz [2013]) and forfirms that are serious about transparency around the mandate (Daske et al.[2013]). Following the initial enforcement of IT laws, the reduction in div-idend payouts is more pronounced in emerging markets and for firms withincreased analyst following and improved liquidity (Bushman, Piotroski,and Smith [2005], Fernandes and Ferreira [2009]).

Our study contributes to the literature in several ways. First, we show thatan exogenous shock to the information environment affects firms’ demandfor and choice of dividends as a commitment device and information sig-nal. This finding is relevant to the FCF-centric theories of dividend pay-outs that put the information asymmetry between managers and investorsat the core of explaining why and when firms pay dividends. We show thatreductions in the information asymmetry problem via more and better in-formation about the firms in the economy lead to less reliance on dividendpayments, consistent with lower agency costs of FCF. This finding extendsthe results of Dewenter and Warther [1998], who compare firms’ dividendpolicies in settings with different levels of information asymmetries, namelythe United States and Japan.

Second, the findings lend support to the idea that corporate insiders canretain more cash within the firm, which they otherwise would have paid outto show their commitment to shareholder interests. This insight is notablydifferent from La Porta et al. [2000], who, in a specification in levels (in-stead of changes), find evidence of higher dividend payouts when investorprotection is strong. Third, on a more descriptive level, we provide evidencethat firms’ payout policies, among other things, reflect a country’s regula-tory environment, including mandatory disclosure and reporting rules andcorporate governance regulation. The results also illustrate that, in a globalsetting, dividend payments continue to play an important role in mitigatingagency problems (e.g., Pinkowitz, Stulz, and Williamson [2006], Denis andOsobov [2008]). In that sense, dividend payments are likely to persist, eventhough share repurchases increasingly make up a larger fraction of totalpayouts in line with what we observe in the United States (e.g., Fama andFrench [2001], Skinner [2008]).

Finally, we contribute to the literature on the economic consequences ofdisclosure (see Leuz and Wysocki [2008] for an overview), and show that


changes in the general information environment have real consequencesin terms of reducing the frequency and, in some instances, the amountof cash payouts to investors. This interpretation might help clarify priorevidence on the link between information quality and investment efficiency(e.g., Biddle, Hilary, and Verdi [2009]) in that better information not onlymitigates overinvestment, but also increases the availability of cash (fromdividends).

On a more cautionary note, we point out that, even though our evidenceis consistent with information asymmetries and changes therein playing animportant role for firms’ payout policy, our setting does not allow us toidentify the exact mechanisms through which these effects obtain (e.g., viabetter disclosures, improved information acquisition and dissemination, ortighter monitoring and prosecution in case of managerial wrongdoing). Wealso cannot preclude the possibility that alternative channels contribute toour findings (e.g., via expanded growth prospects from lower cost of capi-tal). That said, all these channels originate from a reduction in informationasymmetries between corporate insiders and outsiders, which is at the coreof our conceptual argument and ultimately what our empirical evidenceentails.

The remainder of the paper proceeds as follows. In section 2, we developthe hypotheses and discuss the related literature. In section 3, we outlinethe research design, describe the sample selection, and provide descriptivestatistics. Section 4 contains the results of the propensity, information con-tent, and cross-sectional analyses. Section 5 concludes.

2. Hypothesis Development and Related Literature

In a world with frictions like the presence of taxes, asymmetric informa-tion, or incomplete contracts, dividend payouts can affect firm value. In thisstudy, we focus on the FCF-centric theories of dividend policy because theyhave been shown to be particularly descriptive of firms’ observed dividendbehavior and put much emphasis on the information asymmetry problembetween managers and investors (see, e.g., Allen and Michaely [2003], orDeAngelo, DeAngelo, and Skinner [2008], for an overview).7 Adding thisinformation asymmetry to the frictionless world of Miller and Modigliani[1961] creates tension about the FCF of the firm.

7 Aside from the FCF theories, there exist other information-based explanations of firms’ divi-dend policy. For instance, under signaling, managers use dividends as a signal to convey privateinformation about their type to the market, a practice that lower quality firms find too costly toreplicate (e.g., Bhattacharya [1979], Miller and Rock [1985], John and Williams [1985]). Yet,evidence on the empirical validity of the signaling models is decidedly mixed (e.g., Gonedes[1978], DeAngelo, DeAngelo, and Skinner [1996], Benartzi, Michaely, and Thaler [1997],Grullon, Michaely, and Swaminathan [2002]). Moreover, a model in which we interpret divi-dends as voluntary disclosures about the risky assets of the firm also predicts a declining useof dividends, the more is commonly known about the firm (e.g., Dye [1985], Jung and Kwon[1988], Verrecchia [1990]).


Under the pecking order theory, firms finance their positive net presentvalue projects first with internal funds before tapping into the more costlydebt and equity markets (Myers and Majluf [1984]). This prioritization offunding favors FCF retention and ties dividend payouts to firms’ investmentpolicy and life cycle (e.g., DeAngelo, DeAngelo, and Stulz [2006]). Withample investment opportunities (typical for young growth firms), managersare reluctant to use FCF for dividend distributions. If investment oppor-tunities are limited (e.g., in mature, established firms), disgorging FCF toshareholders becomes more feasible. The availability of excess cash is wherethe agency costs of FCF come into play because managers have a tendencyto overinvest by spending it on negative net present value projects (Jensen[1986]). One way of preventing this behavior is to reduce the cash undermanagement’s control, for example, via dividend payouts. The two oppos-ing forces result in a (time-varying) tradeoff between FCF retention anddisbursements that helps explain firms’ actual dividend payment behavior.It follows that the extent of the information asymmetry problem might af-fect the timing and amount of dividends paid. Put differently, changes inthe information asymmetry between managers and investors should lead tochanges in firms’ dividend policies.

However, the directional effect of a change in agency costs of FCF canbe two-sided. On the one hand, managers have incentives to convey theirgood intentions to reduce overinvestment to capital markets, particularlyin light of future capital needs. Here, dividends serve as a means of cred-ibly conveying management’s commitment, and a steady and predictablestream of dividend payments helps the firm build a favorable reputationin the marketplace or attract a certain investor clientele, like institutionalinvestors with superior monitoring capacity (e.g., Dhaliwal, Erickson, Treze-vant [1999], Allen, Bernardo, and Welch [2000]). After an exogenous im-provement of the commonly available information (and hence a reductionin information asymmetry), there is less of a need for dividends to serveas a costly commitment and reputation device. Thus, the propensity of div-idend payouts should go down (i.e., �Pr[dividend payouts] < 0, where�Pr stands for change in probability), and the announcement of dividends(specifically, the reduction of dividends) should be perceived as less of anews event. These effects should be stronger in countries with weak legalprotection and for firms with ample growth opportunities, but limited FCF(La Porta et al. [2000]).8

Conversely, dividends can be interpreted as the outcome of the rela-tive power between the principal and agent. In light of potential over-investment by management, minority investors try to prevent or limit

8 This relative argument implies that a reduction in information asymmetry has the biggesteffects where the agency costs of FCF are high (e.g., Pinkowitz, Stulz, and Williamson [2006]).At the same time, it might be difficult to detect the effects of an information shock in a settingwhere the information environment is already strong (e.g., in the United States or for large,transparent firms).


misappropriation, for instance, by threatening to use their legal or mar-ket powers, thereby forcing companies to disgorge cash dividends.9 Afteran exogenous shock to the information environment that improves minor-ity investors’ monitoring capabilities, they should be able to exert higherpressure on corporate insiders and, in turn, receive higher dividends, inparticular, if firms lack alternative value-maximizing uses of cash (La Portaet al. [2000], Shleifer and Wolfenzon [2002]). Thus, we would expect firmsto pay more dividends as a result of a shift in relative power (i.e., �Pr[dividend payouts] > 0). At the same time, because investors value onedollar of dividends at a premium when their rights are little protectedand they must fear substantial misappropriation (Lang and Litzenberger[1989], Pinkowitz, Stulz, and Williamson [2006]), any additional dollar ofdividends is valued less when their monitoring ability improves. The effectsshould be particularly pronounced in countries and firms with weak share-holder protection and dim growth prospects (La Porta et al. [2000]).10

To sum up, based on the tradeoff between retaining and disbursing FCF,lower information asymmetry should lead to a change in dividend payouts,and the change is negative (positive) under what La Porta et al. [2000]call the “substitute model” (“outcome model”) of agency. Empirically, weexpect a lower (higher) propensity to pay dividends for firms subjectedto the informational shock. Firms should be less (more) likely to initiateor increase dividend-per-share payouts, and more (less) likely to cease orcut such payments. In both cases, the information content of dividend an-nouncements is expected to be lower.

Finally, we briefly discuss the consequences that an information shockmight have on firms with an already better than average information envi-ronment. If investors can sufficiently monitor managers because the firm’sdisclosures are transparent enough a priori, the role of dividends as ameans of mitigating agency costs is diminished, and the exogenous shockshould have little or no effect. For instance, non-U.S. firms whose shares arecross-listed on a U.S. exchange are subject to extensive filing requirementswith the U.S. Securities and Exchange Commission and to market pressuresby financial analysts and the media. This can lead to substantial capital mar-ket benefits due to lower information asymmetry (e.g., Doidge, Karolyi, andStulz [2004], Bailey, Karolyi, and Salva [2006], Hail and Leuz [2009]). Simi-larly, the voluntary adoption of IFRS has been shown, under certain circum-stances, to stand for an improvement in a firm’s transparency (e.g., Barth,

9 They can do so, for example, by voting against unwanted directors, supporting hostiletakeover bids, suing the company, lobbying for stringent regulation, or voting with their feet.

10 This cross-sectional prediction assumes a minimal level of enforcement, legal protection,or market pressure. Absent such mechanisms, one could argue that, even though more vis-ible, corporate insiders do not have to fear substantive repercussions and will continue tomisappropriate as before. In that case, the outcome of higher dividend payments should bemore pronounced in countries and firms with strong investor protection (for which bettermonitoring can actually prompt real consequences).


Landsman, and Lang [2008], Daske et al. [2013]). For these types of firms,a general improvement of the information environment likely has no effectat all (and hence we utilize them in some of our tests as counterfactual).

The FCF-based theories of dividend payouts have received ample atten-tion in the literature. For instance, Lang and Litzenberger [1989] find thatmarket reactions to dividend changes are substantially larger for firms thatmost likely suffer from overinvestment problems. Along the same lines,DeAngelo, DeAngelo, and Stulz [2006] for U.S. firms and Denis and Os-obov [2008] for firms in six developed markets find that dividend pay-outs are concentrated among the largest, most profitable firms, with re-tained earnings comprising a large fraction of total equity. They concludethat these are the firms most likely to suffer from overinvestment issues.11

Probably most related in spirit to our study, Dewenter and Warther [1998]compare dividend policies in the United States and Japan. They show thatJapanese keiretsu firms face fewer agency conflicts than U.S. firms. Conse-quently, Japanese firms experience smaller stock price reactions to dividendomissions and initiations, are less reluctant to stop or cut dividend payouts,and their dividends are more responsive to earnings changes. However, allof the above studies compare the level of information asymmetry acrossfirms and countries instead of changes therein.

In an important study for our setting, La Porta et al. [2000] directlytest the outcome model versus the substitute model. Using a large inter-national sample of nonfinancial firms in 1994, they find that, in stronginvestor protection countries (i.e., common law countries and countrieswith high antidirector rights index values), firms distribute a larger pro-portion of earnings as dividends than when investor protection is weak,in particular, if they face dim growth prospects. They therefore dismissthe substitute model. However, Pinkowitz, Stulz, and Williamson [2006]show a weaker relation between dividends and firm value in countrieswith strong investor protection, consistent with both the outcome model(i.e., the marginal value of each additional dollar disbursed declines) andthe substitute model (i.e., the benefits of paying dividends are larger withweak investor protection). Similarly, it has been shown that a firm’s divi-dend policy can attract specific clienteles like institutional investors (e.g.,Allen, Bernardo, and Welch [2000]) and proxies for superior earningsquality (Skinner and Soltes [2011]). Thus, it possesses some of the key fea-tures of a voluntary commitment device as stipulated under the substitutemodel.

11 Large firms are less likely to suffer from information asymmetries because they tend tobe more transparent to begin with. However, in line with Denis and Osobov [2008], we findthat the proportion of dividend-paying firms (outside the United States) is sufficiently largeto allow for ample variation in information asymmetries and agency costs of FCF. Moreover,the level of information asymmetries likely varies substantially across our international sample(e.g., Leuz, Nanda, and Wysocki [2003]) thereby adding to the power of our tests.


3. Research Design and Data

In this section, we describe our empirical identification strategy and de-velop the regression models to test our main predictions regarding a firm’sfrequency and information content of dividend payouts. We then discussthe sample selection and variable construction and provide descriptivestatistics on payout policies in our global sample.

3.1 EMPIRICAL MODEL AND IDENTIFICATION STRATEGY

We examine the impact of an informational shock on dividend payoutsusing a large panel data set with yearly firm-level observations from 49 coun-tries around the world. Specifically, we investigate whether (1) the propen-sity of firms to pay dividends, and (2) the information content of dividendannouncements change surrounding significant improvements in the infor-mation environment for the average firm in the economy. For the propen-sity analyses, we estimate the following logit regression model:

Pr (Dividend Payments) = β0 + β1 InfoEvent +∑

β j Controls j

+∑

βi Fixed Effectsi + ε. (1)

The dependent variable, Dividend Payments, is a binary indicator variablemarking positive dividends per share (set equal to “1”). In years withoutdividend payments or in case of missing data, we set this variable to “0.”12

In some of the analyses, we replace the dividend payments variable withindicators for annual increases (decreases) in dividends, measured as theyear-to-year change in the dividends per share item in Worldscope (field05101).

Our main variable of interest is the difference-in-differences estimator In-foEvent. This variable takes on the value of “1” for all firm-years subjected tothe informational shock and “0” otherwise. We use two exogenous country-level events to proxy for a general improvement of the information environ-ment in an economy and hence a reduction in the information asymmetryproblem, namely the mandatory adoption of IFRS and the first prosecutionunder newly introduced IT laws.13 The first event led to harmonized ac-counting standards that, compared to many local GAAPs, are more capital-market oriented and provide more extensive measurement and disclosurerules (e.g., Ding et al. [2007], Bae, Tan, and Welker [2008]). Consistent

12 To assure that this research design choice does not bias our data, we re-estimate theanalyses after dropping firm-years without dividend data. The results are largely the same andnone of our inferences change.

