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.”
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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.
406 L. HAIL, A. TAHOUN, AND C. WANG
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.
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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.
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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
DIVIDEND PAYOUTS AND INFORMATION SHOCKS 409
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]).
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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).
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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).
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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.
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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.
414 L. HAIL, A. TAHOUN, AND C. WANG
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.
DIVIDEND PAYOUTS AND INFORMATION SHOCKS 415
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.
416 L. HAIL, A. TAHOUN, AND C. WANG
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.
DIVIDEND PAYOUTS AND INFORMATION SHOCKS 417
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)
DIVIDEND PAYOUTS AND INFORMATION SHOCKS 419
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$1
0m
illio
n,a
nd
limit
the
sam
ple
toco
untr
ies
wit
hat
leas
t10
divi
den
d-pe
r-sh
are
obse
rvat
ion
s.W
efu
rth
erel
imin
ate
firm
sth
atvo
lun
tari
lyad
opte
dIF
RS
befo
reth
em
anda
te,o
rw
hos
esh
ares
are
cros
s-lis
ted
ona
U.S
.exc
han
ge.T
he
tabl
ere
port
sth
eto
tal
num
ber
ofun
ique
firm
sas
wel
las
the
num
ber
offi
rm-y
ears
and
perc
enta
ges
byco
untr
y(p
anel
A)
and
year
(pan
elB
)fo
rth
efo
llow
ing
case
s:(1
)fi
rm-y
ears
wit
hdi
vide
nd
paym
ents
mea
sure
dus
ing
the
divi
den
ds-p
er-s
har
eit
emin
Wor
ldsc
ope
(fiel
d05
101)
,(2)
firm
-yea
rsw
ith
incr
ease
sin
divi
den
dspe
rsh
are
rela
tive
toth
epr
ior
peri
od(i
ncl
udin
gth
ein
itia
tion
ofdi
vide
nd
paym
ents
),an
d(3
)fi
rm-y
ears
wit
hde
crea
ses
indi
vide
nds
per
shar
ere
lati
veto
the
prio
rpe
riod
(in
clud
ing
the
cess
atio
nof
divi
den
dpa
ymen
ts).
Pan
elA
also
lists
the
year
ofth
esi
gnifi
can
tch
ange
sin
firm
s’in
form
atio
nen
viro
nm
ent:
(1)
wh
enIF
RS
repo
rtin
gbe
cam
em
anda
tory
ina
coun
try
(Das
keet
al.[
2008
]),a
nd
(2)
wh
enth
efi
rstp
rose
cuti
onun
der
insi
der
trad
ing
law
sto
okpl
ace
ina
coun
try
(Bh
atta
char
yaan
dD
aouk
[200
2]).
Inth
ose
two
colu
mn
s“n
.a.”
den
otes
that
the
info
rmat
ion
alev
entd
oes
not
appl
ydu
rin
gou
rsa
mpl
epe
riod
.
420 L. HAIL, A. TAHOUN, AND C. WANG
Trend Line: y = 73.4% - 1.2% x
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Perc
ent o
f Tot
al F
irm
s
% Dividend-Paying Firms % Firms with Share Repurchases
Trend Line: y = 27.3 bn + 26.2 bn x
0
100
200
300
400
500
600
700
800
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Payo
uts (
US$
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,
DIVIDEND PAYOUTS AND INFORMATION SHOCKS 421
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.
422 L. HAIL, A. TAHOUN, AND C. WANG
TA
BL
E2
Des
crip
tive
Stat
istic
sfo
rVa
riab
les
Use
din
the
Reg
ress
ion
Ana
lyse
s
NM
ean
Std.
Dev
.P1
P25
Med
ian
P75
P99
Dep
ende
ntV
aria
bles
:D
ivid
end
Paym
ents
(In
dica
tor)
222,
766
0.61
70.
486
Div
iden
dIn
crea
ses
(In
dica
tor)
222,
766
0.37
00.
483
Div
iden
dD
ecre
ases
(In
dica
tor)
222,
766
0.17
20.
377
Div
iden
dA
nnou
ncem
entR
etur
ns(3
Day
s)97
,196
0.03
60.
037
0.00
00.
010
0.02
40.
048
0.17
6C
ontr
olVa
riab
les:
Shar
eR
epur
chas
es(I
ndi
cato
r)22
2,76
60.
222
0.41
5L
og(T
otal
Ass
ets)
(US$
thou
san
d)22
2,76
612
.564
1.83
49.
389
11.2
3812
.364
13.6
3717
.614
Mar
ket-t
o-B
ook
(Rat
io)
222,
766
2.09
32.
380
0.29
70.
861
1.43
32.
403
13.5
03L
ever
age
(Rat
io)
222,
766
0.22
70.
190
0.00
00.
055
0.20
00.
357
0.72
7R
etur
non
Ass
ets
(Rat
io)
222,
766
0.04
30.
102
−0.3
670.
010
0.04
30.
093
0.26
6R
etur
nVa
riab
ility
(Std
.Dev
.)22
2,76
62.
649
1.13
60.
767
1.80
22.
465
3.32
85.
912
Stoc
kR
etur
n(R
atio
)22
2,76
60.
174
0.62
8−0
.754
−0.1
900.
055
0.36
62.
753
Neg
ativ
eEa
rnin
gs(I
ndi
cato
r)22
2,76
60.
184
0.38
8O
verl
apw
ithEa
rnin
gsA
nnou
ncem
ent(
Indi
cato
r)97
,196
0.22
00.
414
�D
ivid
end
per
Shar
e(R
atio
)97
,196
0.00
20.
014
−0.0
510.
000
0.00
10.
004
0.04
9�
Earn
ings
per
Shar
e(R
atio
)97
,196
0.00
00.
146
−0.4
10−0
.013
0.00
50.
