Do Dividends Substitute for the External Corporate Governance? A Cross-Country Dynamic View

Wei (Wendy) Liu

Department of Finance BU 370

Kelley School of Business Indiana University

Bloomington, IN 47405

Phone: (812) 857-5360 Fax: (812) 855-5875

Email: weiliu@indiana.edu

First draft: September 2, 2002

Current draft: November 22, 2002

JEL Classification: G35 Key Words: Dividends, Free Cash Flow, Corporate Governance, Shareholder Protection, Accounting Standards, Information Disclosure, Stock Market Liberalization ________________________________________________________________________ I would like to thank Utpal Bhattacharya, Walter Blacconiere , Amy Dittmar, Andrew Ellul, Neal Galpin, Pankaj Jain, Robert Jennings, Sreenivas Kamma, Christian Lundblad, Darius Miller, Rich Rosen, Ram Thirumalai, Chuck Trzcinka, Xiaoyun Yu and seminar participants at Indiana University for helpful suggestions and discussions. All remaining errors are my own.

Abstract

Theories suggest that external corporate governance environment affects corporate

dividend policies. This study extends and tests the implications of two extant static

agency models making opposite predictions. The outcome model predicts an increase in

dividends when the external corporate governance improves, because shareholders are

better able to force managers to disgorge cash. In contrast, the substitute model suggests

that an improvement in the external corporate governance reduces the role of dividends in

controlling agency costs, leading to a decrease in dividends. Based on a panel of more

than 2,300 firms in 22 economies from 1980 to 1998, I provide evidence that

improvements in information disclosure, insider trading laws, and equity market

discipline are associated with both lower cash dividend ratios and lower sensitivity of

dividends to free cash flow. I find that the positive cross-sectional relation between

dividends and external corporate governance documented in prior research occurs

because the hypotheses were not examined in a dynamic environment.

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1. Introduction

On average, cash dividends represented 34% of earnings worldwide.1 Studies

have shown substantial variations of dividend ratios across economies, especially in

emerging markets.2 As these economies undergo dramatic economic reforms, so does the

corporate dividend policy. For example, the average dividend-to-earnings ratio in

Taiwan dropped nearly 50% from 29% to 16% during 1989 and 1992, as Taiwan

underwent huge changes in its external corporate governance environment. A similar

pattern was observed in the Philippines, where the dividend-to-earnings ratio dropped

from 9.9% in 1991 to 5.9% in 1993.3 In this study, I explore whether changes in external

corporate governance environments partially explain the changes in dividend policies.4

The extant literature on dividend policies has suggested that dividends are

determined by macroeconomic variables (e.g. tax treatment of capital gains versus

dividends, and security transaction costs), in addition to internal firm-specific factors.5

However, the role of the external corporate governance systems in the determination of

dividend ratios has received little attention until recently. La Porta, Lopez-De-Silanes,

Shleifer, and Vishny (hereafter LLSV (2000)) are the first to highlight a relation between

the dividend policy and one aspect of the governance system, shareholder legal rights.

They outline two agency hypotheses with opposite predictions: The “outcome model”

1 Source: Faccio, Lang and Young (2001). Their sample covers over 6,000 firms in 1996. 2 For instance, Aivazian et al. (2001), Glen et al. (1997), and Ramcharran (2001) examine dividend policies in emerging markets. 3 For instance, Taiwan enacted and enforced insider trading laws in 1988 and 1989, opened domestic stock markets in 1991, and significantly improved its accounting disclosure standards in 1992. The Philippines liberalized its equity markets in 1991 and imposed higher accounting disclosure requirements in 1993. 4 The ext ernal corporate governance environments refer to country-level corporate governance and include outside shareholder and debtholder monitoring, the takeover market, product market competition, external managerial labor market and the legal or regulatory system. For two excellent surveys, see Dennis and McConnell (2002) on international corporate governance and Bushman and Smith (2001) on governance role of financial accounting information. 5 Allen and Michael (2002) and Megginson (1997) survey the literature on payout policies.

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views dividends as a result of shareholders’ power to force managers to disgorge cash

and predicts a lower dividend level in countries with lower investor protection. The

competing “substitute model” states that firms pay dividends to establish a good

reputation for raising equity in the future and predicts a higher dividend level in countries

with lower investor protection, where the need for a good reputation is strongest. Based

on their cross-section tests, LLSV (2000) show that countries with better investor

protection have higher dividend ratios. Hence they support the outcome model.

Theories suggest that in addition to shareholder legal rights, other aspects of a

country’s external corporate governance system, such as stock market monitoring and

corporate disclosure, may also align conflicts of interests between corporate insiders and

outside shareholders, thereby affecting dividend policies.6 The purpose of this study is

twofold. First, it fills in the gap in the literature by linking corporate dividend policies

with changes in the external corporate governance environments across countries.

Secondly, it goes beyond pure cross-sectional tests in prior research and examines two

competing hypotheses in a dynamic setting. A pure cross-sectional test assumes a

constant relation between the dependent variable (dividends) and the explanatory variable

(shareholder protection) through time. This assumption may bias the results when the

relation changes after an (unobserved) exogenous event that affects both variables. I

propose that a time-series view is valuable and illustrate the following scenario in Figure

1. Suppose country A, with lower shareholder protection, pays higher dividends than

does country B, with higher shareholder protection. Assume the sensitivity of the

6 See, for instance, Shleifer and Vishny (1986), Noe (1997), and Holmstrom and Tirole (1993) on the relations between agency costs and monitoring role of large shareholders and institutional shareholders. In the agency models of Jensen and Meckling (1976), Jensen (1986) and Easterbrook (1984), agency costs and dividend policies are intertwined.

3

dividends to an unobserved macroeconomic event, X, is a decreasing function of

shareholder protection. After the event X, country A may pay lower dividends than

country B. At time T, a change in shareholder protection takes place and dividends in

both countries decrease. As long as a cross-sectional test is conducted after event X, we

will observe a positive relation between shareholder protection and dividend level, the

opposite of our assumption prior to the event X. In contrast, a time-series test is immune

to the bias because it incorporates the impact of the changes in shareholder protection on

dividends. This argument is not limited to shareholder protection and can be applied to

other aspects of a country’s external corporate governance.

For the above reasons, this study examines the outcome and the substitute models

in a dynamic setting by investigating how dividends respond to changes in the external

corporate governance system in a panel of data. Easterbrook (1984) suggests that

dividends may reduce agency costs by inc reasing the firms’ reliance on external

financing and hence subjecting firms to outside monitoring. This implies that dividend

policies and alternative corporate control technologies may be substitutes. An

improvement in external corporate governance may reduce the role of dividends in

controlling agency costs and hence changes in the corporate governance environment will

be associated with a decrease in dividends. In contrast, the outcome model in LLSV

(2000) predicts an increase in dividends when the corporate governance environment

improves, because shareholders will be better able to force managers to disgorge cash.

However, the “substitute” effect may decrease the agency costs at the same time,

reducing the shareholders’ need to demand higher dividends. Thus the “outcome” and

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“substitute” effects can coexist. A time-series test will decide which one is the primary

effect.

Emerging markets provide a rich setting for examining how dividends respond to

changes in external corporate governance, because they feature not only substantial cross-

country variation in corporate governance rules and in dividend ratios but also have seen

unparallel changes in cross-border capital flows, corporate governance, laws and

regulations over the past 20 years.

In this paper, I examine the dividend policies of more than 2,300 firms from 22

emerging economies during the years 1986-1998. These economies have experienced

changes in three aspects of the corporate governance structure, including shareholder

legal rights, stock market discipline and accounting disclosure. Even though the pure

cross-sectional evidence seems consistent with the outcome model in that economies with

better shareholder protection have higher dividend payout ratios, once the time-series

dimension is added, the substitute effect dominates the outcome effect: Controlling for

cross-sectional differences in firm characteristics, industry-, and country- level factors,

improvements in information disclosure, insider trading laws, and better equity market

discipline are associated with a lower cash dividend ratio. Moreover, the improvements

in the external corporate governance reduce the sensitivity of dividends to free cash flow.

The paper proceeds as follows: Section 2 describes the empirical model, various

measures of external corporate governance and sample selection procedure. Section 3

presents and analyzes the results. Section 4 offers alternative explanations and

robustness checks. Section 5 concludes.

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2. Methodology and Data

This section first describes the basic regression model for the dividend policy and

the firm- and country- level variables. Section 2.2 discusses the rationale and measures of

different aspects of country-level external corporate governance. Section 2.3 details

sample selection of firm-level data.

2.1. Models

Based on the commonly used control variables, I estimate the effect of corporate

governance change on dividend payout ratios in the following model, controlling for

firm-specific, country-, industry- level and worldwide economic factors:

Dividend ratios = f (β * External Corporate Governance Event Indicators, Control Variables)

(1)

The dependent variable is the dividend-to-sales ratio.7 The “Event Indicator”

includes the three measures reflecting country-level corporate governance improvements:

(1) insider trading legislation changes, (2) improvements in accounting standards and

shareholder protection ratings, and (3) domestic stock market liberalizations. The details

and rationale of each measure as described in the next section. The Event Indicator takes

a value of 1 for the post-event period (including the event year) and a value of 0 for the

pre-event period. The null hypothesis will predict β=0. The outcome model predicts β>0.

The substitute model predicts β<0.