13 Note that we do not stipulate that either IFRS adoption or IT enforcement per se leadsto an improvement in the information environment, but, rather, that these events serve asproxies for country-level (regulatory) changes in the information environment and corporategovernance structure at around the time the two events took place.


with this notion, several studies have shown that mandatory IFRS adop-tion is associated with capital-market benefits, improvements of account-ing properties, and positive effects on analysts’ ability to forecast futureearnings (e.g., Daske et al. [2008], Byard, Li, and Yu [2011], Landsman,Maydew, and Thornock [2012]). These effects are particularly pronouncedin the European Union, around changes in enforcement (Christensen,Hail, and Leuz [2013]), and for firms with strong incentives to improve re-porting transparency (Daske et al. [2013]). The second event follows fromthe finding in Bhattacharya and Daouk [2002] that it is the first prosecu-tion, rather than the introduction of IT laws, that matters for capital marketparticipants updating their priors. Consistently, evidence suggests that ana-lyst following increases, analysts start forecasting a broader set of measures,financial reporting quality improves, and share prices become more infor-mative upon the restriction of IT (Bushman, Piotroski, and Smith [2005],Hail [2007], Fernandes and Ferreira [2009], Jayaraman [2012], Zhang andZhang [2012]).14 For both informational events, we predict that they arefollowed by a change in the frequency of dividend payouts (β1 � 0). Thechange is predicted to be negative (β1 < 0) under the substitute model andpositive (β1 > 0) under the outcome model of agency.15

The model in equation (1) includes a comprehensive set of firm-levelControlsj (see section 3.2) and Fixed Effectsi. These variables are importantbecause a firm’s dividend policy also reflects such factors as cash con-straints, investment opportunities, accounting profitability, stock price per-formance, payout history, or alternative payout mechanisms. In our mainspecification, we include country, one-digit SIC industry, and year-fixedeffects, which control for time-invariant unobserved correlated variablesalong those three dimensions (e.g., country-specific payout restrictions orgeneral trends in dividend payouts over time). As both mandatory IFRSadoption and IT enforcement are regulatory initiatives on the country level,we draw statistical inferences based on standard errors clustered by coun-try.16

For our tests of whether the information content of dividends changesafter the two events, we build on equation (1) and estimate the following

14 IT by itself can be informative to the market and, hence, stricter limits on IT could lead toless (and not more) informative stock prices. Consistent with this idea, Fernandes and Ferreira[2009] show that, in emerging markets, stock price informativeness does not change after thefirst prosecution of IT laws while it improves in developed markets. Yet, they still find an overallimprovement of the general information environment in emerging markets because formerlyprivate information entered the public domain.

15 We address concerns that our informational events are systematically linked to firms’payout policy (e.g., via IFRS restrictions on dividend payouts) in section 4.2. See also table A1in the appendix.

16 We also provide results using firm-fixed effects in the robustness tests. Furthermore, theresults remain largely unaffected and none of the inferences change if we double-cluster thestandard errors by country and year.


OLS regression model:

CAR(Div. Announcement) = α0 + α1 InfoEvent +∑

α j Controls j

+∑

αi Fixed Effectsi + ν. (2)

We use three-day Dividend Announcement Returns as the dependent vari-able, and compute them as the absolute value of the cumulative abnormalreturns around the declaration date of firms’ annual dividend per share.Abnormal returns are equal to the daily raw returns of a firm’s share mi-nus the returns on the local market index.17 The definition of InfoEventremains the same. We expect that, if the information shock affects payoutpolicy, it should also have an effect on the information content of divi-dends (α1 � 0). Specifically, dividend announcements should become lessinformative (α1 < 0) when the agency costs of FCF go down. We use adifferent set of firm-level Controlsj in the information content analysis (seesection 3.2) because the main concern here is the effect of confoundingevents like earnings announcements or the magnitude of the change individends and earnings. The model in equation (2) again includes country,industry, and year Fixed Effectsi, and we employ country-clustered standarderrors.

3.2 SAMPLE AND VARIABLE DESCRIPTION

Our total sample comprises all firm-year observations between 1993 and2008 for which we have sufficient Worldscope and Datastream data to es-timate our base regressions in equation (1). We start in 1993 because, be-fore that year, no reliable dividend data are available in Worldscope. Welimit the sample to countries with at least 10 dividend-per-share observa-tions and firms with total assets larger than US $10 million.18 This selec-tion procedure leaves us with a maximum of 222,766 firm-year observa-tions from 49 countries. For our analyses, we split the overall sample into

17 Even though our predictions conceptually are not tied to absolute announcement re-turns but also apply to signed returns, the former likely offer better identification and morepowerful tests. First, empirically, good news announcements and bad news announcementsoffset each other, leading to opposing predictions for the α1 coefficient on InfoEvent. Second,the distinction between good news and bad news announcements is not straightforward anddoes not map one-to-one into dividend increases and decreases. For instance, a dividend cutresulting from an increase in investment opportunities might be perceived as good instead ofbad news. In line with these arguments, we find that, in the pre and post periods around ourtwo events, mean signed returns are always smaller than mean absolute returns (consistentwith good and bad news offsetting each other), and mean signed returns are generally posi-tive around both the announcement of dividend increases and decreases (consistent with thetwo events, on average, conveying good news to the markets).

18 We further exclude firms that voluntarily adopted IFRS before the mandate or whoseshares are cross-listed on a U.S. exchange from the base sample, but use them as counter-factual firms (i.e., firms that are not directly affected by the two information events) in therobustness tests.


two (partially overlapping) subsamples, one for each informational event.That is, we test for the effects around mandatory IFRS adoption employ-ing all firm-years over the 2001 to 2008 period (Nmax = 147,430). In theIT enforcement analyses we consider the 1993–2004 firm-years (Nmax =143,957), and hence explicitly exclude observations following the IFRSmandate.

Table 1 provides a breakdown of the total sample and shows the numberof unique firms and firm-years by country and year. It also contains infor-mation on the number of dividend payments, increases, and decreases. Thelatter two numbers include the initiation and cessation of dividend payouts.As panel A shows, dividend payments are fairly common around the globe.In 62% of the years, firms paid out a dividend ranging from a high of 85%in Chile to a low of 30% in Poland. In all but one country (China), firms aremore likely to raise than to cut dividends per share, confirming managers’reluctance to cut dividends, in particular in the United States (e.g., Bravet al. [2005], DeAngelo, DeAngelo, and Skinner [2008]), and suggestingthat a firm’s payout history is an important determinant of dividend pol-icy.19 Panel A also lists the year of the IFRS mandate (Daske et al. [2008])and when the first IT enforcement took place (Bhattacharya and Daouk[2002]).20

Panel B shows the general trend in dividend payments over time. Thenumber of dividend payments, dividend increases, or dividend decreasesgoes down over the sample period. Even so, more than half of the firmscontinue to pay dividends at the end of the sample period. This is remark-able because 2008 coincides with the beginning of the global financial cri-sis, which likely contributed to the unusually low number of dividend in-creases and the unusually high number of dividend cuts in that year. Thenegative time trend becomes even more obvious in figure 1, panel A, inwhich we plot the proportion of dividend-paying firms from 1993 to 2008.From 2002 on, the downward trend came to a halt, and there was no fur-ther reduction in firms that paid a dividend. The graph also shows that,

19 The reluctance to cut dividends has the following implications for our tests: (1) the per-ceived benefits of cutting dividends have to be substantive enough to outweigh the impliedcosts. (2) The benefits can stem from different channels, for example, from lower agencycosts of FCF or expanded growth prospects following a reduction in cost of capital. (3) Thereluctance to cut dividends could be more pronounced in the United States than elsewhere(see also table 1, panel A). This special role of the United States implies that other reasons forcutting dividends (like expanded growth prospects) are not or are only weakly related to div-idend cuts. Consistently, in sensitivity analyses not tabulated, we find no association betweengrowth prospects (measured by Tobin’s q) and dividend cuts (measured by negative values of� Dividend per Share) in the United States, but do find a significantly negative relation in ournon-U.S. data. Thus, while this observed management behavior might make it harder for usto find results, it seems to be less of a concern in a cross-country setting.

20 When coding the InfoEvent indicator, we use December 31 of the mandatory IFRS year asa cutoff for firms’ fiscal year end. For IT enforcement, we assign it to “1” in the year the firstprosecution took place in a country. Because we do not have the exact enforcement date, weassess this research design choice in section 4.2.


TA

BL

E1

Sam

ple

Com

posi

tion

byC

ount

ryan

dYe

ar

Pan

elA

:Num

ber

ofob

serv

atio

ns,d

ivid

end

paym

entb

ehav

ior,

and

inst

itut

iona

lvar

iabl

esby

coun

try

Div

iden

dD

ivid

end

Div

iden

dPa

ymen

tsIn

crea

ses

Dec

reas

es

Cou

ntr

yU

niq

ueFi

rms

Firm

-Ye

ars

N%

N%

N%

Man

dato

ryIF

RS

Ado

ptio

n

Insi

der

Trad

ing

En

forc

emen

t

Arg

enti

na

6347

619

841

.613

327

.910

021

.0n

.a.

1995

Aus

tral

ia1,

410

6,62

73,

949

59.6

2,96

644

.81,

169

17.6

2005

1996

Aus

tria

4921

315

874

.210

750

.259

27.7

2005

n.a

.B

elgi

um13

873

254

374

.242

457

.914

720

.120

0519

94B

erm

uda

5422

614

664

.696

42.5

4720

.8n

.a.

n.a

.B

razi

l28

31,

578

1,10

269

.865

541

.550

131

.7n

.a.

Bef

ore

1993

Can

ada

1,54

47,

356

2,87

439

.11,

945

26.4

946

12.9

n.a

.B

efor

e19

93C

hile

166

1,30

81,

117

85.4

688

52.6

451

34.5

n.a

.19

96C

hin

a1,

517

7,48

23,

502

46.8

2,09

828

.02,

240

29.9

n.a

.n

.a.

Col

ombi

a37

230

177

77.0

137

59.6

3515

.2n

.a.

n.a

.C

zech

Rep

ublic

4916

473

44.5

4225

.633

20.1

2005

1993

Den

mar

k20

61,

929

1,37

471

.275

739

.235

918

.620

0519

96E

gypt

5826

617

565

.811

041

.455

20.7

n.a

.n

.a.

Fin

lan

d12

987

968

978

.442

548

.429

633

.720

0519

93Fr

ance

830

4,33

82,

819

65.0

1,95

245

.096

122

.220

05B

efor

e19

93G

erm

any

611

2,68

61,

379

51.3

857

31.9

621

23.1

2005

1995

Gre

ece

330

1,98

71,

202

60.5

759

38.2

607

30.5

2005

1996

Hon

gK

ong

916

6,65

14,

093

61.5

2,62

539

.51,

807

27.2

2005

1994

Hun

gary

2696

4344

.827

28.1

1818

.820

0519

95In

dia

886

4,71

53,

829

81.2

2,37

350

.384

217

.9n

.a.

1998

Indo

nes

ia33

02,

238

1,15

651

.770

031

.355

224

.7n

.a.

1996

Irel

and

7335

621

259

.617

549

.250

14.0

2005

n.a

.Is

rael

182

1,00

338

438

.325

125

.018

618

.520

08B

efor

e19

93It

aly

123

607

384

63.3

253

41.7

173

28.5

2005

1996

(Con

tinue

d)

418 L. HAIL, A. TAHOUN, AND C. WANGT

AB

LE

1—C

ontin

ued

Pan

elA

:Num

ber

ofob

serv

atio

ns,d

ivid

end

paym

entb

ehav

ior,

and

inst

itut

iona

lvar

iabl

esby

coun

try

Div

iden

dD

ivid

end

Div

iden

dPa

ymen

tsIn

crea

ses

Dec

reas

es

Cou

ntr

yU

niq

ueFi

rms

Firm

-Ye

ars

N%

N%

N%

Man

dato

ryIF

RS

Ado

ptio

n

Insi

der

Trad

ing

En

forc

emen

t

Japa

n4,

404

44,0

4837

,283

84.6

12,8

0329

.15,

638

12.8

n.a

.B

efor

e19

93K

orea

(Sou

th)

1,17

07,

200

4,47

662

.22,

336

32.4

1,55

821

.6n

.a.

Bef

ore

1993

Lux

embo

urg

2413

610

275

.085

62.5

2014

.720

05n

.a.

Mal

aysi

a1,

044

7,91

05,

304

67.1

3,26

141

.22,

466

31.2

n.a

.19

96M

exic

o11

476

936

547

.527

035

.112

516

.3n

.a.

n.a

.T

he

Net

her

lan

ds17

31,

020

712

69.8

480

47.1

254

24.9

2005

1994

New

Zea

lan

d13

482

063

977

.943

152

.622

227

.120

07n

.a.

Nor

way

241

1,59

292

358

.059

937

.631

419

.720

05B

efor

e19

93Pa

kist

an11

278

250

764

.833

342

.619

024

.320

07n

.a.

Peru

6725

611

544

.979

30.9

5621

.9n

.a.

1994

Phili

ppin

es18

61,

275

555

43.5

376

29.5

235

18.4

2005

n.a

.Po

lan

d24

31,

006

306

30.4

198

19.7

162

16.1

2005

1993

Port

ugal

6234

919

255

.012

736

.479

22.6

2005

n.a

.R

ussi

anFe

dera

tion

8923

714

360

.310

845

.641

17.3

n.a

.n

.a.

Sin

gapo

re63

14,

311

3,13

472

.71,

880

43.6

1,48

534

.420

03B

efor

e19

93So

uth

Afr

ica

445

2,64

01,

904

72.1

1,50

557

.049

918

.920

05n

.a.

Spai

n16

71,

037

756

72.9

573

55.3

220

21.2

2005

1998

SriL

anka

3425

221

284

.115

360

.754

21.4

n.a

.19

96Sw

eden

376

2,58

51,

653

63.9

1,22

247

.336

414

.120

05B

efor

e19

93Sw

itze

rlan

d13

21,

187

933

78.6

543

45.7

214

18.0

2005

1995

Taiw

an1,

283

7,89

74,

453

56.4

2,87

836

.42,

008

25.4

n.a

.B

efor

e19

93T

hai

lan

d52

43,

965

2,66

567

.21,

481

37.4

1,23

431

.1n

.a.

1993

Turk

ey15

91,

020

375

36.8

226

22.2

220

21.6

2006

1996

Un

ited

Kin

gdom

2,17

814

,329

10,6

9374

.68,

701

60.7

2,37

216

.620

05B

efor

e19

93U

nit

edSt

ates

8,52

962

,000

27,4

2244

.221

,310

34.4

6,00

49.

7n

.a.