021
0.35
7
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
suffi
cien
tW
orld
scop
efi
nan
cial
data
and
Dat
astr
eam
stoc
kpr
ice
data
exis
t(s
eeta
ble
1).T
he
tabl
epr
esen
tsde
scri
ptiv
est
atis
tics
for
the
vari
able
sus
edin
the
regr
essi
onan
alys
es.W
eem
ploy
the
follo
win
gde
pen
den
tva
riab
les:
Div
iden
dPa
ymen
tsis
abi
nar
yin
dica
tor
mar
kin
gfi
rm-y
ears
wit
hpo
siti
vedi
vide
nds
per
shar
e(s
eteq
ualt
o“1
”).I
nfi
rm-y
ears
wit
hn
odi
vide
nd
data
orze
rodi
vide
nds
we
sett
his
vari
able
to“0
.”D
ivid
end
Incr
ease
s(D
ecre
ases
)is
abi
nar
yin
dica
tor
mar
kin
gfi
rm-y
ears
wit
ha
year
-to-y
ear
incr
ease
(dec
reas
e)in
divi
den
dspe
rsh
are.
We
mea
sure
Div
iden
dA
nnou
ncem
entR
etur
nsas
the
abso
lute
valu
eof
the
cum
ulat
ive
abn
orm
alre
turn
sov
erth
eth
ree
days
surr
oun
din
gth
ede
clar
atio
nda
teof
the
ann
ual
divi
den
dspe
rsh
are
(fiel
d05
913)
.We
com
pute
abn
orm
alre
turn
sasd
aily
raw
retu
rnsm
inus
loca
lmar
ketr
etur
ns.
We
use
the
follo
win
gco
ntr
olva
riab
les:
We
defi
ne
abi
nar
yin
dica
tor
mar
kin
gfi
rm-y
ears
wit
hSh
areR
epur
chas
es,m
easu
red
asth
e(p
osit
ive)
amou
nto
ffun
dsus
edto
decr
ease
the
num
ber
ofsh
ares
outs
tan
din
g(fi
eld
0475
1),n
etof
any
year
lych
ange
sin
pref
erre
dst
ock
(fiel
d03
451)
.Tot
alA
sset
sar
ede
nom
inat
edin
US$
thou
san
d.M
arke
t-to-
Boo
kis
the
rati
oof
mar
ket
valu
eof
equi
tydi
vide
dby
book
valu
eof
equi
ty.L
ever
age
isth
era
tio
ofto
tald
ebt
divi
ded
byto
tala
sset
s.R
etur
non
Ass
ets
isth
era
tio
ofop
erat
ing
inco
me
divi
ded
byav
erag
eto
tala
sset
s.W
em
easu
reR
etur
nVa
riab
ility
asth
ean
nua
lsta
nda
rdde
viat
ion
ofda
ilyst
ock
retu
rns
over
afi
rm’s
fisc
alye
ar(m
ulti
plie
dby
100)
.Sto
ckR
etur
nis
the
ann
ualb
uy-a
nd-
hol
dre
turn
,in
clud
ing
divi
den
dsov
erth
epr
ior
cale
nda
rye
ar.N
egat
iveE
arni
ngsi
sa
bin
ary
indi
cato
rm
arki
ng
firm
-yea
rsw
ith
anop
erat
ing
loss
.O
verl
apw
ithEa
rnin
gsA
nnou
ncem
enti
sa
bin
ary
indi
cato
rm
arki
ng
divi
den
dan
nou
nce
men
tsw
ith
infi
veda
ysof
the
ann
uale
arn
ings
per
shar
ere
port
date
(fiel
d05
904)
.�D
ivid
end
per
Shar
ean
d�
Earn
ings
per
Shar
ear
eth
eye
ar-to
-yea
rch
ange
sin
divi
den
dsan
dea
rnin
gspe
rsh
are
scal
edby
pric
epe
rsh
are
atth
een
dof
the
fisc
alye
ar.A
ccou
nti
ng
data
and
mar
ket
valu
esar
em
easu
red
asof
the
fisc
alye
aren
d.E
xcep
tfor
vari
able
sw
ith
nat
ural
low
eror
uppe
rbo
unds
,we
trun
cate
allv
aria
bles
atth
e1s
tan
d99
thpe
rcen
tile
,an
dw
eus
eth
en
atur
allo
gof
the
raw
valu
esw
her
ein
dica
ted.
DIVIDEND PAYOUTS AND INFORMATION SHOCKS 423
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
424 L. HAIL, A. TAHOUN, AND C. WANG
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.
DIVIDEND PAYOUTS AND INFORMATION SHOCKS 425
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
426 L. HAIL, A. TAHOUN, AND C. WANG
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.
DIVIDEND PAYOUTS AND INFORMATION SHOCKS 427
TA
BL
E3
Cha
nges
inD
ivid
end
Paym
entB
ehav
ior
Aro
und
Info
rmat
iona
lEve
nts
Pan
elA
:Dif
fere
nce-
in-d
iffe
renc
esan
alys
isof
divi
dend
paym
ents
arou
ndm
anda
tory
IFR
Sad
opti
onan
din
side
rtr
adin
gen
forc
emen
tFu
llSa
mpl
eC
onst
antS
ampl
e
Man
dato
ry20
01–2
004
2005
–200
820
01–2
004
2005
–200
8IF
RS
Pre-
Ado
ptio
nPe
riod
Post
-Ado
ptio
nPe
riod
Pre-
Ado
ptio
nPe
riod
Post
-Ado
ptio
nPe
riod
Ado
ptio
n(a
)(b
)(b
)−
(a)
(a)
(b)
(b)
−(a
)
Man
dato
ry(i
)62
.53%
57.7
8%−4
.75%
∗∗∗
(i)
75.4
1%77
.15%
1.74
%∗∗
∗
IFR
SA
dopt
ers
N=
20,1
13N
=21
,463
N=
9,68
2N
=8,
270
Non
-IFR
S(i
i)57
.47%
60.2
9%2.
