Events at CERGE-EI

Jiří Trešl, Ph.D.

University of Nebraska-Lincoln, USA

Authors: Paul Brockman, Jiri Tresl, and Emre Unlu

Abstract: We posit that firms use dividend payout policy to reduce information asymmetry and agency costs caused by country-level institutional weaknesses. Firms operating in countries with weak insider trading laws attempt to mitigate this institutional weakness by committing themselves to paying out large and stable cash dividends. We test this central hypothesis (among others) using an international sample of firms across 24 countries, as well as by conducting a case study within one country. The results show that weak insider trading laws lead to a higher propensity of paying dividends, larger dividend amounts, and greater dividend smoothing. We also show that the market’s valuation of dividend payouts is significantly higher when insider trading protection is weak. It is important to note that these insider trading results are not due to cross-country variations in investor or creditor rights, nor are they contingent on the enforcement of insider trading laws. Overall, our evidence supports the view that dividend payouts serve as a substitute bonding mechanism when country-level legal protections fail.

Keywords: Insider trading laws; Payout policy, Agency costs

JEL: G38, G35

Full Text:  “The Impact of Insider Trading Laws on Dividend Payout Policy”