7 Three alternative measures are dividend-to-asset, dividend-to-earnings and dividend-to-cash-flow measures.

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Another test of the substitute and the outcome models is built on the Jensen

(1986) free cash flow theory, which states that dividend policy can extract surplus cash

from management control by reducing free cash flow (i.e. uncommitted cash flow from

operation over and above what is needed to fund current and expected future positive-

NPV projects).8 Hence a testable implication of the outcome model is that controlling for

the growth opportunities (or current and expected future positive-NPV investments), an

improvement in corporate governance will increase the sensitivity of dividends to free

cash flow, because firms with more free cash flow will be forced to pay higher dividends.

Thus the outcome model predicts a positive coefficient on the interactive variable

between the change in the corporate governance and the free cash flow measure.

However, substitute model would predict a negative coefficient on the interactive

variable because improvement in other control technologies (such as better accounting

standards or more market scrutiny) reduce investors’ need to force out the free cash flow

through dividends. An insignificant coefficient will imply that two effects offset each

other, or that the corporate governance improvements do not affect dividends through the

free cash flow.

In essence, the model is specified as:

Dividend payout = f (β * External Corporate Governance Event Indicators,

γ *Interaction between Free Cash Flow and the Event Indicators, Control Variables)

(2)

8 The free cash flow theory has received mixed empirical support. Lang and Litzenburger (1989) support the FCF theory, whereas Howe, He and Kao (1992) find little supporting evidence.

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The null hypothesis will predict γ = 0. The outcome model predicts γ > 0. The

substitute model predicts γ < 0. I will discuss the empirical results based on the above

two equations in Section 3.

2.2 Country-level Measure of Improvements in External Corporate Governance

This study intends to capture three aspects of improvements in the corporate

governance environment: better equity market discipline and monitoring, tighter

accounting standards and better shareholder legal rights. I propose that by testing the

substitute versus the outcome hypotheses in a dynamic environment, we will be able to

gain additional insight on how firms’ dividend polices respond to changes in a country’s

external corporate governance. Hence it is necessary to construct a dataset of changes in

the external corporate governance environments. The relevant literature and rationale for

each measure as well as the data sources are discussed below.

2.2A Improvements in Stock Market Discipline

Stock market liberalization is a decision by a country’s government to allow

foreign equity purchases through country funds, depository receipts or direct equity

investment. The impact of stock market liberalization on a country’s financial

development has been a subject of considerable debate over the years. Financial market

liberalizations have been associated with higher country-level growth (e.g. Bekaert,

Harvey and Lundblad (2001, 2002), lower cost of capital (e.g. Bekaert and Harvey

(2000), Errunza and Miller (2000)), and increasing country-level investments (e.g. Henry

(2000 a, b)). Equity market liberalizations have also been associated with better market

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liquidity (e.g. Levine and Zervos (1998)) and increasing institutionalization of ownership

(e.g. Choe, Kho, and Stulz (1997)). Studies have shown theoretically and empirically

that liquidity and institutional investors contribute to better market discipline. For

example, Holmstrom and Tirole (1993) suggest that better liquidity increases

shareholders’ monitoring incentive. Shleifer and Vishny (1986) and Noe (1997) suggest

that large shareholders and institutional investors serve a monitoring role that reduces

agency costs between managers and shareholders. A number of studies, including Gillan

and Starks (2002), Stapledon (1996) and Dimsdale and Prevezer (1994), suggest that

institutional investors, especially foreign investors, tend to demand better information

disclosure and transparency than do retail and domestic investors. To the extent that

equity market liberalizations improve market monitoring and disclosure, measures of

equity market liberalization proxy for better market discipline.

Panel A of Table 1 summarizes the dates of two of commonly used liberalization

measures: the official liberalization and introduction of the American Depository Receipt

(ADR).9 Official liberalization dates in Column 1 are documented by Bekaert and

Harvey (2000). They represent the year when a country changes its foreign investment

laws or announces opening of domestic equity markets to foreign investors. Bekaert and

Harvey (2000) also designate a liberalization year when a country introduces its first

American Depository Receipt (ADR), which is presented in the Column 2, Panel A.

Empirically these two measures have been shown to be good proxy for the opening of

domestic equity markets.

Forester and Karolyi (1999) and Miller (1999) show firm-level spillover effects

from first ADR introduction: positive local price effect even if firms are not themselves 9 I also used the four alternative measures of stock market liberalization. Appendix III provides details.

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cross- listed. Similarly, stock market liberalization may have a “spillover monitoring”

effect, because after domestic equity markets are opened, local firms face increased

competition for capital with firms in foreign markets with possibly better corporate

governance practice and investors now can choose to invest among the domestic and

foreign firms. This means that domestic firms that rely on outside equity capital will

have make more efficient investments and may even take measures to improve their

internal corporate governance, which lead to lower agency costs. In other words, the date

of opening domestic markets can be used a proxy for the improvements in market

monitoring or discipline.

In the liberalization literature which examines the liberalization effects on market

valuation, confounding effects of other macroeconomic reforms during the time of equity

market liberalization have been brought up. Kim and Singal (2000) provide the initial

evidence by showing abnormal high returns in the month leading up to liberalization.

Bekaert and Harvey (2000) use proxies such as credit rating to control for potentially

confounding effect of economic reforms. Henry (2000b) documents that economic

reforms often overlap with the stock market liberalization. By constructing a data set of

economic policy reforms, he shows that the positive investment effect of liberalization is

robust after accounting for the economic reforms. The equity market liberalization

indicators may also inadvertently capture elements such as judicial reforms or public

sector accountability changes. However, since I am using the liberalization indictors to

capture improvements in market discipline, to the extent that these reforms improve the

market discipline, reduce agency costs and increase shareholders’ confidence in

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management, the omitted variables should not affect my conclusion on the effect of

corporate governance change on dividend policies.

2.2B Improvements in Information Disclosure

The external corporate governance systems include outside shareholder and

debtholder monitoring, the takeover market, product market competition, external

managerial labor market and the legal/regulatory system. Information disclosure is a

vital part of the external corporate governance systems.10 The substitute model implies

that when information disclosure such as accounting standards improves in a country,

outside shareholders will be better able to monitor the managers and hence dividend

becomes less important in controlling the agency costs. In contrast, the outcome model

views dividends as an outcome of the external corporate governance system, and predicts

an increase in dividends.

One way to measure the change in information asymmetry is through indicators of

informational quality such as accounting standards and legislations of investor protection.

LLSV (1998) creates a one-year cross-sectional index of “accounting standards” by

rating companies 1990 annual reports on their inclusion or omission of 90 items. Their

investor protection proxy (the “antidirector rights”) is also a pure cross-sectional

measure. It is composed of six items of shareholder rights based on the Company Law or

commercial codes in a given country. Replicating their methodology to create a time

series of the index is very difficult and time-consuming. Hence I rely on various issues

of the International Finance Corporation (IFC)’s annual publication Emerging Stock

10 Bushman and Smith (2001) survey the literature on the governance role of financial accounting information.

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Markets Factbook (hereafter Factbook) and create the “Information Disclosures”

measure (in Column 3). The IFC provides annual rating of 10 categories that reflect a

country’s information quality in the section “Market Information and Investor Protection”

(titled as “Information Disclosure Summary” in more recent issues) for more than 30

emerging markets. Appendix II presents detailed description of the data. For Year 1988-

1994, I record IFC ratings of “Required frequency of interim financial statement” (item

8), “Accounting standards” (item 9) and “Investor protection” (item 10). For the

accounting standards, IFC judges a country by how well the key elements in the

guidelines produced by the International Accounting Standards Committee (IASC) are

adhered to in practice, even though accounting authorities in that country may not legally

oblige companies to comply with the international standards. The rating is based on

internationally acceptable quality. For example, “Poor” accounting standards are those

that are judged to be in need of significant reform. Investor protection refers to

provisions in the company law and regulations that protect shareholders, including

registration rights, voting rights, anti-director rights, minority shareholder rights and

mandatory dividend payments. To measure investor protection the IFC index is a

judgmental measure of the overall protection afforded to investors in a particular market

by the law. Good investor protection conforms to international standards, average quality

is somewhat below international standards but adequate to support investment, while

countries judged to have poor investor protection are those where there is significant risk

of value loss.

I find 19 of the 22 countries in my sample in the IFC Factbook. Table A1 in

Appendix III provide more details. 16 countries show certain room for improvement in

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at least one of the three governance measures. Seven countries show actual

improvements. 6 countries remain in the sample.11 The changes center around 1992 and

1993. The following table summarizes specific improvements in information disclosure

for the 6 countries. 12

Country Year Improvements in Information Disclosure Greece 1992 Accounting standards rating rose from Poor to Adequate Indonesia 1993 Increased the frequency of mandatory interim financial reporting from semiannual to quarterly Malaysia 1992 Established securities regulatory agency Philippines 1993 Increased the frequency of mandatory interim financial reporting from semiannual to quarterly Taiwan 1992 Accounting standards rating rose from Poor to Adequate Turkey 1992 Investor protection rating changed from Poor (PS) to Adequate (AS).

Overall, the Information Disclosures and the first ADR introduction appear to

most closely. For the above 6 countries the “Information Disclosures” lags the

introduction of ADR by 2 years, both in mean and median, ranging from 1 (Taiwan) to 4

years (Greece). This seems consistent with the anecdotal evidence of domestic resistance

to changes in corporate governance regulations. Malaysia is the only country that

improved its investor protection and issued the first ADR in the same year of 1992.