82%
∗∗∗
(ii)
70.2
8%75
.40%
5.12
%∗∗
∗
Ado
pter
sN
=50
,499
N=
55,3
55N
=23
,260
N=
23,2
60(i
)−
(ii)
5.06
%∗∗
∗−2
.51%
∗∗∗
−7.5
7%∗∗
∗(i
)−
(ii)
5.13
%∗∗
∗1.
75%
∗∗∗
−3.3
8%∗∗
∗
Full
Sam
ple
Con
stan
tSam
ple
Insi
der
Pre-
En
forc
emen
tPo
st-E
nfo
rcem
ent
Pre-
En
forc
emen
tPo
st-E
nfo
rcem
ent
Trad
ing
Peri
odPe
riod
Peri
odPe
riod
En
forc
emen
t(a
)(b
)(b
)−
(a)
(a)
(b)
(b)
−(a
)
�E
nfo
rcem
ent
(i)
89.1
9%66
.17%
−23.
02%
∗∗∗
(i)
89.5
0%80
.23%
−9.2
7%∗∗
∗
Cou
ntr
ies
N=
2,39
6N
=25
,898
N=
1,93
3N
=6,
286
Non
enfo
rcem
ent/
(ii)
72.3
0%59
.73%
−12.
57%
∗∗∗
(ii)
76.0
0%70
.65%
−5.3
5%∗∗
∗
Alw
ays
En
forc
emen
tN
=16
,862
N=
98,8
01N
=14
,052
N=
44,7
96C
oun
trie
s(i
)−
(ii)
16.8
9%∗∗
∗6.
44%
∗∗∗
−10.
45%
∗∗∗
(i)
−(i
i)13
.50%
∗∗∗
9.58
%∗∗
∗−3
.92%
∗∗∗
(Con
tinue
d)
428 L. HAIL, A. TAHOUN, AND C. WANG
TA
BL
E3—
Con
tinue
d
Pan
elB
:Log
itre
gres
sion
anal
ysis
ofdi
vide
ndpa
ymen
tsar
ound
man
dato
ryIF
RS
adop
tion
and
insi
der
trad
ing
enfo
rcem
ent
Man
dato
ryIF
RS
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
Div
iden
dD
ivid
end
Div
iden
dD
ivid
end
Paym
ents
Paym
ents
Incr
ease
sD
ecre
ases
Paym
ents
Paym
ents
Incr
ease
sD
ecre
ases
(Ful
lSam
ple)
(Con
stan
tSam
ple)
(Ful
lSam
ple)
(Ful
lSam
ple)
(Ful
lSam
ple)
(Con
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∗∗∗
−5.7
24∗∗
∗4.
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)
DIVIDEND PAYOUTS AND INFORMATION SHOCKS 429
TA
BL
E3—
Con
tinue
d
Pan
elB
:Log
itre
gres
sion
anal
ysis
ofdi
vide
ndpa
ymen
tsar
ound
man
dato
ryIF
RS
adop
tion
and
insi
der
trad
ing
enfo
rcem
ent
Man
dato
ryIF
RS
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
Div
iden
dD
ivid
end
Div
iden
dD
ivid
end
Paym
ents
Paym
ents
Incr
ease
sD
ecre
ases
Paym
ents
Paym
ents
Incr
ease
sD
ecre
ases
(Ful
lSam
ple)
(Con
stan
tSam
ple)
(Ful
lSam
ple)
(Ful
lSam
ple)
(Ful
lSam
ple)
(Con
stan
tSam
ple)
(Ful
lSam
ple)
(Ful
lSam
ple)
Ret
urn
Vari
abili
ty−0
.420
∗∗∗
−0.4
86∗∗
∗−0
.159
∗∗0.
302∗∗
∗−0
.596
∗∗∗
−0.7
05∗∗
∗−0
.292
∗∗∗
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
∗∗∗
0.20
7∗∗∗
0.34
4∗∗∗
0.29
3∗∗∗
−0.4
16∗∗
∗
(4.1
9)(2
.52)
(4.0
0)(−
4.47
)(4
.65)
(6.6
9)(5
.80)
(−5.
44)
Neg
ativ
eEa
rnin
gs−1
.388
∗∗∗
−1.6
36∗∗
∗−0
.730
∗∗∗
0.77
3∗∗∗
−1.7
84∗∗
∗−2
.214
∗∗∗
−0.8
29∗∗
∗1.
042∗∗
∗
(−9.
57)
(−8.
88)
(−8.
96)
(3.9
0)(−
7.26
)(−
7.37
)(−
7.68
)(3
.39)
Cou
ntr
y-,I
ndu
stry
-,an
dYe
ar-F
ixed
Eff
ects
Incl
uded
Incl
uded
Incl
uded
Incl
uded
Incl
uded
Incl
uded
Incl
uded
Incl
uded
Pseu
do-R
265
.8%
67.6
%28
.1%
16.2
%68
.4%
71.8
%30
.1%
16.0
%N
147,
430
64,4
7214
7,43
087
,811
143,
957
67,0
6714
3,95
790
,946
NTr
eatm
ent
Firm
-Yea
rs21
,463
8,27
08,
605
4,33
225
,898
6,28
610
,679
7,04
6
NTr
eatm
entF
irm
s7,
812
2,24
44,
060
2,91
45,
666
764
3,73
23,
385
Th
eta
ble
repo
rts
chan
ges
infi
rms’
divi
den
dpa
ymen
tbe
hav
ior
follo
win
ga
sign
ifica
nt
chan
gein
the
info
rmat
ion
envi
ron
men
t.W
eco
nsi
der
two
info
rmat
ion
alev
ents
:(1)
the
man
dato
ryin
trod
ucti
onof
IFR
Sre
port
ing
(fro
m20
01to
2008
),an
d(2
)th
efi
rste
nfo
rcem
ento
fin
side
rtr
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
quir
eat
leas
tei
ght
obse
rvat
ion
spe
rfi
rm.I
npa
nel
A,w
ere
port
the
num
ber
ofob
serv
atio
ns
and
the
perc
enta
geof
divi
den
d-pa
yin
gfi
rms
acro
sstr
eatm
ent
and
ben
chm
ark
sam
ple
coun
trie
sbe
fore
and
afte
rth
ein
form
atio
nal
even
t.Fo
rm
anda
tory
IFR
S,w
eus
eD
ecem
ber
31,2
005,
and
for
ITen
forc
emen
tth
eye
ar19
96as
acu
toff
for
the
ben
chm
ark
firm
s.W
ein
dica
test
atis
tica
lsi
gnifi
can
ceof
diff
eren
ces
acro
ssce
llsw
ith
t-tes
ts.
