Carbon risk and dividend policy: Evidence from China

Using a large sample of Chinese listed industrial firms from 2009 to 2019, this study investigates the effect of firm-level carbon risk on dividend policy. We find that carbon risk has a significant and negative impact on a firm's dividend payout level. We also find that when firms' capability in innovation is stronger, the degree of earnings uncertainty is higher, a firm belongs to high‑carbon industries, the negative relationship between carbon risk and dividend payout level is more significant. Furthermore, financial constraints and cash holdings are two underlying channels through which carbon risk affects cash dividend payouts. Our findings remain consistent across several robustness checks.     

Asymmetric Cost Behavior and Dividend Policy

Costs are sticky on average, that is, they fall less for sales decreases than they rise for equivalent sales increases. We examine the effect of this asymmetric cost behavior on a firm's dividend policy. Given investors’ aversion to dividend cuts, we predict that firms with higher resource adjustment costs and stickier costs pay lower dividends than their peers because they are less able to sustain any higher level of dividend payouts in the future. We find evidence consistent with this prediction. Further, using a regression discontinuity design that exploits variation in labor adjustment costs generated by close-call union elections, we provide evidence suggesting that the negative relation between cost stickiness and dividend payouts is driven by resource adjustment costs. Our paper sheds new light on the determinants of dividend policy and demonstrates the role of cost behavior in corporate decisions.     

CEO mobility and corporate payouts

We examine how chief executive officer (CEO) mobility affects corporate payouts. We exploit US state courts’ staggered adoption of the inevitable disclosure doctrine (IDD) to obtain exogenous variation in mobility. We report several findings. First, we find that firms in IDD-adopting states increase dividend payouts, whereas the effect of IDD on share repurchases is insignificant relative to firms not in IDD-adopting states. Second, the increase in dividends is concentrated on firms run by CEOs having high ability. Third, CEOs increasing dividends are less likely to be forced to leave their jobs. Fourth, the increase in dividends is concentrated on firms run by early-career CEOs rather than retiring CEOs. Last, CEOs increasing dividends receive more favorable shareholders’ say on pay votes for higher pay. Our evidence supports the notion that restricted mobility induces CEOs to choose a dividend policy that enhances their positions with their shareholders.     

Corporate governance and cash holdings: Evidence from worldwide board reforms

Using staggered board reforms as a quasi-natural experiment and a difference-in-differences approach, this study examines the impact of corporate governance on cash holdings in 41 countries. We find that board reforms are followed by significant reductions in cash holdings. This effect is more pronounced for firms with weaker pre-reform corporate governance and for firms from countries with weaker institutional environments. Analysis of cash spending suggests that, following board reforms, firms are more likely to use cash to increase R&D expenditures, dividend payouts, and share repurchases, but not to increase capital or acquisition expenditures. Finally, the results indicate that enhanced corporate governance following board reforms leads to higher (lower) cash (dividend payouts) values, consistent with the view that board reforms strengthen corporate governance.     

The Effect of Fair Value Adjustments on Dividend Policy Under Mandatory International Financial Reporting Standards Adoption: Australian Evidence

Using a sample of firms from the financial sector of the Australian Securities Exchange, we examine the effect of the fair value adjustments of financial instruments on firms’ dividend distributions in the context of mandatory International Financial Reporting Standards (IFRS) adoption. We find a positive relationship between the fair value adjustments of financial instruments and firms’ dividend payouts, suggesting that the frequent use of fair value adjustments of financial instruments by financial firms following mandatory IFRS adoption has the potential to increase the proportion of transitory earnings in reported earnings and cause changes in dividend policies. Our results add to the ongoing debate on the unintended economic consequences of fair value accounting (FVA) and provide empirical support for regulators’ concerns that unrealized FVA gains from asset revaluation during booms may encourage the distribution of those unrealized gains.     

Cross-border enforcement of securities laws and dividend payouts

Following the September 11, 2001 attacks, numerous countries signed a special nonbinding arrangement to enhance cross-border enforcement of securities laws. This agreement is the Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information (MMoU). This study examines whether and how a country's MMoU entry affects firms' dividend payout policies. Relative to domestic US firms, foreign firms cross-listed in the US report a significant increase in dividend payouts after their home country entered the MMoU. Furthermore, the effect of MMoU on corporate dividend payouts is pronounced for (1) firms with high agency costs, (2) countries with low external governance quality, and (3) countries with poor disclosure environments. Furthermore, we find that MMoU significantly changes the corporate governance structure. Our findings collectively corroborate the prediction of the dividend outcome model and are consistent with the notion that strengthening cross-border regulatory enforcement of foreign firms improves protection for outside shareholders and increases dividend payouts.     