Bef

ore

1993

Tota

l32

,531

222,

766

137,

400

61.7

82,5

1337

.038

,289

17.2

(Con

tinue

d)


TA

BL

E1—

Con

tinue

d

Pan

elB

:Num

ber

ofob

serv

atio

nsan

ddi

vide

ndpa

ymen

tbeh

avio

rby

year

Div

iden

dPa

ymen

tsD

ivid

end

Incr

ease

sD

ivid

end

Dec

reas

es

Year

Firm

-Yea

rsN

%N

%N

%

1993

5,64

24,

383

77.7

2,39

242

.41,

164

20.6

1994

6,35

84,

859

76.4

2,82

344

.41,

173

18.4

1995

7,62

05,

394

70.8

3,24

842

.61,

225

16.1

1996

8,97

86,

142

68.4

3,71

141

.31,

506

16.8

1997

9,70

46,

353

65.5

3,77

138

.91,

701

17.5

1998

10,5

626,

611

62.6

3,71

235

.11,

979

18.7

1999

12,5

507,

598

60.5

4,25

633

.92,

190

17.5

2000

13,9

228,

686

62.4

5,05

736

.32,

393

17.2

2001

15,2

889,

039

59.1

5,00

232

.73,

039

19.9

2002

17,2

449,

818

56.9

5,44

531

.63,

554

20.6

2003

17,7

3410

,344

58.3

6,41

236

.22,

764

15.6

2004

18,3

5511

,248

61.3

7,47

440

.72,

514

13.7

2005

18,9

7611

,759

62.0

7,74

140

.82,

943

15.5

2006

20,2

4112

,234

60.4

8,07

639

.93,

009

14.9

2007

21,1

1912

,657

59.9

8,15

538

.63,

139

14.9

2008

18,4

7310

,275

55.6

5,23

828

.43,

996

21.6

Tota

l22

2,76

613

7,40

061

.782

,513

37.0

38,2

8917

.2

Th

esa

mpl

eco

mpr

ises

am

axim

umof

222,

766

firm

-yea

rob

serv

atio

ns

from

49co

untr

ies

betw

een

1993

and

2008

,for

wh

ich

we

hav

esu

ffici

entW

orld

scop

ean

dD

atas

trea

mda

tato

esti

mat

eou

rba

sere

gres

sion

s(s

eeta

ble

3).W

ere

quir

efi

rms

toh

ave

tota

lass

ets

ofU

S$1

0m

illio

n,a

nd

limit

the

sam

ple

toco

untr

ies

wit

hat

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t10

divi

den

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r-sh

are

obse

rvat

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s.W

efu

rth

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ate

firm

sth

atvo

lun

tari

lyad

opte

dIF

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befo

reth

em

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te,o

rw

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esh

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are

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ted

ona

U.S

.exc

han

ge.T

he

tabl

ere

port

sth

eto

tal

num

ber

ofun

ique

firm

sas

wel

las

the

num

ber

offi

rm-y

ears

and

perc

enta

ges

byco

untr

y(p

anel

A)

and

year

(pan

elB

)fo

rth

efo

llow

ing

case

s:(1

)fi

rm-y

ears

wit

hdi

vide

nd

paym

ents

mea

sure

dus

ing

the

divi

den

ds-p

er-s

har

eit

emin

Wor

ldsc

ope

(fiel

d05

101)

,(2)

firm

-yea

rsw

ith

incr

ease

sin

divi

den

dspe

rsh

are

rela

tive

toth

epr

ior

peri

od(i

ncl

udin

gth

ein

itia

tion

ofdi

vide

nd

paym

ents

),an

d(3

)fi

rm-y

ears

wit

hde

crea

ses

indi

vide

nds

per

shar

ere

lati

veto

the

prio

rpe

riod

(in

clud

ing

the

cess

atio

nof

divi

den

dpa

ymen

ts).

Pan

elA

also

lists

the

year

ofth

esi

gnifi

can

tch

ange

sin

firm

s’in

form

atio

nen

viro

nm

ent:

(1)

wh

enIF

RS

repo

rtin

gbe

cam

em

anda

tory

ina

coun

try

(Das

keet

al.[

2008

]),a

nd

(2)

wh

enth

efi

rstp

rose

cuti

onun

der

insi

der

trad

ing

law

sto

okpl

ace

ina

coun

try

(Bh

atta

char

yaan

dD

aouk

[200

2]).

Inth

ose

two

colu

mn

s“n

.a.”

den

otes

that

the

info

rmat

ion

alev

entd

oes

not

appl

ydu

rin

gou

rsa

mpl

epe

riod

.


Trend Line: y = 73.4% - 1.2% x

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Perc

ent o

f Tot

al F

irm

s

% Dividend-Paying Firms % Firms with Share Repurchases

Trend Line: y = 27.3 bn + 26.2 bn x

0

100

200

300

400

500

600

700

800

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Payo

uts (

US$

bill

ion)

Cash Dividends Share Repurchases

Panel A: Percent of Firms with Dividend Payments or Share Repurchases from 1993 to 2008

Panel B: Payouts for Dividends or Share Repurchases from 1993 to 2008 (in US$ billion)

FIG. 1.—Proportion of dividend-paying firms and dividend payouts over time. The figure plotsthe time-series of the percentage of firms with dividend payments or share repurchases (panelA) and the corresponding aggregate U.S. dollars amounts (panel B). The sample comprisesall firm-year observations from 49 countries over the 1993–2008 period with dividend andcontrol variable data available (see table 1). We also plot a linear trend line for the dividendpayments. We measure dividend payments using the dividends-per-share item (field 05101),and use the common dividend declared (field 18192) to measure the aggregate amounts. Wecompute share repurchases as the (positive) amount of funds used to decrease the number ofshares outstanding (field 04751), net of any yearly changes in preferred stock (field 03451).All data are from Worldscope.

internationally, share repurchases became more popular over time, butnever reached the same level as in the United States (Fama and French[2001]).21 The proportion of firms with share repurchases increases from

21 Our dividend and share repurchase data are from Worldscope (see notes to figure 1).To gauge the data quality, we compare our numbers in the United States to other stud-ies using data from Compustat (e.g., Floyd, Li, and Skinner [2013]). We find that coveragein the United States is more extensive in Compustat than Worldscope, leading to differentlevels of the proportion of firms with dividends and share repurchases (higher in World-scope, and more so for repurchases). However, both data sources display almost identicaltime trends. When we repeat the analyses with share repurchase data from (1) SDC Platinum,


13% to 28% by the end of the sample period. In terms of nominal amounts,a different picture appears. As panel B of figure 1 illustrates, both aggregatedividend payments and share repurchases surged substantially over time.The two graphs taken together suggest that relatively fewer firms disbursedincreasingly larger cash amounts to shareholders (DeAngelo, DeAngelo,and Skinner [2004]). These time-series trends in the data underscore theimportance of our difference-in-differences design.

In table 2, we present descriptive statistics for the variables used in theregression analyses. In equation (1), the propensity model, we include var-ious control variables for size, growth, and profitability (e.g., Fama andFrench [2001], Grullon and Michaely [2002], DeAngelo, DeAngelo, andStulz [2006]): Total Assets is a proxy for firm size and maturity. Larger,more mature firms are more likely to pay dividends. The Market-to-Book ra-tio serves as a proxy for growth opportunities and indicates the need forfirms to retain cash. We expect a negative sign. We expect more profitablefirms, measured with Return on Assets, to be more likely to pay dividends.The annual buy-and-hold Stock Return measures market performance, andwe expect a positive sign. Negative Earnings stands for an operating loss ina given year, rendering the payment of dividends less likely. We further in-clude financial Leverage as a proxy for a firm’s capital structure and interestpayments, but also for potential agency conflicts. Both suggest a negativesign. In line with Chay and Suh [2009], we include Return Variability, mea-sured as the annual standard deviation of daily stock returns, as a proxyfor firms’ cash-flow uncertainty. Firms with higher stock volatility are lesslikely to pay dividends, fearing future cash shortfalls. Finally, we accountfor a firm’s payout history and include the lagged Dividend Payments indi-cator as well as a binary indicator for Share Repurchases in the model. Forboth variables, we expect a positive sign. Dividend payouts are sticky andshare repurchases often serve to complement dividend payments (Famaand French [2001], Skinner [2008]).

In equation (2), the information content model, the following controlvariables are included (e.g., Yoon and Starks [1995], Braggion and Moore[2011]): an Overlap with Earnings Announcement indicator, which takes onthe value of “1” if the earnings announcement occurs within five days ofthe dividend announcement. If so, the coefficient should be positive. �Dividend per Share and � Earnings per Share are the year-to-year changes individends and earnings per share, and capture the news effect.22 We also

(2) Compustat, or (3) using the change in treasury stock from Worldscope (Fama and French[2001]), the results are very similar and none of the inferences change.

22 We scale � Dividend per Share and � Earnings per Share by price at the end of the fiscal year,but obtain very similar results when using percentage changes or assets per share as a deflator.Furthermore, when we condition the information content analyses on the magnitude of thechange in dividends (i.e., add an interaction term of InfoEvent with � Dividend per Share to themodel), the results remain largely unaffected.


TA

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Des

crip

tive

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istic

sfo

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the

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to“0

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ivid

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d05

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com

pute

abn

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alre

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aily

raw

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inus

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lmar

ketr

etur

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use

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follo

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gco

ntr

olva

riab

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defi

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abi

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tor

mar

kin

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ock

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ivid

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include size, market-to-book, leverage, and profitability. For more detailson data sources and variable measurement, see the notes to table 2.

4. Empirical Results

In this section, we first describe the results of the propensity analysesof paying dividends. We then assess the identification strategy we employto capture changes in the information environment, and conduct variousrobustness tests. Next, we discuss the results of the changes in the infor-mation content of dividend announcements. We conclude with some cross-sectional analyses to strengthen our main findings of a reduced propensityto pay dividends.

4.1 ANALYSES OF THE PROPENSITY TO PAY DIVIDENDS

We start our analysis with graphically plotting the percentage of dividend-paying firms as well as the aggregate dividend payouts (in billion dollars)over time. We do so separately for firms in the treatment countries and thebenchmark countries, centered on the informational events (i.e., in theevent year t = 0). Figure 2 contains the graphs for mandatory IFRS adop-tion for the three years before and after the informational event. Panel Ashows that the proportion of dividend-paying firms follows a different trendacross the two groups. While the proportion of dividend-paying firms sub-ject to the IFRS mandate decreases sharply following the regulatory change,the same number remains fairly stable in countries that did not require aswitch in accounting standards. Thus, there are relatively fewer IFRS firmspaying dividends, and the change coincides with the introduction of thenew accounting rules. We can draw similar conclusions from the aggregatedividend payouts in panel B. While firms in non-IFRS countries pay a sub-stantially higher total dividend in the event year, the same number remainsalmost flat in IFRS countries before it follows the general trend and also in-creases. Thus, in a relative sense, IFRS firms pay fewer aggregate dividendsafter the mandate. Figure 3 shows the same two graphs for IT enforcementbeginning in year t – 3 through year t + 5. In panel A, we again observethat the percentage of dividend-paying firms drops at a faster pace (and be-ginning in the event year) in the treatment countries relative to the bench-mark countries (i.e., countries with no IT laws, or where the IT laws hadalready been enforced earlier). Panel B shows a widening gap in aggregatedividend amounts between the two groups, which accelerates in the eventyear.

To more formally test these differential trends, we next conduct a sim-ple difference-in-differences analysis of the percentage of dividend-payingfirms and present results in panel A of table 3. Such a comparison acrossthe cells of a two-by-two matrix is a straightforward way to account for unob-served differences between treatment and benchmark firms and to control


45.0%

50.0%

55.0%

60.0%

65.0% Panel A: Percent of Firms with Dividend Payments for IFRS and Benchmark Countries

Panel B: Dividend Payouts for IFRS and Benchmark Countries (in US$ billion)

-3 -2 -1 0 +1 +2 +3

Perc

ent o

f Tot

al F

irm

s

Years Relative to Event Dividend-Paying Firms (Total) Dividend Payers in IFRS Countries Dividend Payers in Benchmark Countries

IFRS Adoption

0

50

100

150

200

250

300

350

-3 -2 -1 0 +1 +2 +3

Pay

outs

(US$

bill

ion)

Years Relative to Event Dividend Payers in IFRS Countries Dividend Payers in Benchmark Countries

IFRS Adoption

FIG. 2.—Proportion of dividend-paying firms and dividend payouts around mandatory IFRSadoption. The figure plots the time-series of the percentage of firms with dividend payments(panel A) and the corresponding aggregate U.S. dollars amounts (panel B) in the years sur-rounding a significant change in firms’ information environment, that is, the mandatory in-troduction of IFRS reporting. The sample comprises the subset of applicable observationsfrom our base sample as described in table 1. We align the firm-years in event time, and plotseparate lines for the total sample (panel A only), the treatment sample countries, and thebenchmark countries. We measure dividend payments using the dividends-per-share item inWorldscope (field 05101), and use the common dividend declared (field 18192) to measurethe aggregate amounts.

for general trends in the data.23 We report results for the full sample anda constant sample, for which we require at least eight firm-year observa-tions per firm.24 Throughout the panel, the tenor of the results is the same.

23 To allow for a true difference-in-differences comparison we split the benchmark firmsinto a pre and post period using December 31, 2005 (IFRS setting), and the year 1996 (ITsetting) as a cutoff value.

24 For the IFRS setting, the constant sample requires firms to have data in each year. For theIT setting, due to its length and because it dates back to 1993, we require firms to be presentin two-thirds of the 12 years possible.


55.0%

60.0%

65.0%

70.0%

75.0%

80.0%

85.0%

90.0%

95.0%

Panel A: Percent of Firms with Dividend Payments for IT Enforcement and Benchmark Countries

Panel B: Dividend Payouts for IT Enforcement and Benchmark Countries (in US$ billion)

-3 -2 -1 0 +1 +2 +3 +4 +5

Perc

ent o

f Tot

al F

irm

s

Years Relative to Event

Dividend-Paying Firms (Total) Dividend Payers in Δ IT Enforcement Countries Dividend Payers in Benchmark Countries

IT Enforcement

0

50

100

150

200

-3 -2 -1 0 +1 +2 +3 +4 +5

Payo

uts (

US$

bill

ion)

Years Relative to Event

Dividend Payers in Δ IT Enforcement Countries Dividend Payers in Benchmark Countries

IT Enforcement

FIG. 3.—Proportion of dividend-paying firms and dividend payouts around IT enforcement.The figure plots the time-series of the percentage of firms with dividend payments (panel A)and the corresponding aggregate U.S. dollars amounts (panel B) in the years surroundinga significant change in firms’ information environment, that is, the first enforcement of in-sider trading (IT) laws. The sample comprises the subset of applicable observations from ourbase sample as described in table 1. We align the firm-years in event time, and plot separatelines for the total sample (panel A only), the treatment sample countries, and the benchmarkcountries. We measure dividend payments using the dividends-per-share item in Worldscope(field 05101), and use the common dividend declared (field 18192) to measure the aggregateamounts.

The difference-in-differences is always negative and highly significant, indi-cating that the proportion of dividend-paying firms decreased more afterIFRS adoption and after the first IT enforcement relative to the benchmarkfirms. For example, in the upper-left panel the percentage of dividend-paying firms decreases by 4.75 percentage points following the IFRS man-date. At the same time, the proportion of dividend payers increases by 2.82percentage points in countries without regulatory change. The resultingdifference-in-differences is −7.57% and significant.

In panel B of table 3, we explicitly account for other confounding fac-tors, and report the coefficients from estimating equation (1) using logit


regression. We tabulate results for the full sample (Models 1, 3, and 4)and the constant sample (Model 2). Our main variable of interest, Info-Event, always has the expected sign (negative for dividend payments andincreases; positive for dividend decreases) and is highly significant. Theseresults suggest that firms are less likely to pay dividends or announce divi-dend increases, and more likely to cut dividends per share or stop dividendpayments following the two informational events. In terms of magnitude,the InfoEvent coefficients in Model 1 suggest a reduction in the probabil-ity of paying dividends of 9% and 11% for the IFRS setting and the ITenforcement, respectively (evaluated at the means of the other variables).These numbers are clearly economically significant, but not too large tobe implausible. The control variables behave as expected and are gener-ally highly significant. Large, profitable, and better performing firms witha history of paying dividends continue to do so, while highly levered firmswith growth prospects, volatile stock returns, and operating losses are lesslikely to disburse cash dividends. In line with findings in the United States(Fama and French [2001], Skinner [2008]), share repurchases act as com-plements to dividend payouts as shown by the significantly positive sharerepurchase indicator.25 Overall, the results suggest that an exogenous infor-mation shock affects firms’ dividend policy and, more specifically, inducesfirms to make fewer dividend payments, consistent with a lesser need tomitigate the agency costs of FCF.

4.2 ASSESSING IDENTIFICATION AND ROBUSTNESS TESTS

The inferences we draw from the above analyses rely on the assumptionthat our difference-in-differences approach is able to separate the effectsof an informational shock from other factors potentially affecting firms’dividend policies, in particular a general tendency toward fewer dividendpayments over time (as seen in panel A of figure 1). We therefore con-duct a series of robustness and falsification tests to assess the validity of ourempirical identification strategy. If not mentioned otherwise, all tests buildon our base specification for the full sample (i.e., Model 1 in panel B oftable 3).