Inpa
nel
B,
we
repo
rtlo
git
coef
fici
ent
esti
mat
esan
d(i
npa
ren
thes
es)
z-st
atis
tics
base
don
robu
stst
anda
rder
rors
clus
tere
dby
coun
try
from
regr
essi
ng
Div
iden
dPa
ymen
ts(o
rD
ivid
end
Incr
ease
san
dD
ecre
ases
)on
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
ent
vari
able
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.W
eus
eth
en
atur
allo
gof
the
raw
valu
esan
dla
gth
eva
riab
les
byon
eye
arw
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
.∗∗
∗ ,∗∗
,an
d∗
indi
cate
stat
isti
cals
ign
ifica
nce
atth
e1%
,5%
,an
d10
%le
vels
(tw
o-ta
iled)
.
430 L. HAIL, A. TAHOUN, AND C. WANG
TA
BL
E4
Ass
essi
ngId
entifi
catio
nof
the
Cha
nges
inD
ivid
end
Paym
entB
ehav
ior
Aro
und
Info
rmat
iona
lEve
nts
Pan
elA
:Ana
lysi
sof
year
sle
adin
gup
toan
dfo
llow
ing
the
info
rmat
iona
leve
nts
IFR
SA
dopt
ion
ITE
nfo
rcem
ent
(1)
(2)
(3)
(1)
(2)
Div
iden
dPa
ymen
tsD
ivid
end
Paym
ents
Div
iden
dPa
ymen
tsD
ivid
end
Paym
ents
Div
iden
dPa
ymen
tsD
ivid
end
Paym
ents
as(F
ullS
ampl
e)(C
onst
antS
ampl
e)(C
onst
antS
ampl
e,(F
ullS
ampl
e)(C
onst
antS
ampl
e)D
epen
den
tVar
iabl
eN
oU
nit
edSt
ates
)
Year
sR
elat
ive
toE
ven
tYea
r(t
=0)
:Ye
ars
t–2
and
t–1
0.18
20.
079
−0.0
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
−0.2
38∗
−0.7
35∗∗
−1.0
18∗∗
∗
(−0.
67)
(−0.
66)
(−1.
71)
(−2.
13)
(−2.
63)
Year
st�
+2−0
.449
∗∗−0
.801
∗∗−0
.503
−0.6
15∗∗
−0.8
68∗∗
∗
(−2.
19)
(−2.
41)
(−1.
55)
(−2.
54)
(−2.
72)
F-Te
stfo
rD
iffe
ren
ceA
cros
sC
oeffi
cien
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
Incl
uded
Incl
uded
Incl
uded
Incl
uded
Incl
uded
N14
7,43
064
,472
47,5
8414
3,95
767
,067
(Con
tinue
d)
DIVIDEND PAYOUTS AND INFORMATION SHOCKS 431
TA
BL
E4—
Con
tinue
d
Pan
elB
:Cou
nter
fact
ually
assi
gnin
gev
enty
ears
tobe
nchm
ark
coun
trie
sD
ivid
end
Paym
ents
asD
epen
den
tVar
iabl
eIF
RS
Ado
ptio
nIn
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
Enfo
rcem
entC
ount
ries
––
−0.0
72–
(−0.
44)
Nev
er-IT
Enfo
rcem
entC
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
Incl
uded
Incl
uded
Incl
uded
Fixe
dE
ffec
tsIn
clud
edIn
clud
edIn
clud
edIn
clud
edN
147,
430
143,
957
143,
957
143,
957
(Con
tinue
d)
432 L. HAIL, A. TAHOUN, AND C. WANG
TA
BL
E4—
Con
tinue
d
Pan
elC
:Cha
nges
indi
vide
ndpa
ymen
tsfo
rfi
rms
notd
irec
tly
affe
cted
byth
ein
form
atio
nale
vent
Aro
und
Insi
der
Trad
ing
Aro
und
Man
dato
ryIF
RS
Ado
ptio
nE
nfo
rcem
ent
(1)
(2)
(3)
(1)
(2)
Volu
nta
ryVo
lun
tary
U.S
.Vo
lun
tary
U.S
.D
ivid
end
Paym
ents
asIF
RS
Firm
sIF
RS
Firm
sC
ross
-IF
RS
Firm
sC
ross
-D
epen
den
tVar
iabl
e(A
llA
dopt
ers)
(Ser
ious
Ado
pter
s)L
iste
dFi
rms
(All
Ado
pter
s)L
iste
dFi
rms
Cou
nte
rfac
tual
Firm
s:Vo
lunt
ary
IFR
SFi
rms
−0.4
02∗∗
∗0.
265
–0.
256
–(−
2.68
)(0
.87)
(0.4
3)U
.S.C
ross
-Lis
ted
Firm
s–
–−0
.005
–0.
036
(−0.
02)
(0.0
5)In
form
atio
nal
Eve
ntF
irm
s:IF
RS
Ado
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
rD
iffe
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
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
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
coun
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).