2.2C Improvements in Shareholder Legal Rights

The enactment and enforcement of insider trading (IT) laws directly improve

minority shareholder rights by limiting management or insiders’ exploitation of minority

shareholders. They can also be regarded as a signal of a country’s determination to

11 Sri Lanka does not have enough firm-level financial data around the time. 12 Greece experienced an improvement in accounting standards in 1992 and an improvement in the investor protection in 1993. I count 1992 as the year of the “Information Disclosure Improvements” for Greece.

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improve the corporate governance environment. Column 4 and 5 in Panel A of Table 1

show the enactment and initial enforcement dates of IT laws documented in Bhattacharya

and Daouk (2000). The initial enforcement of the IT law is the year when first insider

trading case was prosecuted. For the 22 countries in my sample, the median year of IT

law enactment and enforcement are 1987 and 1996, respectively. The IT Law Enactment

is often the earliest event among all measures of external corporate governance in this

study. Later we will see some evidence that this “early” feature has certain implications

on corporate dividend policy.

2.3. Firm-level Financial Data and Sample Selection

Firm-level financial statement data are collected from the Worldscope database

maintained by the Thompson Financials Corporation. The quarterly Compact-

D/Worldscope (CD-ROM) contains annual financial statements of large publicly traded

firms worldwide. Each CD contains data in the most recent 10 years. For example, the

1998 CD contains financial data of year 1989-1998 for most firms.13 The earliest CD I

am able to obtain was released in 1993. I collect the following two sets of financial

statement data which includes 2,851 firms from 31 emerging countries in the November

1998 CD-ROM and 218 firms from 14 emerging countries on the August 1993 CD-

ROM.14

Due to certain overlap in the two datasets, the merged sample contains 29,951

firm-year observations. This excludes about 1% of observations associated with missing

13 Appendix IV summarizes number of firms by year. 2% of firms have data before 1986. 1% of firms have data in 1998. 14 Worldscope has expanded market coverage over the years . Among the 218 firms on the 1993 database, 144 are matched by company name to the 1998 data and, as a result, have time series longer than 10 years. Tests excluding these firms produce similar results compared to the whole sample.

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SIC or financial industries.15 Eight broad industrial groups are formed according to

companies’ primary 2-digit SIC. They are: (1) agriculture, (2) mining, (3) construction,

(4) manufacturing, (5) transportation, communications and utilities, (6) wholesale trade,

(7) retail trade and (8) services.16

I further exclude following observations due to possible data errors: zero total

assets, non-positive sales, negative book or market value of equity, negative cash

dividend paid to common shareholders, cash dividends greater than sales or greater than

total assets. Similar to prior studies such as Fama and French (2002), top and bottom 1%

of dividend-to-sales ratios are removed to minimize the impact of outliers.17

Because the objective of this study is to evaluate the effect of improvements in

external corporate governance on dividend policies, the sample is limited to countries that

have experienced at least one of the three types of corporate governance events discussed

in Section 2.2. This produces a final sample of 24, 251 firm-year observations (2,356

firms) from 22 countries.

Countries with mandatory dividends present an interesting case in evaluating the

two competing theories. LLSV (2000) excludes the countries with mandatory dividends.

The government in those countries essentially substitutes alternative improvement in

investor protection with mandatory dividend policy. So this seems to support the

substitute hypothesis but not the outcome model. Indeed, LLSV (1998) shows that

“mandatory dividends are used only in the French-civil- law countries”, which have the

15 Firms in the finance industry are classified according to their 2-digit primary SIC between 60 and 69. Due to the concern that utility and transportation industries have specific restrictions on dividend payout, I repeat the analysis on a subsample excluding these firms. The results are similar. 16 LLSV (2000) classify non-financial firms into 7 broad industrial groups: (1) agriculture, (2) mining, (3) construction, (4) light manufacturing, (5) heavy manufacturing, (6) transportation, communications and utilities, and (7) services. 17 A sample winsorized at top 1% shows similar results.

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weakest investor protection, suggesting that” mandatory dividends are indeed a remedial

legal protection for shareholders, who have relatively few other legal rights” (p.1132)

My sample includes five mandatory-dividend countries (Brazil, Chile, Columbia, Greece,

and Venezuela). Excluding them would actually favor the outcome model and bias

against the substitute model. 18

Around the time of the macroeconomic events some firms may fail and others

may survive. So a change in dividend payout may be simply due to the change in the

sample composition rather than the firm’s response to external environment. To address

this concern, I form five narrower samples of firms that have at least one year of data

before and after each of the five external corporate governance events. Panel B of Table

1 presents sample statistics. The narrow sample may be subject to survivorship bias but

ensures that dividend payouts of the same group of firms are being evaluated. Results on

the whole sample do not affect my main conclusions in a material way. I hence report

results based on the narrower sample.

Control variables in equation 1 include firm-, industry-, and country- level

variables and a time trend. Based on the existing literature on determinants of dividends I

include the following firm-level control variables: (1) investment opportunity, (2)

profitability of assets in place, (3) firm size, (4) free cash flow, (5) asset tangibility, (6)

financial leverage, (7) operating leverage, and (8) earnings volatility. Because the

18 The requirements on mandatory dividends are: Brazil (50% of net income), Chile (30%), Columbia (50%), Greece (35%), and Venezuela (20%). Interestingly, the payouts are much lower than required by law except for Chile. LLSV (2000a) and Glen et al (1997) document similar evidence. LLSV (2000a) suggest a possible reason that earnings in reports to shareholders are different from those in reports to authorities.

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accounting definitions of net sales are relatively compatible across countries, I scale

financial variables by net sales.19

Adam and Goyal (2002) show that the market-to-book-asset ratio (MBA) is the

best proxy for firm’s investment opportunity set. Hence I measure the investment

opportunities via the market-to-book asset (MBA).20 The market value of asset is defined

as the market value of equity plus book value of debt and preferred stock. Book value of

debt is computed as the assets minus the book value of equity. Two alternative measures

are: (a) market value assets over book value of fixed assets (to proxy for the replacement

value), and (b) capital expenditure (CAPEX) over total sales.

Prior empirical studies have suggested that more profitable firms pay out more

cash dividends. Hence I measure profitability of assets in place by return on equity

(ROE). An alternative measure is return on sales (ROS).

Fazzari et al (1988) suggest that financially constrained firms are less likely to

maintain high dividends. Therefore I include common proxies for financial constraints

such as financial and operating leverage and firm size. Firm size is the natural log of

sales. An alternative measure of firm size is natural log of total assets. Asset tangibility

is measured by the fixed assets over net sales. Financial leverage is defined as the debt to

sales ratio. An alternative measure is debt to asset ratio. Operating leverage is calculated

as cost of goods sold (COGS) over total sales. Fama and French (2002) test the

implications of tradeoff and pecking order models on dividends. They suggest that firms

19 In robustness tests I repeat all analysis by scaling by assets. The results are slightly weaker. The coefficients of ADR introduction and the insider trading law enforcement become insignificant in certain models. However, due to the difference in treatment of assets across countries, I interpret the results based on measures scaled by total assets with caution. 20 I also use R&D to sales as a proxy . The sample size was largely reduced and the coefficients sometimes become insignificant.

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with more volatile earnings and next cash flows will pay lower dividends. I compute

earnings volatility as the variance of past 3 years of earnings.

The relation between cash dividends and free cash flow (FCF) has been the

subject of a number of studies. For instance, Jensen (1986) and Lang and Litzenberger

(1989) suggest that cash dividends make managers waste less free cash flow (FCF) on

“perks” or inefficient projects. I measure the free cash flow by EBITDA (earnings before

interest, taxes, depreciation, and amortization) minus capital expenditures, scaled by

sales. EBITDA is less sensitive to variations in accounting method and free of the effects

of financing and accounting decisions and hence facilitates cross-firm comparisons. An

alternative measure of the FCF is cash flow from operations net of capital expenditures.

To the extent that capital expenditure captures profitable investments, FCF measures the

uncommitted funds including the amount that can be used to issue dividends.21

I control for potential industry- and country-specific impacts on dividends by

estimating industry- and country fixed effect models.22 The GDP growth rate and the real

interest rates are used to control for the effect of world business cycles on dividend

policies.23 Coefficients of country and industry fixed effect indicators, time trend, and the

two world factors are estimated but not reported.

3. Results and Analysis

21 I do not deduct the cash dividends paid to common shareholders from the FCF measure due to concerns for potential endogeneity. If a firm has higher level of FCF including a discretionary amount that can be paid as common dividends, then we should expect a positive relation between FCF and cash dividends. This is proved by the empirical results in Table 3-5. 22 World-level control variables including the logarithm of the world GDP growth rate and real U.S. Treasury bill rates are dropped because (1) they have insignificant coefficients across almost all regressions, and (2) including them significantly reduces the sample size due to missing observations. 23 The coefficients of these two world business cycle factors are insignificant in almost all regressions.

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In this section, I first confirm the positive cross-sectional relation between dividend ratios

and external corporate governance, seemingly consistent with the outcome model. I then

show that when the competing hypotheses are examined in fixed-effect regression

analysis using a panel of data, the substitution effect dominates the outcome effect over

time. That is, improvements in the external corporate governance generally reduce the

role of dividends in controlling agency costs, leading to both a decrease in dividends and

a lower dividend’s sensitivity to free cash flow.