First, we assess the timing of the informational shock and report resultsin panel A of table 4. Instead of estimating a single event, we break up theentire sample period into four subperiods by including three separate in-dicator variables for the two years leading up to the event (years t – 2 andt – 1), the two years around the event (years t and t + 1), and the remainingyears (t � +2). The years before t – 2 serve as the base period. If the changeto the information environment occurs around the “true” event year, we ex-pect the first of the three indicator variables to be insignificant, the second

25 Note that, when using Dividend Decreases as the dependent variable, the expected signon all the control variables reverses. Furthermore, because by definition the lagged DividendPayments variable takes on a value of “1” for all dividend decreases, we do not include it in themodel.


TA

BL

E3

Cha

nges

inD

ivid

end

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entB

ehav

ior

Aro

und

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rmat

iona

lEve

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dato

ry20

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–200

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)(b

)−

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ry(i

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∗∗∗

(i)

75.4

1%77

.15%

1.74

%∗∗

∗

IFR

SA

dopt

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N=

20,1

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=21

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N=

9,68

2N

=8,

270

Non

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S(i

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60.2

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82%

∗∗∗

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5.12

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pter

sN

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55N

=23

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75%

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∗

Full

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ple

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∗∗∗

(Con

tinue

d)


TA

BL

E3—

Con

tinue

d

Pan

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:Log

itre

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anal

ysis

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ryIF

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and

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(1)

(2)

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(1)

(2)

(3)

(4)

Div

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dD

ivid

end

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dD

ivid

end

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iden

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ivid

end

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iden

dD

ivid

end

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ents

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ents

Incr

ease

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ecre

ases

Paym

ents

Paym

ents

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ease

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ases

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lSam

ple)

(Con

stan

tSam

ple)

(Ful

lSam

ple)

(Ful

lSam

ple)

(Ful

lSam

ple)

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stan

tSam

ple)

(Ful

lSam

ple)

(Ful

lSam

ple)

Info

rmat

ion

alE

ven

ts:

IFR

SA

dopt

ion

−0.3

97∗∗

∗−0

.540

∗∗∗

−0.3

01∗∗

0.14

6∗∗–

––

–(−

3.37

)(−

2.69

)(−

2.12

)(1

.97)

ITEn

forc

emen

t–

––

–−0

.532

∗∗∗

−0.6

68∗∗

∗−0

.299

∗∗0.

413∗∗

∗

(−2.

90)

(−3.

48)

(−2.

52)

(2.8

8)C

ontr

olVa

riab

les:

Div

iden

dPa

ymen

tst−

14.

191∗∗

∗4.

622∗∗

∗2.

005∗∗

∗4.

318∗∗

∗4.

999∗∗

∗2.

095∗∗

∗

(8.9

2)(8

.10)

(3.6

9)(7

.34)

(7.1

9)(3

.18)

Shar

eR

epur

chas

es0.

187∗∗

∗0.

171∗∗

∗0.

188∗∗

−0.1

330.

250∗∗

∗0.

239∗∗

0.26

2∗∗∗

-0.1

93∗∗

∗

(2.7

2)(3

.41)

(2.0

2)(−

1.60

)(3

.46)

(2.2

1)(3

.78)

(−2.

84)

Log

(Tot

alA

sset

s)0.

197∗∗

∗0.

150∗∗

∗0.

146∗∗

∗−0

.139

∗∗∗

0.14

9∗∗∗

0.14

3∗∗∗

0.09

3∗∗∗

−0.1

08∗∗

∗

(8.6

7)(1

1.95

)(7

.97)

(−8.

12)

(5.9

1)(5

.44)

(2.6

6)(−

3.80

)M

arke

t-to-

Boo

k−0

.071

∗∗∗

−0.0

96∗∗

∗−0

.002

−0.0

20−0

.075

∗∗∗

−0.0

95∗∗

∗−0

.001

−0.0

21∗

(−4.

77)

(−3.

07)

(−0.

31)

(−0.

79)

(−4.

53)

(−3.

18)

(−0.

13)

(−1.

68)

Lev

erag

e−1

.303

∗∗∗

−1.5

79∗∗

∗−0

.345

∗∗∗

0.73

5∗∗∗

−1.8

85∗∗

∗−2

.159

∗∗∗

−0.4

45∗∗

1.08

7∗∗∗

(−3.

72)

(−3.

48)

(−3.

96)

(5.8

2)(−

4.26

)(−

3.45

)(−

2.27

)(1

1.95

)R

etur

non

Ass

ets

5.83

4∗∗∗

5.67

2∗∗∗

6.84

2∗∗∗

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24∗∗

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669∗∗

∗3.

713∗∗

6.65

0∗∗∗

−6.6

08∗∗

∗

(5.6

3)(3

.84)

(4.5

7)(−

9.76

)(2

.92)

(2.1

2)(4

.04)

(−6.

75)

(Con

tinue

d)


TA

BL

E3—

Con

tinue

d

Pan

elB

:Log

itre

gres

sion

anal

ysis

ofdi

vide

ndpa

ymen

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ound

man

dato

ryIF

RS

adop

tion

and

insi

der

trad

ing

enfo

rcem

ent

Man

dato

ryIF

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Ado

ptio

nIn

side

rTr

adin

gE

nfo

rcem

ent

(1)

(2)

(3)

(4)

(1)

(2)

(3)

(4)

Div

iden

dD

ivid

end

Div

iden

dD

ivid

end

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iden

dD

ivid

end

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iden

dD

ivid

end

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ents

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ents

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ease

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ases

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ease

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lSam

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stan

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ple)

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ple)

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ple)

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stan

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ple)

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lSam

ple)

Ret

urn

Vari

abili

ty−0

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86∗∗

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302∗∗

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.292

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0.33

5∗∗∗

(−8.

50)

(−5.

89)

(−2.

39)

(6.6

1)(−

19.5

0)(−

17.0

0)(−

4.52

)(1

0.80

)St

ock

Ret

urn

0.15

0∗∗∗

0.17

4∗∗0.

230∗∗

∗−0

.347

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0.20

7∗∗∗

0.34

4∗∗∗

0.29

3∗∗∗

−0.4

16∗∗

∗

(4.1

9)(2

.52)

(4.0

0)(−

4.47

)(4

.65)

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9)(5

.80)

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44)

Neg

ativ

eEa

rnin

gs−1

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−1.6

36∗∗

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0.77

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84∗∗

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.214

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−0.8

29∗∗

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042∗∗

∗

(−9.

57)

(−8.

88)

(−8.

96)

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0)(−

7.26

)(−

7.37

)(−

7.68

)(3

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Cou

ntr

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stry

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dYe

ar-F

ixed

Eff

ects

Incl

uded

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uded

Incl

uded

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uded

Incl

uded

Incl

uded

Incl

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Pseu

do-R

265

.8%

67.6

%28

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16.2

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16.0

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6

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irm

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eta

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den

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ior

follo

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ifica

nt

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gein

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rmat

ion

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ron

men

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eco

nsi

der

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rmat

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ents

:(1)

the

man

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ucti

onof

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port

ing

(fro

m20

01to

2008

),an

d(2

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ento

fin

side

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adin

g(I

T)

law

s(f

rom

1993

to20

04).

We

repo

rtre

sult

sfo

rth

efu

llsa

mpl

e(s

eeta

ble

1)an

da

“con

stan

t”sa

mpl

efo

rw

hic

hw

ere

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ght

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rvat

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nel

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ber

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atio

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perc

enta

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and

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atio

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nel

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git

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esti

mat

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he

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the

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man

date

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valu

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ter

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rstI

Tpr

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orde

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ere

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riab

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see

tabl

es1

and

2.W

eus

eth

en

atur

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the

raw

valu

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gth

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riab

les

byon

eye

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her

ein

dica

ted.

We

incl

ude

coun

try-

,in

dust

ry-,

and

year

-fixe

def

fect

sin

the

regr

essi

ons,

butd

on

otre

port

the

coef

fici

ents

.∗∗

∗ ,∗∗

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d∗

indi

cate

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isti

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ign

ifica

nce

atth

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d10

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vels

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o-ta

iled)

.


TA

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Ass

essi

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ivid

end

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und

Info

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info

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leve

nts

IFR

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ion

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(1)

(2)

Div

iden

dPa

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ampl

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ampl

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epen

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ates

)

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=0)

:Ye

ars

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and

t–1

0.18

20.

079

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28−0

.159

−0.3

46(1

.30)

(0.4

3)(−

0.21

)(−

0.61

)(−

0.96

)Ye

ars

tand

t+1

−0.1

04−0

.119

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38∗

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35∗∗

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18∗∗

∗

(−0.

67)

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66)

(−1.

71)

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13)

(−2.

63)

Year

st�

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.801

∗∗−0

.503

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15∗∗

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68∗∗

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19)

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41)

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55)

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54)

(−2.

72)

F-Te

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ceA

cros

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ts[p

-val

ue]

Year

t–2,

t–1=

Year

t,t+

1[0

.000

][0

.070

][0

.025

][0

.103

][0

.010

]Ye

art,

t+1=

Year

t�+2

[0.0

61]

[0.0

53]

[0.3

47]

[0.7

00]

[0.6

85]

Con

trol

Vari

able

sIn

clud

edIn

clud

edIn

clud

edIn

clud

edIn

clud

edFi

xed

Eff

ects

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uded

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uded

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uded

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uded

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N14

7,43

064

,472

47,5

8414

3,95

767

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(Con

tinue

d)


TA

BL

E4—

Con

tinue

d

Pan

elB

:Cou

nter

fact

ually

assi

gnin

gev

enty

ears

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ark

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ivid

end

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asD

epen

den

tVar

iabl

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Ado

ptio

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side

rTr

adin

gE

nfo

rcem

ent

“Tru

e”E

ven

t:IF

RS

Ado

ptio

n−0

.376

∗∗∗

––

–(−

3.80

)IT

Enfo

rcem

ent

–−0

.563

∗∗−0

.566

∗∗−0

.530

∗∗∗

(−2.

33)

(−2.

40)

(−2.

86)

Cou

nte

rfac

tual

Eve

nt:

Non

-IFR

SA

dopt

ion

Cou

ntri

es0.

147

––

–(1

.27)

Non

-ITEn

forc

emen

tCou

ntri

es–

−0.0

64–

–(−

0.37

)A

lway

s-IT

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rcem

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ount

ries

––

−0.0

72–

(−0.

44)

Nev

er-IT

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rcem

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ount

ries

––

–0.

081

(0.3

7)F-

Test

for

Dif

fere

nce

Acr

oss

Coe

ffici

ents

[p-v

alue

][0

.000

][0

.002

][0

.002

][0

.012

]C

ontr

olVa

riab

les

Incl

uded

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uded

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uded

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uded

Fixe

dE

ffec

tsIn

clud

edIn

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edIn

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edN

147,

430

143,

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143,

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(Con

tinue

d)


TA

BL

E4—

Con

tinue

d

Pan

elC

:Cha

nges

indi

vide

ndpa

ymen

tsfo

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form

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vent

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und

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der

Trad

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und

Man

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ryIF

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ptio

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nfo

rcem

ent

(1)

(2)

(3)

(1)

(2)

Volu

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tary

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lun

tary

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ivid

end

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ents

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RS

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sC

ross

-IF

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ross

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epen

den

tVar

iabl

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llA

dopt

ers)

(Ser

ious

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pter

s)L

iste

dFi

rms

(All

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pter

s)L

iste

dFi

rms

Cou

nte

rfac

tual

Firm

s:Vo

lunt

ary

IFR

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−0.4

02∗∗

∗0.

265

–0.

256

–(−

2.68

)(0

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3)U

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ross

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ted

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036

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02)

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5)In

form

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nal

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ntF

irm

s:IF

RS

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ptio

n−0

.387

∗∗∗

−0.3

94∗∗

∗−0

.378

∗∗∗

––

(−3.

33)

(−3.

37)

(−3.

22)

ITEn

forc

emen

t–

––

−0.5

26∗∗

∗−0

.531

∗∗∗

(−2.

86)

(−2.

88)

F-Te

stfo

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ren

ceA

cros

sC

oeffi

cien

ts[p

-val

ue]

[0.8

85]

[0.0

43]

[0.1

24]

[0.2

42]

[0.4

26]

Indi

cato

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rC

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terf

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Incl

uded

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uded

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uded

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uded

Incl

uded

Con

trol

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able

sIn

clud

edIn

clud

edIn

clud

edIn

clud

edIn

clud

edFi

xed

Eff

ects

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uded

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uded

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uded

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uded

N15

3,60

314

9,20

714

9,24

214

4,38

314

4,25

9

Th

eta

ble

asse

sses

the

iden

tifi

cati

onof

chan

gesi

nfi

rms’

divi

den

dpa

ymen

tbeh

avio

rfo

llow

ing

asi

gnifi

can

tch

ange

inth

ein

form

atio

nen

viro

nm

ent.

We

con

side

rtw

oin

form

atio

nal

even

ts:(

1)th

em

anda

tory

intr

oduc

tion

ofIF

RS

repo

rtin

g,an

d(2

)th

efi

rst

enfo

rcem

ent

ofin

side

rtr

adin

g(I

T)

law

s.If

not

indi

cate

dot

her

wis

e,w

ebu

ildon

our

base

spec

ifica

tion

for

the

full

sam

ple

(see

Mod

el1

inpa

nel

Bof

tabl

e3)

,an

dus

eD

ivid

end

Paym

ents

asth

ede

pen

den

tva

riab

le.I

npa

nel

A,i

nst

ead

ofes

tim

atin

ga

sin

gle

even

tin

dica

tor,

we

incl

ude

thre

ese

para

tein

dica

tor

vari

able

sfo

rth

etw

oye

ars

lead

ing

upto

the

even

t(y

ears

t–2

and

t–1)

,th

etw

oye

ars

arou

nd

the

even

t(y

ears

tan

dt+

1),a

nd

the

rem

ain

ing

year

s(t

�+2

).In

pan

elB

,we

repo

rtth

e“t

rue”

info

rmat

ion

alev

enti

ndi

cato

rsto

geth

erw

ith

indi

cato

rsfo

rco

unte

rfac

tual

even

tsfo

rth

ebe

nch

mar

kfi

rms.

Th

atis

,for

each

ben

chm

ark

sam

ple

coun

try

we

ran

dom

lyas

sign

a“t

rue”

even

tdat

ean

dse

tth

eco

unte

rfac

tual

even

tin

dica

tor

to“1

”be

gin

nin

gon

that

date

.For

ITen

forc

emen

t,w

edo

this

sepa

rate

lyfo

ral

lben

chm

ark

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trie

s(N

on-IT

Enfo

rcem

ent)

,cou

ntr

ies

inw

hic

hth

efi

rst

ITpr

osec

utio

nto

okpl

ace

befo

reth

est

art

ofou

rsa

mpl

e(A

lway

sIT

-Enf

orce

men

t),a

nd

coun

trie

sw

ith

out

ITpr

osec

utio

nov

erth

esa

mpl

epe

riod

(Nev

er-IT

Enfo

rcem

ent)

.In

pan

elC

,we

use

firm

sth

atvo

lun

tari

lysw

itch

edto

IFR

Sre

port

ing

befo

reit

beca

me

man

dato

ry(D

aske

etal

.[20

13])

and

fore

ign

firm

sw

hos

esh

ares

are

liste

don

aU

.S.e

xch

ange

(Hai

lan

dL

euz

[200

9])

asan

addi

tion

albe

nch

mar

kgr

oup.