DIVIDEND PAYOUTS AND INFORMATION SHOCKS 433
(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).
434 L. HAIL, A. TAHOUN, AND C. WANG
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.
DIVIDEND PAYOUTS AND INFORMATION SHOCKS 435
TA
BL
E5
Sens
itivi
tyA
naly
ses
ofth
eC
hang
esin
Div
iden
dPa
ymen
tBeh
avio
rA
roun
dIn
form
atio
nalE
vent
s
Pan
elA
:Man
dato
ryIF
RS
adop
tion
asin
form
atio
nale
vent
(1)
(2)
(3)
(4)
(5)
(7)
Plus
CFO
over
Plus
Ret
ain
edPl
usTa
xR
ate
Firm
-Fi
rm-
(6)
No
U.S
.D
ivid
end
Paym
ents
asTo
talA
sset
sE
arn
ings
Wed
geas
Fixe
dE
ffec
tsFi
xed
Eff
ects
No
U.S
.O
bser
vati
ons
&D
epen
den
tVar
iabl
eas
Con
trol
asC
ontr
olC
ontr
ol(F
ullS
ampl
e)(C
onst
antS
ampl
e)O
bser
vati
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
Paym
ents
t−1
4.18
6∗∗∗
4.08
0∗∗∗
4.19
2∗∗∗
1.15
4∗∗∗
1.64
4∗∗∗
3.63
8∗∗∗
3.60
0∗∗∗
(8.8
2)(8
.38)
(8.9
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)
(2.3
6)(2
.32)
(2.0
4)L
og(T
otal
Ass
ets)
0.19
4∗∗∗
0.19
5∗∗∗
0.19
7∗∗∗
0.96
3∗∗∗
0.76
8∗∗∗
0.22
5∗∗∗
0.21
7∗∗∗
(8.7
1)(6
.94)
(8.7
4)(6
.44)
(3.4
9)(8
.72)
(7.7
8)M
arke
t-to-
Boo
k−0
.075
∗∗∗
−0.0
58∗∗
∗−0
.072
∗∗∗
−0.0
40∗∗
−0.0
23−0
.074
∗∗∗
−0.0
76∗∗
∗
(−5.
11)
(−3.
58)
(−4.
67)
(−2.
13)
(−0.
62)
(−3.
66)
(−3.
60)
Lev
erag
e−1
.230
∗∗∗
−1.3
89∗∗
∗−1
.300
∗∗∗
−4.6
99∗∗
∗−5
.148
∗∗∗
−1.7
21∗∗
∗−1
.738
∗∗∗
(−3.
46)
(−3.
71)
(−3.
72)
(−6.
47)
(−4.
47)
(−8.
01)
(−7.
80)
Ret
urn
onA
sset
s5.
201∗∗
∗5.
810∗∗
∗5.
837∗∗
∗10
.802
∗∗∗
10.4
07∗∗
∗7.
562∗∗
∗7.
832∗∗
∗
(4.7
4)(4
.79)
(5.6
1)(6
.04)
(4.2
0)(8
.47)
(8.4
5)R
etur
nVa
riab
ility
−0.4
18∗∗
∗−0
.436
∗∗∗
−0.4
18∗∗
∗−0
.359
∗∗∗
−0.3
87∗∗
∗−0
.453
∗∗∗
−0.5
07∗∗
∗
(−8.
64)
(−8.
51)
(−8.
65)
(−5.
75)
(−4.
47)
(−8.
61)
(−8.
01)
(Con
tinue
d)
436 L. HAIL, A. TAHOUN, AND C. WANG
TA
BL
E5—
Con
tinue
d
Pan
elA
:Man
dato
ryIF
RS
adop
tion
asin
form
atio
nale
vent
(1)
(2)
(3)
(4)
(5)
(7)
Div
iden
dPa
ymen
tsPl
usC
FOov
erPl
usR
etai
ned
Plus
Tax
Rat
eFi
rm-
Firm
-(6
)N
oU
.S.
asD
epen
den
tTo
talA
sset
sE
arn
ings
Wed
geas
Fixe
dE
ffec
tsFi
xed
Eff
ects
No
U.S
.O
bser
vati
ons
&Va
riab
leas
Con
trol
asC
ontr
olC
ontr
ol(F
ullS
ampl
e)(C
onst
antS
ampl
e)O
bser
vati
ons
No
Year
2008
Stoc
kR
etur
n0.
153∗∗
∗0.
154∗∗
∗0.
149∗∗
∗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
Earn
ings
−1.4
09∗∗
∗−1
.453
∗∗∗
−1.3
89∗∗
∗−1
.006
∗∗∗
−1.2
27∗∗
∗−1
.255
∗∗∗
−1.2
97∗∗
∗
(−9.
82)
(−8.
77)
(−9.
57)
(−10
.22)
(−9.
22)
(−9.
44)
(−9.
62)
CFO
over
Tota
lAss
ets
1.41
7∗∗∗
––
––
––
(5.0
8)R
etai
ned
Earn
ings
–0.
206∗∗
∗–
––
––
(3.8
4)Ta
xR
ate
Wed
ge–
–−0
.006
∗–
––
–(−
1.76
)C
oun
try-
,In
dust
ry-,
and
Incl
uded
Incl
uded
Incl
uded
Year
-&Fi
rm-
Year
-&Fi
rm-
Incl
uded
Incl
uded
Year
-Fix
edE
ffec
tsFi
xed
Eff
ects
Fixe
dE
ffec
ts
Pseu
do-R
266
.0%
66.9
%65
.8%
29.7
%36
.1%
61.1
%61
.6%
N14
5,31
012
9,62
514
7,43
041
,241
18,4
6411
2,83
898
,087
(Con
tinue
d)
DIVIDEND PAYOUTS AND INFORMATION SHOCKS 437
TA
BL
E5—
Con
tinue
d
Pan
elB
:Ins
ider
trad
ing
enfo
rcem
enta
sin
form
atio
nale
vent
(1)
(2)
(3)
(4)
(5)
(7)
Plus
CFO
over
Plus
Ret
ain
edPl
usTa
xFi
rm-
Firm
-(6
)W
ith
out
Div
iden
dPa
ymen
tsas
Tota
lAss
ets
Ear
nin
gsR
ate
Wed
geFi
xed
Eff
ects
Fixe
dE
ffec
tsN
oU
.S.