3.1. Confirming the positive cross-sectional re lation

Panel A and B in Table 2 present the mean and median levels of the four

measures of dividend ratios by country during the entire sample period. I use the same

country- level measures of legal origin and investor protection (or “antidirector rights”) in

LLSV (1998, 2000). The results confirm LLSV (2000)’s cross-sectional findings. That

is, higher dividend payout ratios are observed in Common Law countries and in countries

with stronger investor protection. However, as discussed in the first section, the cross-

sectional results assume constant relations between dividends and shareholder legal

protection. Hence a pure positive cross-sectional relation between dividends and

shareholder protection should not be regarded as evidence aga inst the substitute

hypothesis. In the following sections, I will test the two competing models within a panel

of data.

It is possible that the cross-section relationship because the measures of external

corporate governance in my study are capturing different aspects compared with the

shareholder protection measure in LLSV (2000). To address this concern, I use the five

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corporate governance measures in my study to test the hypothesis that firms in countries

with better external corporate governance in year 1994 have higher dividend ratios.24 I

define countries as having improved external corporate governance if they have opened

domestic equity markets to foreign investors (measured by official liberalization

announcement and introduction of ADR), or if they have tightened accounting standards

according to the IFC rating, or if they have enacted or enforced insider trading law by the

end of 1994. Tests results presented in Panel C and D confirm the positive relation

between dividend ratios and external corporate governance found in LLSV (2000). The

magnitude of difference in ratios in 1994 is largely consistent with those of the whole

sample period (1986-1998) in Panel A and B. More importantly, dividend ratios are

positively related to the level of the external corporate governance. For example,

countries that have opened domestic equity markets or countries have enacted insider

trading law by the end of 1994 have higher mean and median cash dividend payout ratios.

Test statistics show that most of these differences are strongly statistically significant.

The only exception is that certain measures of dividend payout seem negatively related to

the level of insider trading law enforcement. A closer examination, however, shows that

mainly the dividend payouts scaled by sales and total assets exhibit significant negative

relation. Note that the cross-sectional tests are not controlling for differences in other

cross-country factors. For instance, the negative relation may very well be caused by the

possibility that countries that enforced insider trading laws happen to have higher sales or

total assets than countries that have not enforced insider trading laws. The opposite is true

for the positive relations observed throughout the pure cross-sectional tests. This suggests

the need to interpret the cross-sectional results with caution. In the regression analysis in 24 I choose year 1994 because LLSV (2000) focus on dividend ratios in year 1994.

20

Section 3, I control for firm-, industry-, country-, and world- level economic factors that

have been shown to affect dividends and show that the positive relation reverses in the

panel-data regression analysis. This illustrates the importance of controlling for other

financial factors that have been shown to affect dividends. It also shows that examining

the two competing hypotheses in a dynamic setting provide additional insight beyond the

pure cross-sectional tests.

3.2. Decline in Dividends over Time

As proposed in Section 2, the crucial difference between the outcome and the

substitute model lies in the impact of changes of the corporate governance environment

on dividend policy. Because the objective of my study is to study internal corporate

decisions in an agency framework,25 I scale aggregate cash dividends paid to common

shareholders by accounting-based measures, including net sales, total assets, earnings and

cash flows, to minimize the influence of soaring stock pricing on dividend ratios.

A time series test must take into account of the dividend payout patterns over the

years. Prior research such as Bekaert and Harvey (2000) and Henry (2000a) use dividend

yield (dividend/price ratios) as a measure of cost of equity and show that the ratio

decreases after financial liberalization. At first glance, these measures of dividend ratios

seem similar to the cost of equity measures in the liberalization literature. In fact, it

should not be surprising that the accounting variables and stock prices are highly

correlated or even cointegrated. While it is well recognized that accounting performance

25 To the extent that lower dividends may reflect investors’ willingness to trade current cash dividend for higher growth opportunity after equity market liberalization, findings in my study may be consistent with the documented higher growth rate in Chari and Henry (2002). Liu (2002) explores the relation between growth opportunity and dividend changes.

21

determines the stock price, it seems less plausible that stock price would be a major

determinant of the accounting measures. Therefore, endogeneity should not be a concern

in this case. Secondly, the liberalization studies focus on the stock market valuations

around the time of liberalization. In contrast, my study investigates three aspects of the

external corporate governance environments. Even though the decrease in dividend

ratios mainly reflect the decreasing cost of equity following financial liberalizations,

liberalization effect does not explain why dividends decrease following improvements in

other aspects of external corporate governance such as tighter accounting standards

decrease.

Examination of Figure 2 shows that the mean and median cash dividend-to-sales

and dividend-to-earnings ratios in the 22 emerging markets have been declining over the

years, especially from 1988 to 1997.26 This is in contrast to the steady dividend payout

ratios in U.S. documented by DeAngelo et al. (2002).27 However, this decreasing pattern

is consistent with the Glen et al. (1997). Largely based on interviews with managers and

investors in 7 emerging countries, Glen et al. (1997) find that shareholders in emerging

markets have passively approved a decline in dividend payments relative to the market

value of their investments. They view the evidence as supportive of signaling models

that lower dividend payouts indicate higher future growth rate.

Simple summary statistics in Table 1 and more detailed analysis in Section 2 and

3 indicate that late 1980s to the end of 1990s is a period where emerging economies see

26 Interestingly, dividend ratios went up after the 1997 Asian Financial Crisis, an event that is often regarded as an alert for the corporate governance problems. However, due to the small number of firms before 1982 and after 1997, I am cautious to draw any casual conclusion as to the relation between dividend and external corporate governance. 27 An explanation for the different dividend patterns between the United States and emerging markets is that these emerging markets have undergone much more dramatic improvements in external corporate governance, so dividend policies have become much less important in controlling agency costs.

22

improvements in their external corporate governance environments in terms of better

information disclosure, legal protection of minority shareholders and stock market

discipline.

Coupled with the fact that several studies document a rise in investment rates

following the financial liberalization, I take into account of the possible relation between

dividend policies and investments in two ways. First, I control for firm-level investments

using capital expenditure and R&D to sales. Secondly, I test the sensitivity of dividends

to free cash flow controlling for firm-level variables. Results are analyzed in the next

two sections.

3.3 How do governance improvements affect dividends?

Results in Table 3 are based on the country-and- industry-fixed-effect model in

equation (1) with additional controls of time trend, firm characteristics, and world

economic factors.28 Industry-fixed-effect models produce similar results. The dependent

variable is dividend-to-sales ratio.29 The relations between firm characteristics and the

dividends are largely consistent with evidence in country-specific studies including

Goeltom (1995), Aivazian et al. (1997) and Glen et al. (1997). Specifically, after

controlling for country and industry fixed effects, larger, more profitable and less

leveraged firms pay higher dividends.30 The positive relation between the MBA ratio

28 Wooldridge (2002) points out that a random effect analysis for unbalanced panel data requires strong assumptions on the independence of error terms and omitted variables. Otherwise it may yield inconsistent estimators. Although there is little reason to suspect sample selection bias in this study, I estimate fixed-effect models to minimize potential problems. 29 Three alternative measures are also examined. Results on dividend-to-assets and dividend-to-earnings ratios lead to similar conclusions. Coefficients of the external corporate governance measures on the dividend-to-cash-flow ratios are sometimes insignificant, possibly due to smaller sample size as a result of more missing data with the cash flow measure. 30 The coefficients of these two world business cycle factors are often insignificant.

23

(growth opportunity) in the current year and dividends are consistent with the results in

Aivazian et al. (2001) based on the World Bank (IFC) financial database source. The

earnings volatility and asset tangibility do not seem to have a significant impact on

dividends. Coefficients of country and industry fixed effect indicators and the time trend

are not reported.

Results in Table 3 shows that a decline in dividend ratios is associated with all

three aspects of external corporate governance improvements: official liberalization,

better information disclosure and insider trading law enactment and enforcement. The

ADR introduction has a negative but insignificant effect on dividend payouts. The three

aspects of external corporate improvements reduce dividend ratios by an economically

significant amount, ranging from 5% to 36% of its original level. For example, tighter

accounting standard reduce cash dividend by 0.76% of the net sales. Considering the

mean dividend-to-sales ratio is 2.12%, this represents a 36% reduction of dividend ratio

from its original level. Improvements in information disclosure have the biggest effect

on dividend payout ratios compared with stock market discipline and insider trading

laws. I further confirm this observation in a “horse race” presented in Table 5. Overall

the evidence supports the substitution hypothesis but not the outcome hypothesis.

A natural question is whether other economic events during the sample period

also have a dividend-reducing effect. For example, between December 1994 and 1999,

countries including Mexico, Thailand, Indonesia, Korea, Malaysia, Russia and Brazil

experienced recessions. To the extent that control variables such as firm-level

profitability and cash flows capture the effect of declining earnings and cash constraint

24

on firms’ dividend decisions, contemporaneous economic events should not affect the

conclusion in a material way.

3.4 How do governance improvements affect dividends’ role in controlling the

free cash flow?

As discussed in Section 2, another way of testing the two competing models is

related to the Jensen (1986) free cash flow theory. I examine how corporate governance

improvements affect the dividends’ sensitivity to free cash flows by focusing on the

coefficients on the interactive variables of the Event Indicator and the free cash flow

(FCF) in Equation 2. The outcome model predicts a positive coefficient on the

interactive variable between the change in the corporate governance and the free cash

flow measure. In contrast, the substitute model predicts a negative coefficient on the

interactive variable because improvement in alternative control technologies, such as

better accounting standards or more market scrutiny, may reduce investors’ need to force

out the free cash flow in the form of dividends. An insignificant coefficient will imply

that two effects offset each other, or that the corporate governance improvements do not

affect dividends through the free cash flow.