Taxes and dividend policy under alternative tax regimes

This paper examines changes in corporate dividend policy around the introduction of a dividend imputation tax system. This represented a significant change to the Australian tax framework and allows us to test the effect of differential taxation on corporate dividend policy. Consistent with the tax preference for the distribution of dividends, we find dividend initiations, all dividend payout measures and dividend reinvestment plans increased with the introduction of dividend imputation. Similarly we find that gross dividend payouts are more volatile under dividend imputation. Finally, we find that the increase in dividend payout and initiations differs across firms. In particular, we find that the higher the level of available franking tax credits the higher the firm's gross dividend payout and the more likely the firm is to initiate a dividend.     

An empirical investigation of the effect of imputation credits on remittance of overseas dividends

Overseas dividend remittance is an important vehicle for multinational corporations (MNCs) to move funds among their global subsidiaries. Using firm-level data from 2001 to 2004 for Taiwan-based MNCs with subsidiaries in China, this paper provides empirical evidence on the effect of imputation credits on overseas dividend remittances. We find that imputation credits have a positive effect on increasing foreign dividend payouts, thereby reducing the efficiency loss induced by the tax cost for within-firm dividends of MNCs. We also document evidence that parent companies’ net fund flows from related-party transactions with their subsidiaries are negatively correlated with dividends repatriated from those affiliates, supporting the notion that transfer-pricing may be substituting for within-firm dividend remittance. Our results contribute to understanding the links between taxation and related-party transactions and subsidiary dividend repatriation decisions of MNCs.     

Dividend payouts and catering to demands: Evidence from a dividend tax reform

Utilizing the 2012 dividend tax reform in China, this paper examines how firms make dividend payout decisions that cater to the controlling shareholders' demand, especially when controlling shareholders and outside minority shareholders have different dividend preferences. We find that firms increase dividend payouts when controlling shareholders demand higher dividends after the dividend tax reform. In particular, firms pay higher dividends when facing increased demand from controlling shareholders than when the demand is from minority investors. In addition, we find that firms that increase dividend payments due to the controlling shareholders' demand subsequently have more debt financing and poorer firm performance, suggesting that catering to the demands from controlling shareholders is subject to the Type II agency problem.     

Firm-level political risk and corporate leverage decisions

This study examines the effects of firm-level political risk on firm leverage decisions and speed of adjustment. We uncover that firm-level political risk has a negative impact on a firm's total and long-term leverage. We also find that firms facing high political risk tend to prefer debts with short-term maturity. However, firm-level political risk is positively related to debt specialisation, suggesting that firms are more inclined to adopt fewer debt types when they face high political risk. Further analysis reveals that firms with high political risk are associated with a faster speed of adjustment to target than those with low political risk. Our results are robust to endogeneity concerns and the effects of financial crisis.     

An Empirical Analysis of the Stockholder-Bondholder Conflict in Corporate Spin-Offs

We analyze the effect of daily stock and bond abnormal returns around spin-off announcements. Over a three-day event window, we find statistically significant abnormal returns of 3.07% for stocks and 0.11% for straight bonds. Both stock and bond abnormal returns are higher for firms with lower interest and dividend payouts. Stock abnormal returns are also higher for firms with higher pre-spin-off leverage. Overall, we find that the firm value increase compensates for the wealth transfer effect and that bondholders' wealth is not reduced as a result of spin-off.     

Dividends and share repurchases during the COVID-19 economic crisis

In this article, we examine dividends and share repurchases of S&P 1500 firms during the COVID-19 crisis characterized by the stock market crash and a relatively quick stock price recovery propelled by technology stocks. We find that the great majority of firms either maintain or increase the level of dividends during the crisis period. Yet, the relation between the dividend payout and reported earnings is negative and significant. This relation also holds for other types of payouts, including share repurchases and special dividends. Moreover, we find that both forecasted and realized earnings of up to 1 year into the future are negatively associated with current dividends, implying that existing payout policies are unsustainable in the longer term. Surprisingly, the difference-in-differences test shows that firms strongly affected by the COVID-19 crisis have higher dividend payouts (relative to net earnings) compared to unaffected firms. The same test indicates that strongly affected firms significantly reduce repurchases.     

CULTURE,CORPORATE GOVERNANCE,AND DIVIDEND POLICY: INTERNATIONAL EVIDENCE

We find that Hofstede's cultural dimensions—uncertainty avoidance, masculinity, and long‐term orientation—remain significant in the determination of firms’ dividend policies, even after controlling for corporate governance. We also show that this association varies with the strength of corporate governance, measured by the degree of investor protection. Hence, national culture and investor protection independently affect firms’ dividend payouts but also interact with each other, such that strong investor protection induces higher dividend payouts in high uncertainty avoiding and/or highly masculine cultures. Our results provide strong evidence that cultural differences matter and offer additional power in explaining variations in dividend policies.     