Year
of�
ITD
epen
den
tVar
iabl
eas
Con
trol
asC
ontr
olas
Con
trol
(Ful
lSam
ple)
(Con
stan
tSam
ple)
Obs
erva
tion
sE
nfo
rcem
ent
Info
rmat
ion
alE
ven
ts:
ITEn
forc
emen
t−0
.581
∗∗∗
−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)
(−2.
89)
(−2.
78)
Con
trol
Vari
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)
Shar
eR
epur
chas
es0.
236∗∗
∗0.
218∗∗
∗0.
244∗∗
∗0.
356∗∗
∗0.
343∗∗
0.14
4∗∗∗
0.24
7∗∗∗
(3.3
0)(2
.77)
(3.4
1)(3
.17)
(2.3
3)(3
.26)
(3.3
5)L
og(T
otal
Ass
ets)
0.15
1∗∗∗
0.13
4∗∗∗
0.14
8∗∗∗
1.12
2∗∗∗
0.89
4∗∗∗
0.17
8∗∗∗
0.14
8∗∗∗
(6.6
6)(4
.96)
(5.9
5)(8
.78)
(5.3
2)(5
.39)
(5.9
5)M
arke
t-to-
Boo
k−0
.079
∗∗∗
−0.0
32∗
−0.0
74∗∗
∗−0
.002
−0.0
50−0
.078
∗∗∗
−0.0
76∗∗
∗
(−4.
75)
(−1.
86)
(−4.
49)
(−0.
08)
(−1.
49)
(−3.
32)
(−4.
54)
Lev
erag
e−1
.824
∗∗∗
−1.5
59∗∗
∗−1
.883
∗∗∗
−5.2
05∗∗
∗−5
.042
∗∗∗
−2.5
08∗∗
∗−1
.887
∗∗∗
(−3.
86)
(−3.
75)
(−4.
27)
(−6.
91)
(−4.
87)
(−9.
64)
(−4.
25)
Ret
urn
onA
sset
s3.
882∗∗
3.71
3∗∗4.
644∗∗
∗9.
467∗∗
∗9.
364∗∗
8.52
0∗∗∗
4.64
0∗∗∗
(2.3
1)(2
.45)
(2.9
0)(3
.79)
(2.5
7)(7
.90)
(2.9
1)R
etur
nVa
riab
ility
−0.5
95∗∗
∗−0
.550
∗∗∗
−0.5
98∗∗
∗−0
.488
∗∗∗
−0.6
03∗∗
∗−0
.562
∗∗∗
−0.5
96∗∗
∗
(−20
.51)
(−17
.22)
(−19
.32)
(−9.
26)
(−9.
50)
(−12
.79)
(−19
.62)
(Con
tinue
d)
438 L. HAIL, A. TAHOUN, AND C. WANG
TA
BL
E5—
Con
tinue
d
Pan
elB
:Ins
ider
trad
ing
enfo
rcem
enta
sin
form
atio
nale
vent
(1)
(2)
(3)
(4)
(5)
(7)
Plus
CFO
over
Plus
Ret
ain
edPl
usTa
xFi
rm-
Firm
-(6
)W
ith
out
Div
iden
dPa
ymen
tsas
Tota
lAss
ets
Ear
nin
gsR
ate
Wed
geFi
xed
Eff
ects
Fixe
dE
ffec
tsN
oU
.S.
Year
of�
ITD
epen
den
tVar
iabl
eas
Con
trol
asC
ontr
olas
Con
trol
(Ful
lSam
ple)
(Con
stan
tSam
ple)
Obs
erva
tion
sE
nfo
rcem
ent
Stoc
kR
etur
n0.
208∗∗
∗0.
171∗∗
∗0.
208∗∗
∗0.
128∗∗
∗0.
193∗∗
∗0.
210∗∗
∗0.
205∗∗
∗
(4.7
6)(3
.44)
(4.6
3)(2
.85)
(2.6
6)(3
.97)
(4.6
3)N
egat
ive
Earn
ings
−1.7
71∗∗
∗−1
.845
∗∗∗
−1.7
86∗∗
∗−1
.188
∗∗∗
−1.5
43∗∗
∗−1
.414
∗∗∗
−1.7
86∗∗
∗
(−7.
48)
(−6.
80)
(−7.
27)
(−6.
89)
(−6.
77)
(−6.
66)
(−7.
24)
CFO
over
Tota
lAss
ets
1.97
8∗∗∗
––
––
––
(10.
10)
Ret
aine
dEa
rnin
gs–
0.45
3∗∗–
––
––
(2.5
2)Ta
xR
ate
Wed
ge–
–0.
001
––
––
(0.1
9)C
oun
try-
,In
dust
ry-,
and
Incl
uded
Incl
uded
Incl
uded
Year
-&Fi
rm-
Year
-&Fi
rm-
Incl
uded
Incl
uded
Year
-Fix
edE
ffec
tsFi
xed
Eff
ects
Fixe
dE
ffec
ts
Pseu
do-R
268
.7%
69.8
%68
.5%
35.7
%44
.6%
60.4
%68
.4%
N14
0,14
713
0,70
414
3,41
840
,768
21,0
7298
,608
142,
743
Th
eta
ble
repo
rts
sen
siti
vity
anal
yses
ofou
rba
sesp
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)
.