Th

atis

,we

add

ase

para

tebi

nar

yin

dica

tor

for

thes

eco

unte

rfac

tual

firm

sto

the

mod

el(V

olun

tary

IFR

SFi

rms

and

U.S

.Cro

ss-L

iste

dFi

rms)

,an

dco

deit

as“1

”be

gin

nin

gon

the

info

rmat

ion

alev

entd

ate.

Aro

und

man

dato

ryIF

RS

adop

tion

,we

doth

isse

para

tely

for

allv

olun

tary

IFR

Sfi

rms

and

only

for

thos

evo

lun

tary

IFR

Sfi

rms

that

show

eda

seri

ous

com

mit

men

tto

mor

etr

ansp

aren

cyar

oun

dth

ech

ange

inac

coun

tin

gst

anda

rds

unde

ran

yof

the

thre

ecl

assi

fica

tion

sin

Das

keet

al.[

2013

],th

atis

,bas

edon

afi

rm’s

chan

ges

init

sre

port

ing

beh

avio

r,re

port

ing

envi

ron

men

t,an

dre

port

ing

ince

nti

ves.

Toca

ptur

ese

lect

ion

effe

cts,

we

also

incl

ude

abi

nar

yin

dica

tor

vari

able

that

take

son

the

valu

eof

“1”

for

allfi

rm-y

ears

ofth

eco

unte

rfac

tual

firm

s.W

ere

quir

eth

evo

lun

tary

IFR

San

dU

.S.c

ross

-list

edfi

rms

toh

ave

atle

ast

one

obse

rvat

ion

pre

and

post

the

info

rmat

ion

alev

ent.

Th

eta

ble

repo

rts

logi

tco

effi

cien

tes

tim

ates

and

(in

pare

nth

eses

)z-

stat

isti

csba

sed

onro

bust

stan

dard

erro

rscl

uste

red

byco

untr

y.W

eal

sore

port

p-va

lues

(in

brac

kets

)fr

omF-

test

sco

mpa

rin

gco

effi

cien

ts.

∗∗∗ ,

∗∗,a

nd

∗in

dica

test

atis

tica

lsig

nifi

can

ceat

the

1%,5

%,a

nd

10%

leve

ls(t

wo-

taile

d).


(containing the “true” event year) to be negative and smaller than the pre-ceding period, and the third still negative but no different from the middlecoefficient. This pattern is what we observe in the IT setting. Only afterthe first IT enforcement took place, the propensity to pay dividends wentdown, and stayed at lower levels afterwards. In the IFRS setting (columns 1and 2), the middle-period coefficient is insignificantly negative (but, as in-dicated by the F-test, significantly smaller than in the preceding two years).The coefficient becomes significantly negative in period t � +2. Once wedrop the U.S. observations from the analyses (i.e., the country hit by thefinancial crisis in 2008), the event period coefficient becomes significantlynegative, more negative than in the preperiod, and is not distinguishablefrom period t � +2 (column 3). This pattern is consistent with the effectbeginning around IFRS adoption. Overall, we find for both events that thechange in dividend payout behavior started at about the time of the changein information environment.

Second, we counterfactually assign event years to the benchmark coun-tries. That is, we introduce a separate InfoEvent indicator for firms in coun-tries that did not adopt IFRS or did not initiate the enforcement of IT lawsduring the sample period. In the IFRS setting, the counterfactual event in-dicator is set to “1” for fiscal years ending on or after December 31, 2005; inthe IT setting, we randomly assign the “true” event dates to the benchmarkcountries, and do so for all benchmark countries and separately for coun-tries in which the first prosecution took place before our sample periodand countries without IT laws.26 There should be no effect around theseartificial events for benchmark firms. In panel B of table 4, we report the“true” and the counterfactual event indicators together with p-values froman F-test comparing the two. As expected, none of the counterfactual eventindicators are statistically significant, and in all four cases the coefficient issignificantly larger than the “true” event variable.

Third, we contrast the treatment effects to a set of firms for which exante it is not obvious whether the informational shock should have any ef-fect because they presumable already follow a transparent reporting anddisclosure regime (i.e., counterfactual firms). More specifically, we includefirms that voluntarily switched to IFRS reporting before it became manda-tory and non-U.S. firms whose shares are cross-listed on a U.S. exchangeas additional benchmark groups.27 That is, we add these firms to the sam-ple and include a separate InfoEvent indicator for them in the model thattakes on the value of “1” after the informational shock. Table 4, panel C,presents the results of the analyses, which yield three main insights. First,

26 We repeat this random assignment 10 times and each time the results are very similar tothose reported.

27 We identify voluntary IFRS adopters based on Daske et al. [2013], and U.S. exchange–listed firms based on Hail and Leuz [2009]. We require each firm to have at least one observa-tion pre and post the informational events (i.e., the mandatory adoption of IFRS and the firstenforcement of IT laws).


the treatment effect is largely unaffected by the inclusion of the counter-factual firms. Second, in the IFRS setting, we find a significant decrease individend payouts for the counterfactual firms, but only if we consider all vol-untary IFRS firms together. Once we limit the voluntary IFRS firms to thosewith a substantive change in transparency around the voluntary switch (asmeasured by any of the three “serious” vs. “label” classifications in Daskeet al. [2013]), the negative effect goes away and becomes statistically differ-ent from the treatment effect. This pattern is what one would expect forfirms that were already more transparent to begin with. Third, we do notfind any change in dividend policy, neither in terms of magnitude nor sta-tistical significance, for cross-listed firms after the informational events.28

The findings suggest that “true” counterfactual firms are not affected bythe change in the information environment, because presumably investorscan already effectively monitor managers regardless of dividend payouts.

Fourth, we conduct a series of robustness tests to assess various researchdesign choices and report results in table 5. Panel A contains the resultsfor the IFRS setting. In the first three models, we separately add three con-trols: net cash flows from operations divided by total assets as a proxy forcash constraints, retained earnings divided by the book value of total equityas a proxy for firm maturity and earnings power (DeAngelo, DeAngelo, andStulz [2006], Denis and Osobov [2008]), and the wedge between yearly div-idend and capital gains tax rates for individuals, which captures the relativedisadvantage of dividend payouts compared to share repurchases.29 As ex-pected, the first two additional control variables are significantly positive;the tax wedge is significantly negative. In the next two models, we replacethe country- and industry-fixed effects with firm-fixed effects using thefull and constant sample. This accounts for time-invariant firm attributes,but also substantially reduces the number of observations due to lack ofvariation in the dependent variable. Finally, we exclude firm-years from theUnited States, the largest sample country (and also strongly affected by thefinancial crisis), and in the last model further drop the year 2008, which,as seen in table 1, likely was unusual. Throughout the panel, all the IFRSAdoption coefficients are significantly negative.

Panel B of table 5 contains the sensitivity analyses for the IT setting. Weagain include the three additional control variables in the model (i.e., netcash flows, retained earnings, and tax rate wedge), estimate two firm-fixedeffects specifications, and exclude the U.S. observations. Moreover, we esti-mate a model in which we drop the IT enforcement year from the analysis.

28 The coefficients across treatment and counterfactual firms are significantly different inonly one of the five cases, which is likely a power issue because we only have very few voluntaryIFRS and U.S. cross-listed firms (hence, we are not able to separately analyze the serious IFRSadopters in the IT setting).

29 To avoid measurement issues from the change in accounting standards, we use the lastRetained Earnings value under local GAAP in firm-years with IFRS reporting. However, similarresults obtain when we use actual values as reported under IFRS instead.


TA

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Sens

itivi

tyA

naly

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ofth

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hang

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iden

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vent

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Pan

elA

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dato

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Plus

CFO

over

Plus

Ret

ain

edPl

usTa

xR

ate

Firm

-Fi

rm-

(6)

No

U.S

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ivid

end

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asTo

talA

sset

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arn

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Wed

geas

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xed

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ects

No

U.S

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epen

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eas

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trol

asC

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ons

No

Year

2008

Info

rmat

ion

alE

ven

ts:

IFR

SA

dopt

ion

−0.3

87∗∗

∗−0

.298

∗∗−0

.356

∗∗∗

−0.5

62∗∗

∗−0

.712

∗∗∗

−0.3

49∗∗

−0.2

88∗∗

(−3.

27)

(−2.

47)

(−3.

02)

(−2.

65)

(−2.

78)

(−2.

49)

(−2.

44)

Con

trol

Vari

able

s:D

ivid

end

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t−1

4.18

6∗∗∗

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2∗∗∗

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4∗∗∗

1.64

4∗∗∗

3.63

8∗∗∗

3.60

0∗∗∗

(8.8

2)(8

.38)

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2)(4

.52)

(6.7

9)(1

6.80

)(1

6.96

)Sh

are

Rep

urch

ases

0.17

7∗∗∗

0.15

7∗∗0.

188∗∗

∗0.

276∗∗

∗0.

305∗∗

0.08

9∗∗0.

080∗∗

(2.6

4)(2

.18)

(2.7

4)(2

.86)

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6)(2

.32)

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4)L

og(T

otal

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ets)

0.19

4∗∗∗

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7∗∗∗

0.96

3∗∗∗

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8∗∗∗

0.22

5∗∗∗

0.21

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1)(6

.94)

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8)M

arke

t-to-

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k−0

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11)

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58)

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(−3.

71)

(−3.

72)

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47)

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80)

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urn

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sset

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etur

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riab

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∗−0

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tinue

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TA

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(7)

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iden

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etai

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oU

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arn

ings

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geas

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xed

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ects

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U.S

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riab

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ontr

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ampl

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2008

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kR

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n0.

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∗0.

154∗∗

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∗0.

092∗∗

∗0.

104∗∗

0.16

4∗∗∗

0.16

8∗∗∗

(4.3

8)(4

.30)

(4.2

3)(2

.78)

(2.0

6)(5

.11)

(4.1

5)N

egat

ive

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ings

−1.4

09∗∗

∗−1

.453

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97∗∗

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CFO

over

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1.41

7∗∗∗

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etai

ned

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ings

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206∗∗

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xR

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.1%

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.6%

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7,43

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TA

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sin

form

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(1)

(2)

(3)

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(7)

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of�

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epen

den

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lSam

ple)

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stan

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ple)

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sE

nfo

rcem

ent

Info

rmat

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alE

ven

ts:

ITEn

forc

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t−0

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∗∗∗

−0.5

36∗∗

−0.5

25∗∗

∗−0

.631

∗−0

.666

∗∗−0

.552

∗∗∗

−0.5

45∗∗

∗

(−3.

07)

(−2.

21)

(−2.

77)

(−1.

79)

(−2.

10)

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89)

(−2.

78)

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trol

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able

s:D

ivid

end

Paym

ents

t−1

4.34

0∗∗∗

4.29

9∗∗∗

4.33

2∗∗∗

1.48

0∗∗∗

2.25

3∗∗∗

3.50

3∗∗∗

4.31

9∗∗∗

(7.3

1)(6

.86)

(7.3

6)(5

.14)

(8.8

2)(1

4.54

)(7

.30)

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eR

epur

chas

es0.

236∗∗

∗0.

218∗∗

∗0.

244∗∗

∗0.

356∗∗

∗0.

343∗∗

0.14

4∗∗∗

0.24

7∗∗∗

(3.3

0)(2

.77)

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1)(3

.17)

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3)(3

.26)

(3.3

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og(T

otal

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0.15

1∗∗∗

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8∗∗∗

1.12

2∗∗∗

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4∗∗∗

0.17

8∗∗∗

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8∗∗∗

(6.6

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(5.3

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.39)

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arke

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Boo

k−0

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∗∗∗

−0.0

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−0.0

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∗−0

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∗∗∗

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(−4.

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(−1.

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49)

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ecifi

cati

on(s

eeM

odel

1in

pan

elB

ofta

ble

3),

exam

inin

gch

ange

sin

firm

s’di

vide

nd

paym

ent

beh

avio

rar

oun

d(1

)th

em

anda

tory

intr

oduc

tion

ofIF

RS

repo

rtin

g(p

anel

A),

and

(2)

the

firs

ten

forc

emen

tof

insi

der

trad

ing

(IT

)la

ws

(pan

elB

).W

eus

eD

ivid

end

Paym

ents

asth

ede

pen

den

tva

riab

le.I

npa

nel

A,

we

repo

rtre

sult

sfo

rth

efo

llow

ing

mod

els:

(1)

we

add

net

cash

flow

sfr

omop

erat

ion

sdi

vide

dby

tota

las

sets

(CFO

over

Tota

lAss

ets)

asa

con

trol

.(2)

We

incl

ude

Ret

aine

dEa

rnin

gsdi

vide

dby

the

book

valu

eof

tota

lequ

ity.

Toav

oid

mea

sure

men

tiss

ues,

we

take

the

last

valu

eun

der

loca

lGA

AP

infi

rm-y

ears

wit

hIF

RS

repo

rtin

g.(3

)W

ead

dth

eye

arly

Tax

Rat

eWed

geas

aco

ntr

ol,t

hat

is,t

he

diff

eren

cebe

twee

nth

edi

vide

nd

tax

rate

and

the

capi

talg

ain

sta

xra

tefo

rin

divi

dual

sin

aco

untr

y.W

eco

llect

tax

rate

info

rmat

ion

from

the

OE

CD

and

from

publ

icat

ion

sby

the

big

audi

tfirm

s.N

ext,

we

repl

ace

the

coun

try-

and

indu

stry

-fixe

def

fect

sw

ith

firm

-fixe

def

fect

sfo

rei

ther

the

full

sam

ple

(4)

orth

eco

nst

ants

ampl

e(5

).(6

)W

eex

clud

eth

ela

rges

tsam

ple

coun

try

from

the

anal

ysis

(i.e

.,th

eU

nit

edSt

ates

).(7

)W

efu

rth

erex

clud

eth

eye

arof

the

fin

anci

alcr

isis

(i.e

.,20

08).

Inpa

nel

B,w

ere

plac

em

odel

(7)

wit

ha

mod

elth

atom

its

the

year

inw

hic

hth

efi

rst

ITpr

osec

utio

nto

okpl

ace

ina

coun

try.

Th

eta

ble

repo

rts

logi

tco

effi

cien

tes

tim

ates

and

(in

pare

nth

eses

)z-

stat

isti

csba

sed

onro

bust

stan

dard

erro

rscl

uste

red

byco

untr

y.∗∗

∗ ,∗∗

,an

d∗

indi

cate

stat

isti

cals

ign

ifica

nce

atth

e1%

,5%

,an

d10

%le

vels

(tw

o-ta

iled)

.


This helps avoid the misclassification of firm-years due to the unknown ex-act date of the initial prosecution under the new IT laws. Across all models,the results of the IT Enforcement variable are negative and significant, con-sistent with the findings reported earlier.