Table 4 presents the results estimated under Equation (2). The free cash flow

variable is measured by EBITDA net of capital expenditure and tax. 31 Controlled for the

firm-, industry-, and country- level characteristics, the interaction of FCF with four

measures of the corporate governance improvements show negative and significant

coefficients.

31 Alternative specifications of the free cash flow variable include (1) “EBITDA net of capital expenditure”, and (2) Operating cash flow (Funds from Operations net of non-cash items from discontinued operations) net of capital expenditure. The conclusions do not change.

25

Note that almost all coefficients on the corporate governance change indicators

alone become insignificant. This indicates that the improvements in external corporate

governance affect the dividend payouts mainly through free cash flow. Overall the

negative coefficients on the interactive variables suggest that improved information

disclosure, better market discipline and IT law enactment have reduced the importance of

dividend policies in controlling agency costs. Although the IT law enactment shows a

small positive impact on dividends alone, its overall effect on dividends is negative and

supports the substitution hypothesis.32

In other words, the evidence shows that dividends were used to control agency

costs, but when better alternative control technologies become available, dividends

become less important in controlling agency costs. The empirical findings also support

Jensen (1986).

Table 5 provides further evidence supporting the substitute hypothesis by running

a “horse race” among all five measures of improvements in external corporate

governance. Improved information disclosure and IT law enforcements are strongly

associated with a decrease in the cash dividend ratio. For countries that have experienced

all three forms of improvements in corporate governance, tighter accounting standards

reduce dividend-to-sales ratios by 0.8% (or a whopping 40% reduction from its original

level, considering the mean level of dividend-to-sales ratios is approximately 2% for the

32 The “IT law enactment” is often the first reform among the five aspects. As the initial reform, the law enactment may have a much stronger effect than other measures that come in later. If the IT law enactment reduce the “perceived” adverse selection costs of capital and induces more investors to trade and to supply liquidity, it will promote the equity market development, which in turn increases firms’ reliance on external equity financing. Firms that rely more on external equity may have greater need to build a reputation by paying higher dividends. This leads to a positive relationship between the dividends and the IT law enactment, seemingly consistent with the outcome hypothesis. In the meantime, the IT law enactment may act as substitute for dividends in controlling agency costs manifested through free cash flow. So the substitute effect and the outcome effect coexist.

26

whole sample). Similarly, IT law enforcements decrease dividend ratios by 0.74% (or

37% from reduction from the original level). This suggests that compared to other

measures such as improved market discipline, tighter accounting standards and insider

trading law enforcement have much stronger impact in reducing agency costs between

managers and outside shareholders.

4. Alternative Explanations, Robustness Checks and Future Extensions

Based on the extant literature, several alternative explanations for the declining

dividend ratios come to mind. For example, mainly based on the U.S. evidence, prior

studies such as Grullon and Michaely (2002) have shows that dividends and share

repurchase act like substitutes. Hence one may suggest that share repurchase may have

increased and become a more important method of returning cash to shareholders in these

emerging economies during the sample period. Alternatively, several studies have shown

that after a country opened its equity markets, investment opportunities improve and

growth rates became higher, so shareholders may demand lower dividend in anticipation

of higher growth of the firm. I now explore these possibilities.

4.1. Do share repurchases explain the dividend cuts?

Prior studies such as Ambarish, John and Williams (1987) and Ofer and Thankor

(1987) suggest that share repurchase represents an alternative method of returning cash to

shareholders. Firms may cut dividends and buying back shares simultaneously, leaving

the total amount of cash distribution unchanged. To investigate this possibility, I present

27

the annual number of share repurchases during the sample period in Appendix V. 18 of

the 22 countries are found in the SDC database.33 is almost Three countries (Chile,

Columbia and Taiwan) do not show any repurchase activities. The median and the mean

number of share repurchases for a given country are 0 and 1, respectively. The activities

are sporadic but appear to have certain clustering. To see whether share repurchase

activities coincide with the external corporate governance improvement measures, I

record the first year when a stock repurchase took place. In addition, I classify a year as

the “first cluster” year when the number of repurchase is no less than the mean level for

that country. Comparing the “first repurchase” and the “first cluster” year with the years

of the corporate governance improvements in Panel A of Table 1, I find that repurchase

activities usually appear later than the three measures of the corporate governance

improvements. The only exceptions are Indonesia and Philippines. For Indonesia, 1991

sees the first share repurchase, first ADR introduction and the enactment of the insider

trading law. For Philippines, 1995 sees the first share repurchase and the first country

fund. Although more in-depth investigation may provide us some insight as to whether

the dividends and share repurchases are indeed substitutes in emerging economies, given

the overall sporadic share repurchase activities, increase in share repurchase does not

seem to have “substituted” dividends away.

4.2. Do dividend cuts signal future growth opportunities?

33Financial data before 1986 only accounts for less than 2% of my sample. Share repurchase activities before 1986 were also extremely low. Hence I only report the statistics starting 1986.

28

Signaling theories suggest that holding everything else constant, better quality

firms commit to higher dividends than do lower quality firms.34 According to the

financial hierarchy theory, firms with higher growth opportunities may cut dividends to

preserve cash due to costly external financing. Hence we would expect a negative

coefficient between growth opportunities and dividend payout ratios when controlling for

cash constraints that a firm may face. Empirical evidence on the relation between

dividend payouts and Tobin’s Q (often used as a proxy for firm quality or investment

opportunities) is mixed. For instance, Benartzi et al. (1997) find little relation between

dividends and growth opportunities while Brook et al. (1998) show that lower dividend is

associated with higher growth opportunities. In practice, all dividend cuts are not bad

news. Firms have cut dividends to reinvest all earnings into business as a signal for

accelerated growth rate. Stock markets react positively to such dividend cuts.35

In addition to the agency theories tested in this study, an alternative explanation to

the observed dividend decrease is that investors are willing to trade off the short-term

dividend cash flows for better long-run growth potentials. Similar to Fama and French

(2002), I use current growth opportunity as a proxy for future growth opportunity is one

of the control variables in the regression. Results in Table 3 and 4 show a positive

relation between the growth opportunity and the contemporaneous dividend payout. The

positive relation is strong and consistent across regressions with different proxies for the

growth rates.36 Furthermore, even though higher growth rate may explain part of the

34 See, for instance, Bhattacharya (1979), John and Williams (1985), and Ravid and Sarig (1991). 35 For example, see PR Newswire (August 28, 1997) story on Windmere-Durable Holdings Inc. (listed on NYSE). Stock market showed a positive three-day abnormal return of 4.09% around the firm’s announcement of eliminating regular quarterly dividends. 36 These results are consistent with Aivazin et al. (2001), which uses the World Bank data and has a different sample of emerging markets.

29

dividend decrease after opening of domestic equity markets, there is little reason to

suspect that better information disclosure or enacting and enforcing insider trading laws

would increase a firm’s future growth rate. Hence the decrease in dividend payout ratios

in emerging countries documented in this study goes beyond the liberalization effect.

4.3 Clientele effect as another alternative explanation

Based on Sweden data, Dahlquist and Robertsson (2001) document that foreign

investors prefer firms paying lower dividends. This finding is consistent with the

empirical evidence that financial liberalization boosts the investment growth. Hence

another alternative explanation is that a clientele effect may be behind the declining

dividends: Firms may lower dividends to attract capital. This alternative explanation is

not without merit. However, there are at least two reasons why clientele effect is unlikely

the main contributor to the dividend decline.

First, investors may prefer lower dividends for exactly the reason highlighted in

the substitute hypothesis: better alternative corporate control technologies have reduced

the importance of dividend policy in controlling for agency costs.

Secondly, even though clientele effect is the real factor driving down the

dividends after stock market liberalization, it is not clear why improvement in

information disclosure and insider trading laws would necessarily increase the proportion

of shareholders, who for some reason, prefer lower dividends. Since the other two

aspects of corporate governance improvements often took place in years different from

the stock market liberalization, it seems unlikely that all three events have the same

clientele effect.

30

5. Conclusions

How do corporate dividend policies respond to improvements in the external

corporate governance environment? This study extends and tests the implications of two

static agency models of dividends. The outcome model predicts an increase in dividends

when the external corporate governance improves, because shareholders are better able to

force managers to disgorge cash. In contrast, the substitute model suggests that an

improvement in the external corporate governance reduces the role of dividends in

controlling agency costs, leading to a decrease in dividends. Based on a panel of over

2,300 firms in 22 economies from 1980 to 1998, I provide cross-sectional and time-series

evidence that dividends substitute fo r external corporate governance: Improved

information disclosure, insider trading laws, and equity market discipline are associated

with both lower cash dividend ratios and lower sensitivity of dividends to free cash flow.

These results contrast those found in previous research that show a positive cross-

sectional relation between dividends and external corporate governance and illustrate the

importance of examining these hypotheses in a dynamic environment.

As with all studies, several caveats should be kept in mind. This study does not

distinguish between dividend cuts and dividend omissions. These two types of decisions

may be based on different rationales and may have quite different information contents.

Due to data limitation, I only find 6 countries that experienced improvements in

accounting standards. Hence caution is needed before making any generalizations on the

effect of improvement of investor protection on firm dividend policies and agency costs.

31

It will be interesting, for example, to see if the “flip” side of the story holds as well.

Specifically, do dividends increase after a deterioration of the external corporate

governance?