DIVIDEND PAYOUTS AND INFORMATION SHOCKS 439
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).
440 L. HAIL, A. TAHOUN, AND C. WANG
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.
DIVIDEND PAYOUTS AND INFORMATION SHOCKS 441
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.
442 L. HAIL, A. TAHOUN, AND C. WANGT
AB
LE
6C
hang
esin
the
Info
rmat
ion
Con
tent
ofD
ivid
end
Ann
ounc
emen
tsA
roun
dIn
form
atio
nalE
vent
s
Pan
elA
:OL
Sre
gres
sion
anal
ysis
ofdi
vide
ndan
noun
cem
entr
etur
nsar
ound
man
dato
ryIF
RS
adop
tion
and
insi
der
trad
ing
enfo
rcem
ent
Man
dato
ryIF
RS
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
Div
iden
dD
ivid
end
Div
iden
dD
ivid
end
Paym
ents
Paym
ents
Incr
ease
sD
ecre
ases
Paym
ents
Paym
ents
Incr
ease
sD
ecre
ases
Th
ree-
Day
Abs
olut
eD
ivid
end
An
nou
nce
men
tRet
urn
sas
Dep
ende
ntV
aria
ble
(Ful
lSam
ple)
(Con
stan
tSam
ple)
(Ful
lSam
ple)
(Ful
lSam
ple)
(Ful
lSam
ple)
(Con
stan
tSam
ple)
(Ful
lSam
ple)
(Ful
lSam
ple)
Info
rmat
ion
alE
ven
ts:
IFR
SA
dopt
ion
−0.0
04∗∗
−0.0
04∗∗
∗−0
.004
∗−0
.006
∗∗–
––
–(−
2.16
)(−
2.91
)(−
1.87
)(−
2.46
)IT
Enfo
rcem
ent
––
––
−0.0
05∗∗
−0.0
04∗∗
−0.0
05−0
.005
∗∗∗
(−2.
40)
(−2.
40)
(−1.
58)
(−4.
12)
Con
trol
Vari
able
s:O
verl
apw
ithEa
rnin
gs0.
005∗∗
∗0.
004∗∗
0.00
6∗∗∗
0.00
20.
002∗∗
∗0.
001∗∗
0.00
2∗∗0.
002∗∗
Ann
ounc
emen
t(3
.78)
(2.2
0)(5
.16)
(1.3
5)(2
.95)
(2.0
9)(2
.03)
(2.2
0)�
Div
iden
dpe
rSh
are
0.05
4∗∗∗
0.05
0∗∗0.
206∗∗
∗−0
.081
∗∗0.
005
−0.0
020.
198∗∗
∗−0
.113
∗∗∗
(3.5
2)(2
.48)
(5.9
4)(−
2.51
)(0
.24)
(−0.
10)
(6.3
8)(−
3.69
)�
Earn
ings
per
Shar
e−0
.002
−0.0
010.
001
−0.0
04∗∗
0.00
3∗0.
004∗
0.00
6∗∗∗
0.00
1(−
1.08
)(−
0.26
)(0
.60)
(−2.
02)
(1.8
0)(2
.02)
(3.5
2)(0
.46)
Log
(Tot
alA
sset
s)−0
.002
∗∗∗
−0.0
02∗∗
∗−0
.003
∗∗∗
−0.0
02∗∗
∗−0
.002
∗∗∗
−0.0
02∗∗
∗−0
.002
∗∗∗
−0.0
02∗∗
∗
(−8.
35)
(−10
.19)
(−6.
93)
(−4.
84)
(−10
.83)
(−9.
48)
(−8.
12)
(−7.
91)
Mar
ket-t
o-B
ook
−0.0
00−0
.000
0.00
0−0
.000
0.00
0−0
.000
0.00
00.
000
(−0.
11)
(−0.
37)
(0.0
4)(−
1.63
)(0
.56)
(−0.
31)
(1.2
4)(0
.08)
Lev
erag
e0.
008∗∗
0.00
80.
007∗
0.00
10.
004∗
0.00
5∗∗0.
001
0.00
2(2
.10)
(1.6
7)(1
.77)
(0.6
7)(1
.77)
(2.2
1)(0
.59)
(1.1
4)R
etur
non
Ass
ets
0.01
20.
012
0.00
50.
011
0.00
2−0
.009
0.00
2−0
.002
(1.0
8)(0
.74)
(0.7
3)(1
.45)
(0.2
0)(−
0.78
)(0
.19)
(−0.
18)
Cou
ntr
y-,I
ndu
stry
-,an
dYe
ar-F
ixed
Eff
ects
Incl
uded
Incl
uded
Incl
uded
Incl
uded
Incl
uded
Incl
uded
Incl
uded
Incl
uded
Adj
uste
dR
27.
2%7.
0%9.
1%8.
3%8.
1%8.
7%9.
8%8.
0%N
61,2
5733
,119
38,7
4611
,972
61,3
0635
,491
37,1
7912
,682
(Con
tinue
d)
DIVIDEND PAYOUTS AND INFORMATION SHOCKS 443
TA
BL
E6—
Con
tinue
d
Pan
elB
:Sen
siti
vity
anal
yses
ofth
edi
vide
ndan
noun
cem
entr
etur
nsar
ound
man
dato
ryIF
RS
adop
tion
and
insi
der
trad
ing
enfo
rcem
ent
Man
dato
ryIF
RS
Ado
ptio
nIn
side
rTr
adin
gE
nfo
rcem
ent
(1)
(2)
(3)
(4)
(1)
(2)
(3)
(4)
Firm
-Fi
rm-
No
U.S
.Fi
rm-
Firm
-W
ith
out
Fixe
dE
ffec
tsFi
xed
Eff
ects
No
U.S
.O
bser
vati
ons
&Fi
xed
Eff
ects
Fixe
dE
ffec
tsN
oU
.S.