Fifth, we run a series of robustness tests to examine alternative explana-tions for our results and address institutional concerns and concerns spe-cific to each of the two informational events (results not tabulated). First,in light of prior literature showing a reduction in cost of capital followingour two events (e.g., Bhattacharya and Daouk [2002], Daske et al. [2008]),it is quite possible that the lower cost of capital generates new investmentopportunities for firms by turning previously negative NPV projects intopositive ones. These growth prospects render dividend payouts less attrac-tive. Even though it is conceptually and empirically difficult to fully sepa-rate the information shock–induced expansion of growth prospects froma direct reduction in the agency costs of FCF, we conduct two analyses toseparate the two channels: We explicitly control for aggregate country-levelor firm-level growth prospects and cost of capital in equation (1), and werun cross-sectional analyses, in which we allow the coefficient on InfoEventto vary depending on whether the firm or country experiences an increaseor decrease in (aggregate) growth prospects and cost of capital.30 If lowercost of capital increases the investment opportunity set and triggers moreinvestments, we should observe a negative (positive) relation between fu-ture growth prospects (cost of capital) and the propensity to pay dividends.We only find very limited evidence of such a relation (for market-to-book).More importantly, the main effect of the two information events is nevermitigated. Furthermore, the cross-sectional tests do not reveal a differen-tial relation among firms with positive or negative shocks to growth or costof capital, suggesting that the indirect channel is not enough to explain ourmain results.

Next, we look into the well-documented finding that managers are reluc-tant to cut or stop dividend payments (e.g., Brav et al. [2005], DeAngelo,DeAngelo, and Skinner [2008]; see also footnote 19). To examine this issuein our setting, we collect detailed background information from annual re-ports, press releases, and media articles on 108 randomly selected dividend

30 We measure aggregate growth prospects by the country-year median market-to-book ratioor the log of the total inflows and outflows of foreign direct investments in a country andyear (source: World Bank). We measure cost of capital as the country-year median or firm-specific implied cost of capital computed from the average of four accounting-based valuationmodels (see Hail and Leuz [2006]) and estimated using the Hou, van Dijk, and Zhang [2012]approach. We separately include each of these four proxies as additional control variables inthe model. In the cross-sectional tests we create binary partitioning variables based on year-to-year changes in the four proxies (i.e., set to “1” for increases in growth and decreases in costof capital) and interact them with the InfoEvent variable (similar in structure to our tests insection 4.4).


cuts as indicated in Worldscope (54 pre-IFRS and 54 post-IFRS adoption).31

Managers often refer to performance problems (27%), future growth andinvestment projects (17%), and debt-related issues (4%) when justifyinglower dividend payments. These explanations seem informative becausewe find that firms referring to future growth indeed have higher Tobin’sq and market-to-book ratios and firms referring to performance problemsindeed have lower returns on equity than the rest. However, in a large num-ber of cases, management remains mum or nonspecific when announcingdividend cuts (50%). Interestingly, the proportion of “no comment” an-nouncements is significantly larger after the IFRS mandate (assessed with achi-squared test). This communication behavior is consistent with a reduc-tion in information asymmetry, and hence a lesser need to provide addi-tional information.

In an additional series of tests, we address whether institutional featureslike an explicit link between IFRS reporting and firms’ ability to pay divi-dends, restrictions on share repurchases, or changes in capital gains anddividend tax rates around the event might have affected our findings. Ta-ble A1 in the appendix provides institutional background information onthese potentially confounding factors. When we rerun our main analysesafter dropping (1) countries with institutional ties between IFRS and div-idend payouts (e.g., Denmark, Italy), (2) years before share repurchaseswere allowed in a country, and (3) countries where there was a change intax rates and/or the tax regime around the event (e.g., Finland or Norwayin 2005), the results remain largely the same and none of the inferencechanges.

We then examine the potential endogeneity of the two informationalevents, that is, whether local market conditions and other economic forcesmight have affected the implementation timing of IFRS adoption or IT en-forcement. In the spirit of Altonji, Elder, and Taber [2005], we first predictfirms’ propensity to pay dividends based on GDP, growth in GDP, inflation,and aggregate stock market capitalization (plus all the control variablesfrom our base specification in table 3). These factors capture local marketconditions and have the potential to be correlated with dividend payouts.We then use the predicted values from this first stage regression to code abinary indicator of predicted dividend payments (“1” if predicted propen-sity �0.5) and use it as a dependent variable in our base model. Underthe alternative explanation that local market conditions and forces induceour results, we should find similar coefficient estimates as before. How-ever, both the IFRS Adoption and IT Enforcement variables are insignificantly

31 The purpose of this hand-collection was also to validate our dividend data. That is, wechecked whether (1) firms reduced dividend payments as indicated in Worldscope, (2) theamount of the change in dividend payouts is the same across the two sources, and (3) theannouncement dates correspond. We did not find any problems with our data as, in 103 outof 108 cases, Worldscope corresponds with what firms report.


positive, suggesting that local market and economic forces do not explainour findings.

Finally, we examine two alternative informational events. One completelyunrelated to IFRS adoption and IT enforcement (i.e., the introductionof the Sarbanes-Oxley Act, SOX, in the United States) and one closelyaligned in time with IFRS adoption (i.e., the implementation of the Mar-ket Abuse Directive, MAD, in the European Union).32 When we rerun ourbase specification with either a SOX or MAD indicator, the coefficients onthese variables are negative and highly significant, suggesting a reductionin the propensity to pay dividends after the respective informational shock.This effect is consistent with our main findings, and should help alleviateconcerns that unobserved institutional factors in the cross-country settingmight drive our results. Moreover, it illustrates that IFRS adoption servesas a mere proxy for an information shock (not its causal source), but thatthe ultimate causes underlying the change in the information environmentcan be manifold.

4.3 ANALYSES OF THE INFORMATION CONTENT OF DIVIDEND PAYMENTS

In this section, we turn to the tests of information content following thetwo events. We present results of estimating equation (2) using OLS re-gression for all dividend announcements (full and constant sample), andseparately for the announcement of dividend increases and dividend de-creases in table 6, panel A. The three-day absolute Dividend AnnouncementReturns serve as a proxy for information content. Because we need dividend(and earnings) announcement dates from Worldscope, the sample is sub-stantially smaller than in the propensity analyses. Throughout the panel,our main variable of interest, the InfoEvent coefficient, is negative and, withone exception, significant. This pattern indicates that markets react less tothe announcement of dividend payments, increases, and decreases follow-ing the mandatory adoption of IFRS or the first prosecution of IT laws. Asmaller market reaction is indicative of lower information content of divi-dend payouts after an information shock.

The relative magnitude of the coefficients on dividend increases and div-idend decreases suggests an asymmetric reaction to the information events,even though they are not statistically different from each other. This pat-tern is consistent with a Bayesian perspective, under which dividend in-creases conform with investors’ priors about their role in mitigating theagency problem in a weak information environment (e.g., in the periodbefore IFRS adoption or IT enforcement). At the same time, dividend de-

32 For the analysis of SOX, we limit the sample to U.S. observations in the six years sur-rounding the passage of the act, that is, we code the InfoEvent indicator in equation (1) as “1”for fiscal-year ends after September 2002. For the MAD analyses, we use the IFRS sample andcode the InfoEvent indicator as “1” based on the MAD entry-into-force dates in Christensen,Hail, and Leuz [2011]. Note that for 21 out of 29 countries MAD became effective in 2005 andtherefore is not distinguishable from IFRS adoption in our research design.


AB

LE

6C

hang

esin

the

Info

rmat

ion

Con

tent

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ivid

end

Ann

ounc

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tsA

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iden

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ivid

end

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ree-

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nce

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ple)

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ple)

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ts:

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∗∗–

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2.16

)(−

2.91

)(−

1.87

)(−

2.46

)IT

Enfo

rcem

ent

––

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−0.0

05∗∗

−0.0

04∗∗

−0.0

05−0

.005

∗∗∗

(−2.

40)

(−2.

40)

(−1.

58)

(−4.

12)

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trol

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able

s:O

verl

apw

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0.00

6∗∗∗

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002∗∗

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001∗∗

0.00

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002∗∗

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ounc

emen

t(3

.78)

(2.2

0)(5

.16)

(1.3

5)(2

.95)

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0)�

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.081

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020.

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∗−0

.113

∗∗∗

(3.5

2)(2

.48)

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84)

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Pan

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vide

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etur

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rcem

ent

Info

rmat

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alE

ven

ts:

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SA

dopt

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03∗

−0.0

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∗−0

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∗−0

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–(−

1.78

)(−

2.92

)(−

1.82

)(−

1.99

)IT

Enfo

rcem

ent

––

––

−0.0

03−0

.004

∗−0

.006

∗∗∗

−0.0

05∗∗

(−1.

59)

(−2.

05)

(−2.

91)

(−2.

47)

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trol

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0.00

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∗0.

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0.00

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0.00

2∗∗∗

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ounc

emen

t(2

.35)

(1.3

7)(3

.64)

(3.7

5)(3

.85)

(2.0

7)(2

.96)

(2.7

4)�

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are

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Firm

s–

–−0

.000

–0.

008∗∗

∗

(−0.

13)

(4.4

6)In

form

atio

nal

Eve

ntF

irm

s:IF

RS

Ado

ptio

n−0

.004

∗∗−0

.004

∗∗−0

.004

∗∗–

–(−

2.16

)(−

2.15

)(−

2.18

)IT

Enfo

rcem

ent

––

–−0

.005

∗∗−0

.005

∗∗

(−2.

40)

(−2.

40)

F-Te

stfo

rD

iffe

ren

ceA

cros

sC

oeffi

cien

ts[p

-val

ue]

[0.6

70]

[0.3

94]

[0.3

17]

[0.8

75]

[0.0

00]

Indi

cato

rfo

rC

oun

terf

actu

alFi

rms

Incl

uded

Incl

uded

Incl

uded

Incl

uded

Incl

uded

Con

trol

Vari

able

sIn

clud

edIn

clud

edIn

clud

edIn

clud

edIn

clud

edFi

xed

Eff

ects

Incl

uded

Incl

uded

Incl

uded

Incl

uded

Incl

uded

N63

,042

61,7

6262

,023

61,3

3561

,410

Th

eta

ble

repo

rts

chan

ges

inth

ein

form

atio

nco

nte

nt

offi

rms’

divi

den

dan

nou

nce

men

tsfo

llow

ing

asi

gnifi

can

tch

ange

inth

ein

form

atio

nen

viro

nm

ent.

We

con

side

rtw

oin

form

atio

nal

even

ts:(

1)th

em

anda

tory

intr

oduc

tion

ofIF

RS

repo

rtin

g(f

rom

2001

to20

08),

and

(2)

the

firs

ten

forc

emen

tof

insi

der

trad

ing

(IT

)la

ws

(fro

m19

93to

2004

).W

ere

port

resu

lts

for

the

full

sam

ple

(see

tabl

e1)

and,

wh

ere

indi

cate

d,a

“con

stan

t”sa

mpl

efo

rw

hic

hw

ere

quir

eat

leas

teig

hto

bser

vati

ons

per

firm

.Th

eta

ble

repo

rts

OL

Sco

effi

cien

tes

tim

ates

and

(in

pare

nth

eses

)t-s

tati

stic

sba

sed

onro

bust

stan

dard

erro

rscl

uste

red

byco

untr

yfr

omre

gres

sin

gth

eab

solu

teva

lues

ofth

eth

ree-

day

Div

iden

dA

nnou

ncem

entR

etur

nson

anin

form

atio

nal

even

tin

dica

tor

plus

con

trol

s.T

he

IFR

SA

dopt

ion

vari

able

take

son

the

valu

eof

“1”

for

fisc

alye

ars

endi

ng

onor

afte

rD

ecem

ber

31of

the

year

ofth

eIF

RS

man

date

;th

eIT

Enfo

rcem

entv

aria

ble

take

son

the

valu

eof

“1”

for

allfi

scal

year

sen

din

gin

oraf

ter

the

year

ofth

efi

rstI

Tpr

osec

utio

n.F

orde

tails

onth

ere

mai

nin

gva

riab

les,

see

tabl

es1

and

2.In

pan

elA

,we

repo

rtre

sult

sfo

r(1

)al

lan

nou

nce

men

tsof

divi

den

dpa

ymen

ts,(

2)th

ean

nou

nce

men

tof

divi

den

dpe

rsh

are

incr

ease

son

ly,a

nd

(3)

the

ann

oun

cem

ent

ofdi

vide

nd

per

shar

ede

crea

ses

only

.In

pan

elB

,we

repo

rtth

efo

llow

ing

sen

siti

vity

anal

yses

:we

repl

ace

the

coun

try-

and

indu

stry

-fixe

def

fect

sw

ith

firm

-fixe

def

fect

sfo

rei

ther

the

full

sam

ple

(1)

orth

eco

nst

ant

sam

ple

(2).

(3)

We

excl

ude

the

larg

est

sam

ple

coun

try

from

the

anal

ysis

(i.e

.,th

eU

nit

edSt

ates

).(4

)W

efu

rth

erex

clud

eth

eye

arof

the

fin

anci

alcr

isis

(i.e

.,20

08)

or,i

nth

eIT

sett

ing,

omit

the

year

inw

hic

hth

efi

rst

ITpr

osec

utio

nto

okpl

ace

ina

coun

try.

Inpa

nel

C,w

eus

efi

rms

that

volu

nta

rily

swit

ched

toIF

RS

repo

rtin

gbe

fore

itbe

cam

em

anda

tory

(Das

keet

al.[

2013

])an

dfo

reig

nfi

rms

wh

ose

shar

esar

elis

ted

ona

U.S

.exc

han

ge(H

aila

nd

Leu

z[2

009]

)as

anad

diti

onal

ben

chm

ark

grou

p.T

hat

is,w

ead

da

sepa

rate

bin

ary

indi

cato

rfo

rth

ese

coun

terf

actu

alfi

rms

toth

em

odel

(Vol

unta

ryIF

RS

Firm

san

dU

.S.C

ross

-Lis

ted

Firm

s),a

nd

code

itas

“1”

begi

nn

ing

onth

ein

form

atio

nal

even

tda

te.A

roun

dm

anda

tory

IFR

Sad

opti

on,w

edo

this

sepa

rate

lyfo

ral

lvol

unta

ryIF

RS

firm

san

don

lyfo

rth

ose

volu

nta

ryIF

RS

firm

sth

atsh

owed

ase

riou

sco

mm

itm

entt

om

ore

tran

spar

ency

arou

nd

the

chan

gein

acco

unti

ng

stan

dard

sun

der

any

ofth

eth

ree

clas

sifi

cati

ons

inD

aske

etal

.[20

13],

that

is,b

ased

ona

firm

’sch

ange

sin

its

repo

rtin

gbe

hav

ior,

repo

rtin

gen

viro

nm

ent,

and

repo

rtin

gin

cen

tive

s.To

capt

ure

sele

ctio

nef

fect

s,w

eal

soin

clud

ea

bin

ary

indi

cato

rva

riab

leth

atta

kes

onth

eva

lue

of“1

”fo

ral

lfi

rm-y

ears

ofth

eco

unte

rfac

tual

firm

s.W

ere

quir

eth

evo

lun

tary

IFR

San

dU

.S.c

ross

-list

edfi

rms

toh

ave

atle

ast

one

obse

rvat

ion

pre

and

post

the

info

rmat

ion

alev

ent.

Pan

elC

also

repo

rts

p-va

lues

(in

brac

kets

)fr

omF-

test

sco

mpa

rin

gco

effi

cien

ts.T

hro

ugh

outt

he

tabl

e,w

ein

clud

eco

untr

y-,i

ndu

stry

-,an

dye

ar-fi

xed

effe

cts

inth

ere

gres

sion

s,bu

tdo

not

repo

rtth

eco

effi

cien

ts.