Also due to data limitation, specific tax law changes in each country during the

sample period have not been controlled for. However, this may not have much impact on

my conclusion, considering the existing evidence on the weak effect of dividends tax

advantage on corporate dividend policy. For example, LLSV (2000) show little evidence

supporting the view that tax discourages dividend payment. They suggest that tax

payments are already capitalized in the firm value and hence do not influence dividend

policy.

Although the effect of internal corporate governance on dividends is outside the

scope of this study, the topic warrants some discussion. The relative power of outsiders

versus insiders and hence the agency cost can be reflected in the insider versus outsider

equity ownership. Several cross-country studies construct firm-level ownership structure

data to investigate the impact of ownership on firm value, investment and financing

decisions (e.g. Faccio et al. (2001), Lins (2003), Lins and Lemmons (2003)). Following

an improvement of shareholder legal rights or opening of domestic equity markets, firms

with lower insider ownership (or higher outsider ownership) are more likely to attend to

the demand or preference of their minority shareholders. The interaction between

internal and external corporate governance and their joint impact on corporate investment

and financing decisions remain an interesting and fruitful area.

32

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36

Table 1, Pane l A Improvements in External Corporate Governance by Country Details of data sources and definitions are presented in Section 2 and in Appendix II and III. All 22 countries have improvements in at least one aspect of external corporate governance. Financial statement data for firms in these economies are obtained from the Worldscope. The Official Liberalization and the ADR Introduction in (4) are documented in Bakeart and Harvey (2000). The Information Disclosure indicates the year during which a country shows an improvement in the annual corporate governance ratings of the country-level accounting standards and investor protection. Source: the Emerging Stock Market Factbook by the International Finance Corporation (IFC). The insider trading (IT) law enactment and insider trading law enforcement year documented by Bhattacharya and Daouk (2002).

1 2 3 4 5

Country Official

Liberalization ADR

Introduction Information Disclosure

IT Law Enactment

IT Law Enforcement

Argentina 1989 1991 1991 1995 Brazil 1991 1992 1976 1978 Chile 1992 1990 1981 1996 Colombia 1991 1992 1990 No Greece 1987 1988 1992 1988 1996 India 1992 1992 1992 1998 Indonesia 1989 1991 1993 1991 1996 Ireland 1989 1990 No Israel 1996 1981 1989 South Korea 1992 1990 1976 1988 Malaysia 1988 1992 1992 1973 1996 Mexico 1989 1989 1975 No New Zealand 1987 1988 No Pakistan 1991 1995 No Philippines 1991 1991 1993 1982 No Portugal 1986 1990 1986 No Sri Lanka 1992 1992 1987 1996 Taiwan 1991 1991 1992 1988 1989 Thailand 1987 1991 1984 1993 Turkey 1989 1990 1992 1981 1996 Venezuela 1990 1998 No Zimbabwe 1993 No No

Median Year 1991 1991 1992 1987 1996 Mean Year 1990 1991 1992 1985 1993

Number. of Countries 22 15 7 21 13

37

Table 1, Panel B Number of Firms and Observations by the Whole Sample and by the Narrow Samples

Whole sample

Narrow Sample Observations

Country Observations Firms Official

Liberalization ADR

Introduction Information Disclosure

IT Law Enactment

IT Law Enforcement

Argentina 366 36 86 166 166 226 Brazil 1461 140 699 729 Chile 796 76 339 179 364 Colombia 269 25 179 189 124 Greece 1108 108 40 206 868 316 India 3120 312 1640 1640 1640 Indonesia 1110 111 20 650 790 650 600 Ireland 499 50 280 399 Israel 360 36 250 South Korea 2642 249 1233 1133 476 Malaysia 3631 343 524 1784 2165 3010 Mexico 1074 99 349 349 New Zealand 480 48 20 40 Pakistan 746 74 186 706 Philippines 777 76 206 206 467 Portugal 809 72 439 Sri Lanka 120 12 100 Taiwan 2077 208 225 225 355 45 55 Thailand 2096 210 720 1650 Turkey 530 53 160 210 310 380 Venezuela 130 13 40 80 Zimbabwe 50 5 20 Total 24251 2356 6496 8905 4955 5206 8431

38

Table 2 Positive Cross-sectional Relation between Dividends and External Corporate Governance Panel A and B report the mean and the median dividend ratios by country as well as the test results on the differences of dividend ratios based on cross-sectional classification of a country’s legal origin and level of shareholder legal protection. The measures of legal origin (Common v. Civil Law) and level of legal shareholder protection (High v. Low Protection) are in LLSV (1998, 2000). “Civil Law” equals 1 if a country has a Civil Law origin in LLSV (1998). “Low Protection” equals 1 when the “antidirector rights” is less than or equal to the median value of 3. “Div/sales”, “Div/TA”, “Div/earn”, “Div/CF” are dividend-to-sales, dividend-to-assets , dividend-earnings, and dividend-to-cash-flow ratios. I supplement the legal origin or shareholder protection from LLSV (1998) when such data are not available for a given country in LLSV (2000). T-statistics on the difference in means are from the Satterthwaite tests. Panel A

Mean Country Civil Law Low Protection div/sales div/TA div/earn div/CF

Argentina 1 0 1.63% 1.24% 14.53% 26.81% Brazil 0 1 1.76% 1.01% 21.74% 17.92% Chile 0 0 5.69% 2.78% 38.90% 33.81%

Colombia 0 1 3.87% 1.77% 29.73% 34.58% Greece 0 1 2.64% 2.24% 27.19% 30.44% India 1 0 0.92% 0.72% 11.22% 20.64%

Indonesia 1 1 3.31% 2.12% 29.62% 24.31% Ireland 1 0 1.37% 1.13% 17.66% 20.27% Israel 1 1 1.25% 0.80% 16.75% 17.13% Korea 1 0 2.70% 1.56% 23.76% 24.02%

Malaysia 1 1 1.46% 1.11% 14.59% 18.86% Mexico 0 0 2.55% 1.85% 28.77% 32.50%

New Zealand 1 0 1.56% 1.56% 17.79% 24.17% Pakistan 1 1 1.04% 0.65% 9.73% 14.57%

Philippines 1 1 1.30% 0.88% 17.68% 15.32% Portugal 1 1 0.38% 0.34% 18.02% 10.07% Sri Lanka 0 . 1.85% 1.69% 19.94% 20.25% Taiwan 0 1 1.47% 0.89% 10.77% 28.23%

Thailand 1 1 3.02% 1.99% 28.36% 31.80% Turkey 0 1 2.24% 2.55% 18.48% 18.53%

Venezuela 1 1 1.32% 0.72% 18.87% 10.75% Zimbabwe 0 1 3.34% 2.35% 24.85% 19.84%

Mean

Sample 2.12% 1.45% 20.86% 22.49% Common Law 2.89% 1.92% 24.90% 27.26%

Civil Law 1.72% 1.16% 18.34% 20.41%

High Protection 2.49% 1.62% 22.66% 27.34% Low Protection 2.08% 1.39% 20.30% 21.29%

T-Statistics for difference in means div/sales div/TA div/earn div/CF Common-Civil Law 13.69 13.26 10.13 13.09 High-Low Protection 9.05 7.95 4.06 14.46

39

Panel B Z-statistics on the difference in medians are from the Wilcoxon two-sample nonparametric tests. Median

Country div/sales div/TA div/earn div/CF Argentina 0.00% 0.00% 0.00% 19.52%

Brazil 0.12% 0.00% 19.16% 14.62% Chile 4.30% 2.12% 38.20% 30.30%

Colombia 1.51% 1.25% 29.58% 33.56% Greece 1.41% 1.28% 23.84% 29.07% India 0.00% 0.00% 0.00% 17.39%

Indonesia 2.46% 1.65% 28.01% 20.08% Ireland 0.73% 0.93% 16.93% 16.84% Israel 0.40% 0.32% 8.69% 15.11% Korea 1.35% 0.92% 18.79% 18.87%

Malaysia 0.28% 0.13% 2.98% 13.66% Mexico 1.29% 1.47% 27.06% 27.40%

New Zealand 0.00% 0.00% 0.06% 19.57% Pakistan 0.00% 0.00% 0.00% 8.01%

Philippines 0.01% 0.01% 0.18% 13.70% Portugal 0.13% 0.15% 7.28% 6.92% Sri Lanka 1.29% 0.94% 18.37% 13.66% Taiwan 0.00% 0.00% 0.00% 25.67%

Thailand 1.51% 1.28% 25.43% 29.63% Turkey 0.51% 0.57% 8.91% 15.76%

Venezuela 1.00% 0.59% 14.08% 9.42% Zimbabwe 2.17% 1.63% 27.14% 20.52%

Median Sample 0.62% 0.58% 15.50% 18.13%

Common Law 1.35% 1.22% 25.45% 26.54% Civil Law 0.21% 0.14% 5.13% 17.11%

High Protection 1.20% 0.83% 16.12% 22.78% Low Protection 0.77% 0.59% 13.02% 18.61%

Z-Statistics for difference in medians

div/sales div/TA div/earn div/CF Common-Civil Law 10.96 10.9 9.62 14.63 High-Low Protection 10.77 10.04 5.86 15.39

40

Panel C: Differences in the mean levels are computed as the firm-level mean dividend ratios in countries that have improved its external corporate governance by the end of year 1994 minus the mean ratios in countries without such improvements. The total number of firms in this sample is 1,987. ADR Introduction cannot be included because all countries have issued their first ADR before 1994. T-statistics based on pairwise Satterthwaite tests are reported in the parentheses.