Year
of�
ITT
hre
e-D
ayA
bsol
ute
Div
iden
dA
nn
oun
cem
entR
etur
ns
asD
epen
den
tVar
iabl
e(F
ullS
ampl
e)(C
onst
antS
ampl
e)O
bser
vati
ons
No
Year
2008
(Ful
lSam
ple)
(Con
stan
tSam
ple)
Obs
erva
tion
sE
nfo
rcem
ent
Info
rmat
ion
alE
ven
ts:
IFR
SA
dopt
ion
−0.0
03∗
−0.0
04∗∗
∗−0
.004
∗−0
.004
∗–
––
–(−
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)
Con
trol
Vari
able
s:O
verl
apw
ithEa
rnin
gs0.
004∗∗
0.00
30.
004∗∗
∗0.
005∗∗
∗0.
002∗∗
∗0.
002∗∗
0.00
2∗∗∗
0.00
2∗∗∗
Ann
ounc
emen
t(2
.35)
(1.3
7)(3
.64)
(3.7
5)(3
.85)
(2.0
7)(2
.96)
(2.7
4)�
Div
iden
dpe
rSh
are
0.03
5∗∗∗
0.02
40.
060∗∗
∗0.
063∗∗
∗−0
.007
−0.0
070.
014
0.00
5(2
.80)
(1.2
2)(3
.82)
(3.2
1)(−
0.30
)(−
0.29
)(0
.60)
(0.2
4)�
Earn
ings
per
Shar
e−0
.002
−0.0
00−0
.000
0.00
20.
004∗∗
0.00
5∗∗0.
004∗∗
0.00
3(−
1.07
)(−
0.15
)(−
0.05
)(1
.63)
(2.4
2)(2
.43)
(2.3
9)(1
.63)
Log
(Tot
alA
sset
s)−0
.001
−0.0
01−0
.003
∗∗∗
−0.0
03∗∗
∗−0
.002
∗∗∗
−0.0
01−0
.002
∗∗∗
−0.0
02∗∗
∗
(−0.
57)
(−0.
71)
(−11
.89)
(−9.
24)
(−2.
76)
(−0.
95)
(−10
.44)
(−10
.74)
Mar
ket-t
o-B
ook
−0.0
01∗∗
−0.0
010.
000
0.00
0−0
.001
∗∗−0
.000
0.00
00.
000
(−2.
25)
(−1.
12)
(0.5
4)(0
.58)
(−2.
07)
(−1.
68)
(0.1
5)(0
.48)
Lev
erag
e0.
005
0.00
40.
009∗∗
0.00
9∗∗0.
003
0.00
10.
005∗∗
∗0.
004∗
(1.1
8)(0
.75)
(2.5
0)(2
.38)
(0.7
8)(0
.37)
(2.7
0)(1
.71)
Ret
urn
onA
sset
s0.
009
0.00
50.
011
0.00
9−0
.001
−0.0
060.
008
0.00
2(0
.78)
(0.3
8)(0
.93)
(0.8
7)(−
0.12
)(−
0.45
)(0
.76)
(0.2
1)C
oun
try-
,In
dust
ry-,
and
Year
-&Fi
rm-
Year
-&Fi
rm-
Incl
uded
Incl
uded
Year
-&Fi
rm-
Year
-&Fi
rm-
Incl
uded
Incl
uded
Year
-Fix
edE
ffec
tsFi
xed
Eff
ects
Fixe
dE
ffec
tsFi
xed
Eff
ects
Fixe
dE
ffec
ts
Adj
uste
dR
235
.8%
28.2
%6.
3%6.
6%33
.4%
23.7
%7.
4%8.
1%N
61,2
5733
,119
51,4
2046
,555
61,3
0635
,491
46,2
6860
,621
(Con
tinue
d)
444 L. HAIL, A. TAHOUN, AND C. WANGT
AB
LE
6—C
ontin
ued
Pan
elC
:Div
iden
dan
noun
cem
entr
etur
nsfo
rfi
rms
notd
irec
tly
affe
cted
byth
ein
form
atio
nale
vent
Aro
und
Insi
der
Trad
ing
Aro
und
Man
dato
ryIF
RS
Ado
ptio
nE
nfo
rcem
ent
(1)
(2)
(3)
(1)
(2)
Th
ree-
Day
Abs
olut
eD
ivid
end
Volu
nta
ryVo
lun
tary
U.S
.Vo
lun
tary
U.S
.A
nn
oun
cem
entR
etur
ns
IFR
SFi
rms
IFR
SFi
rms
Cro
ss-
IFR
SFi
rms
Cro
ss-
asD
epen
den
tVar
iabl
e(A
llA
dopt
ers)
(Ser
ious
Ado
pter
s)L
iste
dFi
rms
(All
Ado
pter
s)L
iste
dFi
rms
Cou
nte
rfac
tual
Firm
s:Vo
lunt
ary
IFR
SFi
rms
−0.0
03−0
.001
–−0
.008
–(−
1.36
)(−
0.18
)(−
0.40
)U
.S.C
ross
-Lis
ted
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).
DIVIDEND PAYOUTS AND INFORMATION SHOCKS 445
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.
446 L. HAIL, A. TAHOUN, AND C. WANG
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.
DIVIDEND PAYOUTS AND INFORMATION SHOCKS 447
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)
448 L. HAIL, A. TAHOUN, AND C. WANGT
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).
DIVIDEND PAYOUTS AND INFORMATION SHOCKS 449
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).
450 L. HAIL, A. TAHOUN, AND C. WANG
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
DIVIDEND PAYOUTS AND INFORMATION SHOCKS 451
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)
DIVIDEND PAYOUTS AND INFORMATION SHOCKS 453
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.
454 L. HAIL, A. TAHOUN, AND C. WANG
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