∗∗∗ ,

∗∗,a

nd

∗in

dica

test

atis

tica

lsig

nifi

can

ceat

the

1%,5

%,a

nd

10%

leve

ls(t

wo-

taile

d).


creases conform with investors’ priors about dividends serving less of a roleas a commitment device once the information environment has improved.Consequently, we expect a higher reduction in information content for div-idend decreases (from relatively more information content in the pre pe-riod to relatively less in the post period) than dividend increases (fromrelatively less information content in the pre period to relatively more inthe post period). The control variables in the models behave largely as ex-pected. In particular, the closeness of an earnings announcement has pos-itive spillover effects, and the magnitude of the dividend-per-share changematters. Moreover, large firms with a generally richer information environ-ment convey less information during the days of the dividend announce-ments.

Next, we repeat some of the robustness tests for the information contentanalysis, and report results in panel B of table 6. We replace country- andindustry-fixed effects with firm-fixed effects (Models 1 and 2), eliminatethe U.S. observations from the sample (Model 3), and, in the IFRS setting,also drop the year 2008 or, in the IT setting, drop the year of the initialprosecution of the new laws (Model 4). Corroborating our earlier results,the coefficient on IFRS Adoption and IT Enforcement is always negative and,with the exception of one of the firm-fixed effects specifications, significantat the 10% level or better (two-tailed).

Finally, in panel C of table 6, we contrast the treatment effects with thechange in information content for voluntary IFRS adopting firms and firmswith a U.S. cross-listing around the two informational events. That is, weadd these counterfactual firms to the sample and include a separate binaryindicator for them in the model (coded as “1” beginning at the informa-tional event date).33 The table allows the following insights: first, when weinclude the additional benchmark firms, the treatment effect of mandatoryIFRS adoption and IT enforcement is largely unaffected. Second, neithervoluntary IFRS firms (all or just the serious adopters) nor U.S. cross-listedfirms experience a significant decline in information content around thetwo events. The latter result suggests that these firms presumably were al-ready transparent enough so that investors did not have to rely on dividendpayouts to mitigate information asymmetry. Overall, the information con-tent findings align with the propensity tests, and, taken together, suggestthat, after an improvement of the common information in the economy,managers as well as investors rely less on dividend payouts.

33 We use the same data sources to identify the counterfactual firms as in table 4, panel C,and require voluntary IFRS and U.S. cross-listed firms to have at least one observation preand post the informational event. Because of the earlier event period for IT enforcement, thenumber of counterfactual firms (with data available) is relatively small so that the results haveto be interpreted cautiously.


4.4 CROSS-SECTIONAL ANALYSES OF THE PROPENSITY TO PAY DIVIDENDS

In this section, we provide cross-sectional evidence along the two dimen-sions “extent of the agency problem” and “strength of the informationshock” to corroborate our main findings of a lower propensity to pay divi-dends following a shock to the information environment. We expect firmssuffering from more severe agency problems, due to institutional or firm-specific reasons, to benefit more from a reduction in information asymme-try between managers and investors. Similarly, the reduction in informationasymmetry should be greater the stronger the information shock. In bothcases we expect to find a more pronounced decline in dividend payouts af-ter the event. To test these predictions, we conduct cross-sectional analysesby estimating the following extension of the logit model in equation (1):

Pr (Dividend Payments) = β0 + β1InfoEvent + β2 InfoEvent × PART

+ β3PART +∑

β j Controls j

+∑

βi Fixed Effectsi + ε. (3)

PART stands for a (binary or continuous) partitioning variable that lets usexamine whether the propensity of dividend payouts systematically differsacross various subsets of sample firms. We include the partitioning variableas a separate main effect as well as interaction term with the InfoEvent in-dicator. Consequently, in the case of a binary PART variable, the model inequation (3) estimates the propensity relation separately for each cell of atwo-by-two matrix along the treatment effect (e.g., mandatory IFRS adop-tion yes or no) and the partitioning dimension (e.g., investor protectionstrong or weak). The remaining variables in equation (3) are the same asbefore.

In table 7, panel A, we report results of estimating equation (3) partition-ing by the extent of the presumed agency problem.34 We only report themain variables of interest together with an F-test for the joint significanceof the sum of two coefficients, but the full set of controls is included. First,in line with La Porta et al. [2000], we use a country’s Legal Origin as a proxyfor its investor protection. The rights of minority shareholders are arguablybetter protected in common law countries than in code law countries; con-sequently a more serious information asymmetry problem should exist inthe latter countries. Consistent with this argument and the substitute modelof agency, the reduction in dividend payouts is more pronounced whereinvestor protection is weak. That is, while the main effect of the InfoEventvariable representing code law countries is always significantly negative, the

34 We exclude the U.S. observations in our cross-sectional tests of the IFRS setting to reducethe potential effects of the financial crisis. Including those observations produces very similarbut slightly weaker results.


TA

BL

E7

Cro

ss-S

ectio

nalA

naly

ses

ofth

eC

hang

esin

Div

iden

dPa

yout

sA

roun

dIn

form

atio

nalE

vent

s

Pan

elA

:Par

titi

ons

base

don

the

exte

ntof

the

agen

cypr

oble

mM

anda

tory

IFR

SA

dopt

ion

(No

Un

ited

Stat

es)

Insi

der

Trad

ing

En

forc

emen

t

Div

iden

dPa

ymen

tsas

(1)

(2)

(3)

(1)

(2)

(3)

Dep

ende

ntV

aria

ble

Leg

alO

rigi

nIn

side

Ow

ner

ship

Equ

ity

Fin

anci

ng

Leg

alO

rigi

nIn

side

Ow

ner

ship

Equ

ity

Fin

anci

ng

Info

rmat

ion

alE

ven

tAcr

oss

Part

itio

ns:

(1)

Info

Even

t−0

.445

∗∗∗

−0.2

95−0

.335

∗∗−0

.675

∗∗−0

.244

−0.5

16∗∗

∗

(−2.

78)

(−1.

27)

(−2.

44)

(−2.

57)

(−0.

66)

(−2.

85)

(2)

Info

Even

t×PA

RT

0.18

5∗−0

.005

−0.0

100.

244

−0.0

21∗∗

−0.3

17∗∗

(1.7

5)(−

1.48

)(−

0.96

)(0

.83)

(−2.

42)

(−2.

09)

(3)

PAR

T–

0.00

6∗∗−0

.080

–0.

021∗∗

−0.0

02(2

.37)

(−1.

57)

(2.4

9)(−

0.02

)F-

Test

for

Sum

of(1

)+

(2)

[p-v

alue

][0

.060

][0

.193

][0

.014

][0

.036

][0

.463

][0

.001

]C

ontr

olVa

riab

les

Incl

uded

Incl

uded

Incl

uded

Incl

uded

Incl

uded

Incl

uded

Fixe

dE

ffec

tsIn

clud

edIn

clud

edIn

clud

edIn

clud

edIn

clud

edIn

clud

edN

112,

838

38,3

1111

2,83

814

3,95

764

,641

143,

957

(Con

tinue

d)


AB

LE

7—C

ontin

ued

Pan

elB

:Par

titi

ons

base

don

the

stre

ngth

ofth

ein

form

atio

nsh

ock

Man

dato

ryIF

RS

Ado

ptio

n(N

oU

nit

edSt

ates

)In

side

rTr

adin

gE

nfo

rcem

ent

Div

iden

dPa

ymen

tsas

(1)

(2)

(3)

(4)

(5)

(6)

Dep

ende

ntV

aria

ble

EU

Cou

ntr

ies

�E

nfo

rcem

ent

Seri

ous

Ado

pter

sE

mer

gin

gM

arke

ts�

An

alys

tFol

low

ing

�St

ock

Liq

uidi

ty

Info

rmat

ion

alE

ven

tAcr

oss

Part

itio

ns:

(1)

Info

Even

t−0

.227

−0.2

18−0

.298

∗−0

.257

−0.4

13∗∗

−0.2

45(−

1.60

)(−

1.46

)(−

2.17

)(−

1.00

)(−

2.08

)(−

0.83

)(2

)In

foEv

ent×

PAR

T−0

.212

∗∗−0

.269

∗∗−0

.183

∗∗−0

.478

−0.4

07∗

−0.6

56∗∗

(−1.

96)

(−2.

40)

(−2.

27)

(−1.

46)

(−1.

75)

(−2.

30)

(3)

PAR

T–

0.10

00.

126∗∗

–0.

461∗∗

0.86

4∗∗∗

(0.9

6)(2

.02)

(2.0

9)(3

.47)

F-Te

stfo

rSu

mof

(1)

+(2

)[p

-val

ue]

[0.0

05]

[0.0

02]

[0.0

01]

[0.0

03]

[0.0

00]

[0.0

00]

Part

itio

nin

gVa

riab

le(r

awva

lues

)–

–In

clud

ed–

Incl

uded

Incl

uded

Con

trol

Vari

able

sIn

clud

edIn

clud

edIn

clud

edIn

clud

edIn

clud

edIn

clud

edFi

xed

Eff

ects

Incl

uded

Incl

uded

Incl

uded

Incl

uded

Incl

uded

Incl

uded

N11

2,83

811

2,83

888

,571

143,

957

143,

957

126,

549

Th

eta

ble

pres

ents

cros

s-se

ctio

nal

anal

yses

ofch

ange

sin

firm

s’di

vide

nd

paym

ent

beh

avio

rfo

llow

ing

asi

gnifi

can

tch

ange

inth

ein

form

atio

nen

viro

nm

ent.

Inpa

nel

A,w

edi

vide

the

sam

ple

base

don

the

exte

nt

ofth

epr

esum

edag

ency

prob

lem

and

use

the

follo

win

gpa

rtit

ion

ing

vari

able

s(P

AR

T):

(1)

We

dist

ingu

ish

betw

een

coun

trie

sof

com

mon

law

Leg

alO

rigi

n(“

1”)

and

code

law

lega

lor

igin

(“0”

).Fo

rco

untr

ies

wit

hm

issi

ng

codi

ng

inL

aPo

rta

etal

.[1

998]

,w

eas

sign

them

wit

hw

hat

fits

best

.(2

)In

side

Ow

ners

hip

mea

sure

das

the

perc

enta

geof

clos

ely

hel

dsh

ares

for

afi

rmin

agi

ven

year

(Wor

ldsc

ope

fiel

d08

021)

.Bec

ause

ofn

onlin

eari

ties

infi

rms’

own

ersh

ipst

ruct

ure,

we

trun

cate

this

con

tin

uous

vari

able

abov

eth

eco

untr

ym

ean

valu

es.(

3)W

ese

tth

eEq

uity

Fina

ncin

gva

riab

leto

“1”

for

firm

sw

ith

ah

isto

ryof

equi

tyfi

nan

cin

g,th

atis

,if

atan

ypo

int

over

the

sam

ple

peri

odpr

ior

toth

ein

form

atio

nal

even

tth

efi

rmex

tern

ally

rais

edeq

uity

capi

tal.

Dat

aon

equi

tyis

sues

are

from

SDC

Plat

inum

.In

pan

elB

,we

divi

deth

esa

mpl

eba

sed

onth

epr

esum

edst

ren

gth

ofth

ein

form

atio

nal

even

tan

dus

eth

efo

llow

ing

part

itio

nin

gva

riab

les

(PA

RT

):(1

)W

edi

stin

guis

hbe

twee

nEU

Cou

ntri

es(“

1”)

and

oth

ers

(“0”

).(2

)W

epa

rtit

ion

the

trea

tmen

tfi

rm-y

ears

into

thos

ew

ith

anin

crea

sein

Enfo

rcem

ent

(“1”

)an

dth

ere

st(“

0”),

capt

ured

byth

eye

ar-to

-yea

rch

ange

(�)

inth

eru

leof

law

inde

xfr

omK

aufm

ann

,Kra

ay,a

nd

Mas

truz

zi[2

009]

.(3

)W

edi

stin

guis

hbe

twee

nSe

riou

sA

dopt

ers

(“1”

),th

atis

,firm

sth

atsh

owed

anab

ove

med

ian

chan

gein

thei

rre

port

ing

ince

nti

ves

arou

nd

man

dato

ryIF

RS

adop

tion

asm

easu

red

inD

aske

etal

.[20

13],

and

labe

lado

pter

sw

ith

abe

low

med

ian

chan

ge(“

0”).

(4)

We

dist

ingu

ish

betw

een

coun

trie

sfr

omEm

ergi

ngM

arke

ts(“

1”)

and

deve

lope

dm

arke

tco

untr

ies

(“0”

).T

he

clas

sifi

cati

onis

from

the

Mor

gan

Stan

ley

Cap

ital

Inte

rnat

ion

alda

taba

se.(

5)W

ese

tth

e�

Ana

lyst

Follo

win

gva

riab

leto

“1”

for

firm

-yea

rsw

ith

posi

tive

year

-to-y

ear

chan

ges

inth

en

umbe

rof

anal

ysts

follo

win

gth

efi

rmas

indi

cate

din

I/B

/E/S

.(6

)�

Stoc

kL

iqui

dity

take

son

the

valu

eof

“1”

for

firm

-yea

rsw

ith

posi

tive

year

-to-y

ear

chan

ges

inm

arke

tliq

uidi

ty.

We

mea

sure

liqui

dity

asth

eye

arly

med

ian

ofth

eA

mih

ud[2

002]

illiq

uidi

tym

etri

c(i

.e.,

daily

abso

lute

stoc

kre

turn

sdi

vide

dby

US$

trad

ing

volu

me)

.Th

eta

ble

repo

rts

resu

lts

from

regr

essi

ng

the

Div

iden

dPa

ymen

tsin

dica

tor

onth

em

ain

effe

ctsa

nd

the

inte

ract

ion

term

ofth

ere

spec

tive

part

itio

nin

gva

riab

lew

ith

the

IFR

SA

dopt

ion

vari

able

orIT

Enfo

rcem

entv

aria

ble.

Inth

eIF

RS

sett

ing,

we

excl

ude

the

U.S

.obs

erva

tion

sfr

omth

ean

alys

es.T

he

pan

elon

lyre

port

sth

elo

git

coef

fici

ent

esti

mat

esan

d(i

npa

ren

thes

es)

z-st

atis

tics

ofth

em

ain

vari

able

sof

inte

rest

,but

incl

udes

the

full

set

ofco

ntr

ols

and

fixe

def

fect

s(s

eeM

odel

1in

pan

elB

ofta

ble

3).I

nth

eSe

riou

sA

dopt

ers,

�A

naly

stFo

llow

ing,

and

�St

ock

Liq

uidi

tyre

gres

sion

sw

ein

clud

eth

era

wva

lues

ofth

epa

rtit

ion

ing

vari

able

sas

addi

tion

alco

ntr

ols.

We

also

repo

rtp-

valu

es(i

nbr

acke

ts)

from

F-te

sts

asse

ssin

gth

est

atis

tica

lsi

gnifi

can

ceof

the

sum

oftw

oco

effi

cien

ts.

∗∗∗ ,

∗∗,a

nd

∗in

dica

test

atis

tica

lsig

nifi

can

ceat

the

1%,5

%,a

nd

10%

leve

ls(t

wo-

taile

d).


interaction term representing the marginal effect for common law coun-tries is positive (and significant in the IFRS setting).35

Next, we examine two firm-level proxies of potential agency problems.Inside Ownership stands for the proportion of holdings by management andcontrolling shareholders; Equity Financing represents firms’ history of tap-ping into the equity markets.36 More concentrated ownership makes itmore likely for managers to exploit their relative position of strength viamisappropriation of FCF, and hence these firms suffer from more severeagency problems, while firms regularly relying on external capital marketsshould reap larger benefits from a reduction in information asymmetry. Inline with these arguments, we find that the interaction term is always nega-tive (but only significant in the IT setting). These findings suggest that firmswith higher perceived agency costs and benefits from lowering them, dis-play a stronger reduction in dividend payouts following the informationalevents.