Difference in

div/sales Difference in

div/TA Difference in

div/earn Difference in

div/CF Official Liberalization 0.90% 0.48% 3.72% 10.90%

(2.53) (1.70) (3.36) (2.60)

Information Disclosure 2.28% 1.58% 18.74% -0.03% (14.57) (15.69) (2.64) (0.01)

IT Law Enactment 0.85% 0.18% 3.43% -0.38% (3.24) (0.87) (0.07) (0.05)

IT Law Enforcement -0.75% -0.38% 2.10% -7.73% (4.01) (3.41) (0.83) (2.68)

Panel D: Differences in the median levels are computed as the firm-level mean dividend ratios in countries that have improved its external corporate governance by the end of year 1994 minus the median ratios in countries without such improvements. The total number of firms in this sample is 1,987. ADR Introduction cannot be included because all countries have issued their first ADR before 1994. Z-statistics based on the Wilcoxon two-sample nonparametric tests are reported in the parentheses.

Diffe rence in

div/sales Difference in

div/TA Difference in

div/earn Difference in

div/CF Official Liberalization 0.41% 0.18% 3.05% 3.47%

(0.92) (1.13) (0.62) (1.85)

Information Disclosure 1.21% 1.26% 16.01% -6.80% (13.47) (13.81) (3.04) (0.71)

IT Law Enactment 0.47% 0.48% 9.89% 0.25% (3.51) (2.80) (2.58) (0.39)

IT Law Enforcement -0.63% -0.44% 2.36% -2.71% (2.60) (2.15) (1.46) (3.21)

41

Table 3 A Panel View: The Effects of Corporate Governance Improvements on Dividends The dependent variable is dividend-to-sales ratio. Controlling for time trend, country-and-industry-fixed effect models are estimated based on Equation (1). Coefficients of these control variables are not reported. Variable definitions are in Appendix I. Each measure of the external corporate governance improvements are explained in the Section 2. The standard errors of the coefficients have been adjusted for autocorrelation and heteroskedasticity using Newey-West (1987) procedure. P-values are reported underneath the coefficients. ***, **, and * represents 1%, 5% and 10% significance level. 1 2 3 4 5 Intercept -0.0095* 0.0074 -0.0328** -0.0082 -0.0275* (0.0768) (0.2810) (0.0462) (0.1769 ) (0.0614) Free Cash Flow 0.1597*** 0.1767*** 0.2122*** 0.2091*** 0.1925*** (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) Growth 0.0035*** 0.0028*** 0.0018* 0.0021** 0.0025** (0.0002) (0.0030) (0.0701) (0.0210) (0.0135) Size 0.0004 -0.0001 0.0027*** 0.0001 0.0020*** (0.1993 (0.7190) (0.0000) (0.7673) (0.0008) Leverage -0.0214*** -0.0212*** -0.0197*** -0.0181*** -0.0297*** (0.0000) (0.0000) (0.0001) (0.0000) (0.0000) Return on Equity -0.0001 -0.0002 -0.0097*** -0.0003 -0.0004 (0.5050) (0.3416) (0.0003) (0.2948) (0.2922 Official Liberalization -0.0019* (0.0987) ADR Introduction -0.0015* (0.0891) Information Disclosure -0.0076*** (0.0398) IT Law Enactment -0.0028* (0.0963) IT Law Enforcement -0.0038*** (0.0076) Firm-year observations 3850 5357 2427 2995 4343 Adjusted R-square 37% 33% 34% 36% 43%

42

Table 4 Another Panel View: The Effects of Corporate Governance Improvements on the Sensitivity of Dividend Policies to Free Cash Flow The dependent variable is dividend-to-sales ratio. Controlling for time trend, country-and-industry-fixed effect models are estimated based on Equation (2). Coefficients of these control variables are not reported. Variable definitions are in Appendix I. Each measure of the external corporate governance improvements are explained in the Section 2. The standard errors of the coefficients have been adjusted for autocorrelation and heteroskedasticity using Newey-West (1987) procedure. P-values are reported underneath the coefficients. ***, **, and * represents 1%, 5% and 10% significance level.

1 2 3 4 5 Intercept -0.0205** 0.0153 -0.0338** -0.0267 -0.0282** (0.0583) (0.2454) (0.0341) (0.1638) (0.0494) Free Cash Flow (FCF) 0.1945*** 0.2055*** 0.2300*** 0.2214*** 0.1943*** (0.0000) (0.0000) (0.0000) (0.0000) (0.0000) Growth 0.0035*** 0.0029*** 0.0016* 0.0021** 0.0025** (0.0002) (0.0023) (0.0961) (0.0248) (0.0135) Size 0.0002* 0.0001* 0.0027*** 0.0001* 0.0020** (0.0836) (0.0982) (0.0000) (0.0832) (0.0007) Leverage -0.0204*** -0.0206*** -0.0197*** -0.0184*** -0.0297*** (0.0000) (0.0000) (0.0001) (0.0000) (0.0000) Return on Equity 0.0028 -0.0002 -0.0068*** -0.0003 -0.0004 (0.1237) (0.2711) (0.0031) (0.2761) (0.2922) Official Liberalization 0.0019 (0.4223) Official * FCF -0.0457*** (0.0006) ADR Introduction 0.0029 (0.2468) First ADR * FCF -0.0408*** (0.0006) Information Disclosures -0.0045 (0.1773) Information Disclosure*FCF -0.0286* (0.0590) IT Law Enactment 0.0084* (0.0442) IT Enactment*FCF -0.0174** (0.0233) IT Law Enforcement 0.0044 (0.1430) IT Enforce*FCF -0.0050 (0.7232) Firm-year observations 3850 5357 2427 2995 4343 Adjusted R-square 38% 36% 39% 38% 32%

43

Table 5 A “Horse Race”: The Different Effects of Various Corporate Governance Improvements on Dividends The dependent variable is dividend-to-sales ratio. Country-and-industry-fixed effect models are estimated controlling for the same firm financial characteristics as in Table 3 and time trend. Coefficients of control variables are omitted. Variable definitions are in Appendix I. Each measure of the external corporate governance improvements are explained in the Section 2. The standard errors of the coefficients have been adjusted for autocorrelation and heteroskedasticity using Newey-West (1987) procedure. P-values are reported underneath the coefficients. ***, **, and * represents 1%, 5% and 10% significance level.

"A Horse Race" Free Cash Flow 0.1772 *** (0.0000) Official Liberalization 0.0033 (0.5535) ADR Introduction -0.0046 (0.3711) Information Disclosure -0.008 * (0.0557) IT Law Enactment 0.0052 (0.3629) IT Law Enforcement -0.0074 * (0.0686) Firm-year observations 1278 Adjusted R-square 60%

44

Appendix I. Variable Definitions Firm-level Variables (Source: Worldscope Database) Div/sales Dividend/Sales. Dividends are total cash dividends paid to

common shareholders. Sales are net sales. Div/TA Dividend/Total Assets. Div/earn Dividend/Earnings. Earnings are net income before preferred

dividends. Div/CF Dividend/Cash Flow. Cash flows are funds from operations net

of non-cash items from discontinued operations. Cash Cash plus equivalents scaled by net sales MBA Market-to-book Assets: The market value of asset equals market

value of equity plus book value of debt and preferred stock. Book value of debt equals book value of assets minus book value of equity.

CAPEX Capital expenditure scaled by net sales Free Cash Flow (FCF) EBITDA (earnings before interest, taxes, depreciation, and

amortization) minus capital expenditures, scaled by net sales. Financial Leverage Total debt over net sales Size Log of net sales ROE Return on Equity, defined by Worldscope as (net income before

preferred dividends – preferred dividend requirement)/ last year’s common equity.

Operating Leverage Cost of goods sold over net sales Earnings volatility Variance of earnings (used to compute EPS) during the past 3

years Country-level Variables Common Law Equals 1 if the origin of Company Law or Commercial Code of

the country is the English Common Law and 0 otherwise. Source: LLSV (1998, 2000).

Civil Law Equals 1 if the origin of Company Law or Commercial Code of the country is the Roman Law and 0 otherwise. Source: LLSV (1998, 2000).

High Investor Protection Equals 1 if the index of antidirector rights is greater than the sample median (=3) and 0 otherwise. Source: LLSV (1998, 2000).

Low Investor Protection Equals 1 if the index of antidirector rights is less than or equal to the sample median (=3) and 0 otherwise.

Shareholder Legal Protection: Measures: Insider Trading Law Enactment (“IT law enactment”) and Insider Trading Law Enforcement (“IT law enforcement”) Source: Bhattacharya and Daouk (2000).

Information Disclosure Measure: Improvements in country ratings of accounting standards and shareholder protection. Source: Emerging Stock Markets Factbook by International Finance Corporation (1989-1995).

Stock Market Discipline Measures: Official Liberalization and ADR Introduction Source: Bekaert and Harvey (2000).

45

Appendix II Improvements in Accounting Standards and Investor Protection

The International Finance Corporation (IFC) presents summaries of the following 10

market transparency and investor protection measures in their annual publication Emerging Stock

Markets Factbook : (#1) At least one share price index is calculated; (#2) Frequency of securities

exchange publication; (#3) Daily coverage of stock market on an international wire service; (#4)

Regular publication of P/E and yield; (#5) Market commentaries in English prepared by local and

international brokers or analysts; (#6) Company brokerage reports prepared by local and

international brokers or analysts; (#7) Is consolidated audited annual accounts required? (#8)

Frequency of interim financial statement; (#9) Accounting standards; and (#10) Investor

protection.