Economic policy uncertainty and firm tax avoidance

We find strong evidence that firms reduce cash effective tax rate when economic policy uncertainty heightens. Firms also engage in more aggressive forms of tax avoidance including long-term tax planning or shelters. Cash holdings attenuate the negative effect of policy uncertainty on cash effective tax rate, especially for financially constrained firms. The cash tax savings are retained for reinvestments rather than dividend payouts. Our findings suggest that policy uncertainty exacerbates external financing frictions, which in turn induces precautionary motives of tax avoidance.     

The impact of government ownership on dividend policy in China

We investigate the impact of State ownership on Chinese corporate dividend policy. We find that Chinese firms' dividend payout rates respond fairly quickly to earnings changes, and the average actual payout ratio for Chinese firms falls between the payout ratios for emerging-market and developed firms. These results are consistent with the dividend policies of developing economies in general. We also find that dividend payouts among dividend-paying firms, and the likelihood that a firm will pay a dividend, are increasing in State ownership. Our findings are consistent with the State's need for cash flow as a partial motivation for continued State ownership of a significant portion of the corporate economy, and support the agency and tax clientele explanations for dividend policy.     

The evolution of corporate payout in Canada

We document changes in the aggregate percentage and number of dividend-paying Canadian firms from 1989 to 2021 and observe a disappearing and partially reappearing dividend phenomenon similar to that in the United States. Unlike the US experience, in Canada, the number and percentage of dividend-paying firms are consistently higher than those of repurchasing firms throughout the sample period. Further, in Canada, the changes are driven by changes in the number of listed firms before and after the bursting of the internet bubble and the effects of the global financial crisis, which we call the new listing effect. The numbers are also affected by a tax change directed at income trusts and the change in the number of firms in the oil, gas, and mining sectors. In predicting a firm's dividend status based on firm-level characteristics, unlike recent US research, we find that the life-cycle theory, as measured by cumulative retained earnings and earnings volatility, plays an important role in explaining dividend status.     

Corporate social responsibility and the wealth gains from dividend increases

This study examines whether corporate social responsibility (CSR) influences the stock price response to dividend increase announcements and changes in subsequent operating performance. We find that dividend increasing firms with lower CSR scores elicit higher abnormal announcement returns and greater improvements in industry‐adjusted operating performance. These findings support the argument in the literature that socially responsible firms are more transparent and commit to higher ethical standards than other firms, suggesting that they suffer fewer agency and informational problems (Kim, Park, & Wier, 2012). Consequently, larger dividend payouts reduce agency costs in firms with lower CSR commitments, thereby generating higher wealth gains for shareholders.     

The value of financial flexibility and corporate financial policy

We propose a novel approach to measure the value that shareholders assign to financial flexibility. In contrast to existing proxies for financial constraints, our measure is market-based, forward-looking and not directly influenced by past financial decisions. We find that firms for which shareholders consider financial flexibility more valuable have lower dividend payouts, prefer share repurchases to dividends, and exhibit lower leverage ratios. Moreover, these firms tend to accumulate more cash. Our analysis contributes to the growing literature on financial flexibility and indicates that—in line with prior survey evidence—financial flexibility considerations shape corporate financial policy.     

Earned/contributed capital, dividend policy, and disclosure quality: An international study

We examine the agency cost version of the lifecycle theory of dividends by taking advantage of cross-country variations in disclosure environments. The outcome hypothesis posits that transparent disclosure environments lead to higher dividend payouts because shareholders can more accurately measure (and therefore demand) excess cash flows. In contrast, the substitute hypothesis argues that opaque disclosure environments lead to higher payouts because managers have stronger incentives to establish their reputation for fair treatment. Our empirical results confirm both hypotheses and contribute to the literature in two primary ways. First, we confirm that the lifecycle theory of dividends explains dividend payout patterns around the world. Second, and more important, we show that the firm’s disclosure environment plays a significant role in dividend payouts through its effect on agency costs; that is, we confirm an agency cost-inclusive lifecycle theory of dividends.     

Firm-level political risk and distance-to-default

This study provides the first empirical evidence of the relationship between firm-level political risk and distance-to-default. Based on our examination of a quarterly dataset of 2727 U.S. firms covering a period from January 2002 to April 2019, we conclude that firm-level political risk is negatively associated with distance-to-default. We document three economic mechanisms through which political risk increases default risk: information asymmetry, organizational capital, and investment growth. The evidence indicates that the association is more pronounced for firms with low analysts’ forecast accuracy, organizational capital, and investment growth. Employing hand-collected data, we also reveal that firms are able to exploit their corporate lobbying to immunize themselves against default risk. Our findings are robust to different endogeneity identifications, including a natural experiment, alternative distance-to-default proxies, and different sub-samples. Overall, we present novel evidence of an adverse impact of firm-level political risk on distance-to-default and how such a negative effect can be mitigated.