Dividend Payouts and Information Shocks

This paper examines changes in firms’ dividend payouts following an exogenous shock to the information environment. Traditional signaling, agency, and voluntary disclosure models predict that the more is commonly known about a firm and its competitors in the marketplace, the less private information managers will have to reveal themselves via costly signals or cash disbursements. To test these predictions, we analyze the dividend payment behavior for a global sample of firms around the mandatory adoption of IFRS and around the initial enforcement of new insider trading laws. Both events have the potential to improve the general information environment in the economy. We find that following the two events firms are less likely to pay (or increase) cash dividends, but more likely to cut (or stop) such payments. The changes in dividend policy occur around the time of the informational shock and only in countries and for firms subject to the regulatory change. In further analyses we find that the information content of dividends, measured as three-day absolute announcement returns, is lower after the informational events. The findings underscore that firms’ payout policies, among other things, depend on the extent of information about all firms in the economy.