I am able to collect data from the Factbooks published over year 1989 -1995, which

report the ratings for the above 10 items during year 1988-1994. Most of the countries show little

cross-sectional and time-series variation for the first 7 variables except Measure #3. I do not

include Measure #3 as a measure of change in corporate governance because it mainly reflects the

aggregate information transmission of a stock market and seems to bear little relation with

minority investor protection. Hence I use measure #8, #9 and #10 to proxy for the external

corporate governance mechanism changes. Due to data availability, I use the earliest year (i.e.

1988) when the IFC rating starts as the base year. I label a country as having “room for

improvement” and assign a value of 1 to the indicator variable if a country meets any of the

following three criteria in the base year:

• The frequency of mandatory interim financial reporting (measure #8) was less than “Q”

(Quarterly).

• The assigned rating was lower than “G” (Good, of internationally acceptable quality) for

“Accounting Standard” (measure #9).

• The rating was lower than “GS” (Good, of internationally acceptable quality, and have

functioning securities commission or similar agency concentrating on regulating market

activity)” for “Investor Protection” (measure #10).

Good accounting standards are those judged to be of internationally acceptable quality in

so far as key elements in the guidelines produced by the International Accounting Standards

Committee (IASC) are adhered to in practice even though accounting authorities in a particular

country may not legally oblige companies to comply with the international standards. Poor

accounting standards are those that are judged to be in need of significant reform. Investor

protection refers to provisions in the company law and regulations that protect shareholders,

46

including registration rights, voting rights, anti-director rights, minority shareholder rights and

mandatory dividend payments. To measure investor protection the IFC index is a judgmental

measure of the overall protection afforded to investors in a particular market by the law. Good

investor protection conforms to international standards, average quality is somewhat below

international standards but adequate to support investment, while countries judged to have poor

investor protection are those where there is significant risk of value loss on this count.

The IFC Factbook covers 19 of the 22 countries in my sample. 16 countries show “room

for improvement” in year 1988. Seven countries (Greece, Indonesia, Malaysia, Philippines, Sri

Lanka, Turkey, and Taiwan) show actual improvement during 1989-1994. When an

improvement appears for both the accounting and the investor protection category, I record the

earlier date as the year of the “IFC change” to full measure its impact. A summary of the IFC

data is in Table A1. The corporate governance improvements cluster in 1992 and 1993. The

“Information Disclosure” sample is consisted of six countries excluding Sri Lanka, which does

not have sufficient firm-level financial data around the year of the change (1992). India shows a

deterioration in Measure #9 and #10 in 1994 and hence is also separated from the other countries

because the expected change in its dividend payout will move in opposite directions compared to

the six countries with corporate governance improvement.

47

Appendix II, Table A1 Improvements in Information Disclosure

Source: Emerging Stock Markets Factbook published by International Finance Corporation.

Country

Information Disclosure

Interim Reporting

Accounting Standards Rating

Investor Protection Rating

Room for Improvement

Argentina 1 Brazil 0 Chile 0 Colombia 1 Greece 1992 1992 1993 1 India 1994 1994 1994 1 Indonesia 1993 1993 1 Ireland . Israel . Korea 1 Malaysia 1992 1992 1 Mexico 0 New Zealand . Pakistan 1 Philippines 1993 1993 1 Portugal 1 Sri Lanka 1992 1992 1 Taiwan 1992 1992 1 Thailand 1 Turkey 1992 1992 1 Venezuela 1 Zimbabwe 1

Value of “1” under the “Room for Improvement” indicates that the external corporate governance of that country may improve over the period 1989-1994. Value of “0” indicates the ratings of all three corporate governance measures in the base year 1988 has reached the highest level and hence cannot be further improved. Missing value “.” indicates that the country is not in the Factbook rating.

48

Appendix III Alternative Measures of Stock Market Liberalization

The following four alternative measures are used (results omitted): (1) The year when the first country fund was established, as documented in

Bekaert and Harvey (2000). (2) The year of the “first stock market liberalization” for 12 countries as

documented by Henry (2000a), which uses official policy decree dates whenever available. (For example, liberalization in Argentina began with the New Foreign Investment Regime in November 1989. Mexico started its stock market liberalization by substantially reducing the restrictions on foreign portfolio inflows in May 1989.) Alternatively, Henry (2000a) identifies the liberalization year as either the establishment of first country fund or an increase in the IFC’s Investability index of at least 10 percent. Compared with the Official Liberalization and the ADR introduction measures in Bekaert and Harvey (2000), Henry’s measures sometimes lead by as many as 5 or 6 years,. Due to the small number of countries and the low number of firms in each country under both measures in the narrow samples, I exclude the first fund date and Henry’s first sign measure.

(3) I also construct a measure of stock market liberalization from the annual net equity portfolio flow of each country in the World Bank’s Global Development Finance (GDF) database. The foreign investor presence in the stock market may be best measured by the percentage of shares held by foreign investors. Due to unavailability of such data, I use the annual net equity portfolio flow of each country as a proxy. I am able to gather annual data of (net) portfolio equity flows for 16 countries in my sample. I document the first year when the GDF equity flows become positive. For 11 countries the actual flows appear in the same year or within one year of the First Fund date (Column 3). Only two countries (Mexico and the Philippines) have the two dates unmatched by more than 2 years. I follow Harrison, Love and McMillan (2001) by using the natural log of equity and FDI flows as a percentage of GNP to measure the degree of influence of foreign equity and FDI investors on a host country. I use the log of the actual flows in the regression analysis.

(4) The Capital Account Liberalization Indicator in the IMF’s Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER) reports.37 I do not find the AREAER measures have any effect on either the level or the change of dividend payouts in that none of the regression coefficients of AREAER appear significant. This is possibly due to the fact that these capital account liberalization measures are quite strict and are not very closely related to the presence of foreign equity investors or corporate governance changes.

37 I am grateful to Chris Lundblad for sharing the data.

49

Appendix IV

Observations by Year for the Whole Sample

Year % of observations

1980 0.02% 1981 0.09% 1982 0.25% 1983 0.43% 1984 0.53% 1985 0.65% 1986 0.87% 1987 1.33% 1988 2.68% 1989 3.63% 1990 4.18% 1991 6.26% 1992 8.96% 1993 10.72% 1994 12.17% 1995 15.36% 1996 16.94% 1997 13.58% 1998 1.35%

Total 100%

50

Appendix V

Number of Share Repurchase Programs by Country Source: Securities Data Corporation (SDC) database. The mean equals the total number of repurchase divided by the number of years when an actual repurchase took place. "1st repurchase" indicates the year when the first stock repurchase in a given country is recorded. "1st cluster" indicates the first year when the actual number of repurchase is equal to or greater than the mean level of repurchases.

Country 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 Total Mean Median 1st Repurchase 1st ClusterArgentina 0 0 0 0 0 0 0 1 0 1 0 0 5 7 2 0 1993 1998Brazil 0 0 0 0 0 0 0 0 2 3 0 7 6 18 5 0 1994 1994Chile 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 . .Colombia 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 . .Greece 0 0 0 0 3 0 0 0 0 1 4 1 1 10 2 0 1990 1990India 0 0 0 0 0 0 0 0 1 0 0 1 2 4 1 0 1994 1994Indonesia 0 0 0 0 0 1 0 0 0 1 0 0 0 2 1 0 1991 1991Ireland 0 0 0 0 0 0 2 1 1 4 0 0 2 10 2 0 1992 1992Israel 0 0 0 0 1 0 0 0 0 0 1 0 7 9 3 0 1990 1998Mexico 0 0 0 0 0 1 7 5 7 7 1 3 6 37 5 1 1991 1992New Zealand 0 0 0 0 0 1 0 1 0 4 5 1 11 23 4 0 1991 1995Philippines 0 1 0 0 0 0 0 0 0 1 1 2 1 6 1 0 1987 1995Portugal 0 0 0 0 0 0 0 0 0 0 1 0 0 1 1 0 1996 1996Korea 0 0 0 0 0 0 0 0 3 10 53 6 3 75 15 0 1994 1996Taiwan 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 . .Thailand 0 0 0 0 0 0 0 0 1 1 1 1 0 4 1 0 1994 1994Venezuela 0 0 0 0 0 0 1 0 1 0 0 0 0 2 1 0 1992 1992Zimbabwe 0 0 0 0 0 0 0 0 0 0 0 0 1 1 0 0 1998 1998

Country Median 0 0 0 0 0 0 0 0 0 1 0 0 1 5 1 0 1992 1994Country Mean 0 0 0 0 0 0 1 0 1 2 4 1 3 12 2 0 1992 1994

51

Figure 1. Dividend ratios from the cross-sectional versus the time-series perspective Assumption: Country A has lower investor protection than B. X is an unobserved macroeconomic event. A change in shareholder protection takes place at time T.

A B

B A

X

Time T

52

Figure 2 Mean and Median Cash Dividend Ratios By Year

Sample: 2,356 firms in 22 Emerging Markets.

Mean and Median Dividend-to-Sales Ratios by Year

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

Year

Div

iden

d R

atio

s

Mean Median

Mean and Median Dividend-to-Earnings Ratios by Year

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

Year

Div

iden

d ra

tios

Mean Median