In panel B of table 7, we report results estimating equation (3) for par-titions by the strength of the presumed information shock. For details onthe variable measurement, see the notes to the table. First, we considermandatory IFRS adoption. Prior literature documents substantial hetero-geneity of the capital-market and transparency effects around the switchin accounting standards. For instance, it has been shown that liquidity ef-fects are stronger in the European Union (Daske et al. [2008]) when com-bined with changes in enforcement (Christensen, Hail, and Leuz [2013])and for firms with a substantial change in reporting incentives around themandate (Daske et al. [2013]). Consistent with these results, we find thatthe reduction in dividend payouts is significantly larger in EU countries,in years with an improvement in the general enforcement infrastructure(measured as positive changes in the rule of law index from Kaufmann,Kraay, and Mastruzzi [2009]), and for “serious” mandatory IFRS adopters(based on a change in the reporting incentive factor around the switch ascomputed by Daske et al. [2013]).

35 The results do not square with La Porta et al. [2000], who find evidence in support of theoutcome model. Using their institutional variables, sample selection criteria, and estimationtechnique, we are able to replicate their findings for the year 1994 with our data (but onlyafter limiting the Japanese observations to the 100 largest firms). However, when we expandthe sample, apply panel estimation, and use either the Legal Origin or the Kaufmann, Kraay,and Mastruzzi [2009] Rule of Law variables, the main effect of investor protection as well as theinteraction term with growth (measured by market-to-book) are hardly ever significant andoften have the opposite sign. At the same time, the main effect for growth is always significantlynegative.

36 The relation between ownership and (equity) agency issues is likely nonlinear, suggestingthat, above a certain threshold, inside ownership actually increases instead of decreases align-ment with investor interests (e.g., Ang, Cole, and Lin [2000]). To reflect this trade-off, we onlyuse the lower part of the distribution of closely held shares in our cross-sectional tests (withthe respective country means as cutoff values).


For the IT setting, Bushman, Piotroski, and Smith [2005] show that an-alyst following increases more in emerging markets, suggesting a largerimprovement in publicly available information. Consistent with this argu-ment, we find a negative (but insignificant) coefficient on the interac-tion term in our model (column 4), representing the marginal effect foremerging markets. When we partition the IT sample using binary indicatorvariables for firm-years with positive changes in analyst following or mar-ket liquidity (measured using the Amihud [2002] price impact metric), wefind that firms with improvements in analyst coverage and liquidity exhibitstronger reductions in dividend payouts following IT enforcement. Theseresults are consistent with stronger informational changes leading to largeradjustments in firms’ dividend policies.

5. Conclusion

This paper examines changes in firms’ propensity to pay dividends andthe information content of dividend announcements following a positiveexogenous shock to the information asymmetry problem between man-agers and investors. Thus, we analyze the value of dividend payments as avoluntary commitment device to mitigate the agency costs of FCF from thefirm’s and the market’s perspective. We argue that more precise commoninformation ex ante reduces adverse selection and makes it easier ex postfor minority investors to monitor corporate insiders. This improvement ininformation asymmetry can result from an increase in transparency, butalso from better monitoring and enforcement of extant disclosure regula-tion. All these forces should reduce the demand for and the value of div-idend payouts as a commitment device. Conversely, minority shareholdersmight exert legal and market pressures to extract more cash from the firmvia dividends. We test these predictions for a global sample of firms aroundtwo events that serve as proxies for a general improvement of the informa-tion environment, namely mandatory IFRS adoption and initial enforce-ment of new IT laws.

We find that, following the two events, firms are less likely to pay (orincrease) dividends, but more likely to cut (or stop) such payments. Thechanges in dividend policy occur around the time of the informationalshock, do not apply to firms with an arguably better information environ-ment to begin with, and are more pronounced when the agency problemis larger and the informational shock stronger. We further find that the in-formation content of dividends, measured as three-day absolute announce-ment returns, is lower after the two events. In sum, our findings lend sup-port to the FCF-centric theories of dividend policy, specifically the substi-tute (but not the outcome) model of agency (La Porta et al. [2000]), inthat they show that enhancing the information environment significantlylowers investors’ and managers’ demand for and the perceived value ofdividend payouts. They also suggest that regulatory changes to the disclo-sure environment have real consequences in terms of reducing the cash


disbursements to investors (relative to an unaffected group of benchmarkfirms).

Several caveats apply to our study. First, we only focus on dividend pay-ments. However, alternative (less costly) ways of disbursing cash to share-holders than dividend payments exist. While we control for share repur-chases in our tests, the informational shock might also affect the way inwhich the two instruments interrelate. Second, regulatory changes to thedisclosure environment could enhance the credibility of financial reports,which in turn makes it possible for managers to move away from cash divi-dends with no or little discretion to more subjective (but less costly) meansof conveying their commitment to avoid overinvestment (e.g., managementforecasts, conference presentations, firm-initiated media coverage). Third,our research design is more or less agnostic about the specific channels thatlead to a reduction of the agency problem (e.g., better firm disclosures, fi-nancial analyst information acquisition and dissemination, more informa-tive stock prices, and corporate governance). We also cannot preclude thatalternative channels contribute to our findings (e.g., via expanded growthopportunities from lower cost of capital following the information shock).We do, however, conduct sensitivity analyses to ensure that our main re-sults prevail in light of several competing explanations. That said, all thesechannels originate from a reduction in information asymmetries betweencorporate insiders and outsiders, which is at the core of our conceptualargument and ultimately what our empirical evidence entails.

452 L. HAIL, A. TAHOUN, AND C. WANGA

PPE

ND

IX

TA

BL

EA

1In

stitu

tiona

lDet

ails

Rel

evan

tfor

Firm

s’D

ivid

end

Polic

yA

roun

dM

anda

tory

IFR

SA

dopt

ion

and

Insi

der

Trad

ing

Enfo

rcem

ent

(1)

(2)

(3)

(4)

(5)

(6)

Info

rmat

ion

alA

reIF

RS

Req

uire

d/Is

Profi

tDis

trib

utio

nA

reSh

are

Are

Th

ere

Are

Th

ere

Eve

nt

Perm

itte

dfo

rSi

ngl

eB

ased

onIF

RS

Rep

urch

ases

Sign

ifica

ntT

axSi

gnifi

can

tTax

(IFR

S/

ITE

nti

tyA

ccou

nts

ofA

ccou

nts

Poss

ible

Allo

wed

(IfY

es,

Ch

ange

sA

roun

dC

han

ges

Aro

und

ITC

oun

try

En

forc

emen

t)L

iste

dFi

rms?

(Man

dato

ry)?

Sin

ceW

hen

)?IF

RS

Ado

ptio

n?

En

forc

emen

t?

Arg

enti

na

–/

ITE

nfo

r.–

–Ye

s–

No

Aus

tral

iaIF

RS

/IT

En

for.

N.a

.N

.a.

Yes

[<19

93]

No

No

Aus

tria

IFR

S/

–N

oN

oYe

sN

o–

Bel

gium

IFR

S/

ITE

nfo

r.N

oaN

oYe

sN

oYe

sk

Ch

ile–

/IT

En

for

––

Yes

–N

oC

zech

Rep

ublic

IFR

S/

ITE

nfo

r.N

oYe

sYe

sYe

shN

oD

enm

ark

IFR

S/

ITE

nfo

r.R

equi

red/

perm

itte

dbYe

sYe

s[2

000]

Yesi

No

Fin

lan

dIF

RS

/IT

En

for.

Perm

itte

dcYe

sYe

s[1

997]

Yesj

Yesl

Fran

ceIF

RS

/–

No

No

Yes

[199

8]Ye

s–

Ger

man

yIF

RS

/IT

En

for.

No

No

Yes

[199

8]N

oN

oG

reec

eIF

RS

/IT

En

for.

Req

uire

dYe

sYe

s[<

1993

]N

oN

oH

ong

Kon

gIF

RS

/IT

En

for.

N.a

.N

.a.

Yes

No

No

Hun

gary

IFR

S/

ITE

nfo

r.N

oN

oYe

sN

oYe

sh

Indi

a–

/IT

En

for.

––

Yes

[199

9]–

No

Indo

nes

ia–

/IT

En

for.

––

Yes

–N

oIr

elan

dIF

RS

/–

Perm

itte

dYe

sYe

sN

o–

Isra

elIF

RS

/–

N.a

.N

.a.

Yes

No

–It

aly

IFR

S/

ITE

nfo

r.R

equi

redd

Yes

Yes

[<19

93]

No

No

Lux

embo

urg

IFR

S/

–Pe

rmit

ted

No

Yes

[<19

93]

No

–M

alay

sia

–/

ITE

nfo

r.–

–Ye

s[1

997]

–N

oN

eth

erla

nds

IFR

S/

ITE

nfo

r.Pe

rmit

ted

Yes

Yes

[<19

93]

No

No

New

Zea

lan

dIF

RS

/–

N.a

.N

.a.

Yes

No

–N

orw

ayIF

RS

/–

Perm

itte

deN

.a.

Yes

[199

9]Ye

sj–

Paki

stan

IFR

S/

–N

.aN

.a.

Yes

No

– (Con

tinue

d)


TA

BL

EA

1—C

ontin

ued

(1)

(2)

(3)

(4)

(5)

(6)

Info

rmat

ion

alA

reIF

RS

Req

uire

d/Is

Profi

tDis

trib

utio

nA

reSh

are

Are

Th

ere

Are

Th

ere

Eve

nt

Perm

itte

dfo

rSi

ngl

eB

ased

onIF

RS

Rep

urch

ases

Sign

ifica

ntT

axSi

gnifi

can

tTax

(IFR

S/

ITE

nti

tyA

ccou

nts

ofA

ccou

nts

Poss

ible

Allo

wed

(IfY

es,

Ch

ange

sA

roun

dC

han

ges

Aro

und

ITC

oun

try

En

forc

emen

t)L

iste

dFi

rms?

(Man

dato

ry)?

Sin

ceW

hen

)?IF

RS

Ado

ptio

n?

En

forc

emen

t?

Peru

–/

ITE

nfo

r.–

–Ye

s[1

997]

–Ye

sk

Phili

ppin

esIF

RS

/–

N.a

.N

.a.

Yes

No

–Po

lan

dIF

RS

/IT

En

for.

Perm

itte

dfYe

sYe

s[1

998]

No

Yesh

Port

ugal

IFR

S/

–Pe

rmit

tedg

Yes

Yes

No

–Si

nga

pore

IFR

S/

–N

.a.

N.a

.Ye

s[1

998]

No

–So

uth

Afr

ica

IFR

S/

–N

.a.

N.a

.Ye

s[1

999]

No

–Sp

ain

IFR

S/

ITE

nfo

r.N

oN

oYe

s[<

1993

]N

oYe

sk

SriL

anka

–/

ITE

nfo

r.–

–N

.a–

No

Swed

enIF

RS

/–

No

No

Yes

[200

0]N

o–

Swit

zerl

and

IFR

S/

ITE

nfo

r.Pe

rmit

ted

No

Yes

[199

2]N

oN

oT

hai

lan

d–

/IT

En

for.

––

Yes

–N

oTu

rkey

IFR

S/

ITE

nfo

r.N

.a.

N.a

.Ye

sN

oN

oU

nit

edK

ingd

omIF

RS

/–

Perm

itte

dYe

sYe

s[<

1993

]N

o–

Add

itio

nal

expl

anat

ion

s:(a

)B

elgi

um:r

equi

red

for

real

esta

tein

vest

men

tfi

rms.

(b)

Den

mar

k:re

quir

edfo

rn

onfi

nan

cial

firm

sw

ith

out

con

solid

ated

acco

unts

;per

mit

ted

for

all

oth

erfi

rms.

(c)

Fin

lan

d:ex

cept

for

insu

ran

cefi

rms

and

requ

irin

ga

cert

ified

audi

tor.

(d)

Ital

y:ex

cept

for

insu

ran

cefi

rms.

(e)

Nor

way

:re

quir

edfo

rfi

rms

wit

hou

tco

nso

lidat

edac

coun

ts.(

f)Po

lan

d:pe

rmit

ted

for

publ

icly

trad

edfi

rms

orw

hos

epa

ren

tus

esIF

RS.

(g)

Port

ugal

:per

mit

ted

for

firm

sw

hos

epa

ren

tus

esIF

RS,

exce

ptfo

rfi

nan

cial

inst

itut

ion

s.(h

)C

zech

Rep

ublic

,Hun

gary

,an

dPo

lan

d:ch

ange

inca

pita

lgai

ns

tax

rate

.(i)

Den

mar

k:ch

ange

inta

xre

gim

e.(j

)Fi

nla

nd

and

Nor

way

:ch

ange

inta

xre

gim

ean

ddi

vide

nd

tax

rate

.(k)

Bel

gium

,Per

u,an

dSp

ain

:ch

ange

indi

vide

nd

tax

rate

.(l)

Fin

lan

d:ch

ange

inta

xre

gim

ean

dca

pita

lgai

ns

tax

rate

.T

he

tabl

esu

mm

ariz

esin

stit

utio

nal

char

acte

rist

ics

ofco

untr

ies

that

expe

rien

ced

our

two

info

rmat

ion

alev

ents

(i.e

.,IF

RS

adop

tion

and/

orIT

enfo

rcem

ent)

asin

dica

ted

inco

lum

n(1

).W

edr

awth

ein

form

atio

nfo

rco

lum

n(2

)fr

oma

repo

rtby

the

Eur

opea

nC

omm

issi

onon

the

“Im

plem

enta

tion

ofth

eIA

SR

egul

atio

n(1

606/

2002

)in

the

EU

and

EE

A”

(Feb

ruar

y7,

2012

).T

he

info

rmat

ion

inco

lum

n(3

)is

from

KPM

G’s

“Fea

sibi

lity

Stud

yon

Cap

ital

Mai

nte

nan

ce,”

Jan

uary

2008

,com

mis

sion

edby

the

Eur

opea

nC

omm

issi

on(c

ontr

act

ET

D/2

006/

IM/F

2/71

).D

ata

inco

lum

n(4

)ar

efr

omL

asfe

r[2

002]

,Sa

bri

[200

3],

McL

ean

,Po

nti

ff,

and

Wat

anab

e[2

009]

,an

dW

ebsi

tes

oflo

cal

supe

rvis

ory

auth

orit

ies

and

exch

ange

s.N

ote

that

alm

osta

llco

untr

ies

hav

eso

me

rest

rict

ion

son

shar

ere

purc

has

es(e

.g.,

they

limit

shar

ere

purc

has

esto

10%

ofsh

ares

outs

tan

din

g).T

he

info

rmat

ion

inco

lum

ns

(5)

and

(6)

isfr

omth

eO

EC

Dta

xda

taba

sean

dva

riou

sta

xsu

rvey

san

dsu

mm

arie

spu

blis

hed

byth

ebi

gau

dit

firm

s.W

eco

nsi

der

tax

rate

chan

ges

inth

eth

ree

year

ssu

rrou

ndi

ng

the

even

tas

sign

ifica

nt

ifth

eyex

ceed

anin

crea

seor

decr

ease

of5%

indi

vide

nd

orca

pita

lgai

ns

tax

rate

s.“N

.a.”

den

otes

that

the

info

rmat

ion

isn

otav

aila

ble

inth

ein

dica

ted

data

sour

ces.


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Documents

Dividend Payouts and Information Shocks