Dividend policy and corporate investment under information shocks

Mostafa Harakeh

Journal of International Financial Markets, Institutions and Money, 2020, vol. 65, issue C

Abstract: This study exploits the mandatory adoption of International Financial Reporting Standards (IFRS) as an exogenous shock to the corporate information environment to examine how the constraining effect of dividend policy on corporate investment changes under lower levels of information asymmetry. To identify the treatment effect of the information shock, I employ a difference-in-differences research design using an international sample of 25 countries that spans the period 2000–2010. I first show that the information shock mitigates information asymmetry. Then, I find that the constraining effect of dividends on investments declines following the information shock, especially among firms with higher levels of information asymmetry ex-ante. Finally, I show that less constrained investments contribute to maximizing firm value. Overall, I show how reducing information asymmetry mitigates agency conflicts over dividend policy and thereby decreases the probability of forgoing valuable investments to pay dividends, which is found to maximize shareholders’ wealth.

Keywords: Information shocks; Information asymmetry; Dividend policy; Corporate investment; Firm value (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:65:y:2020:i:c:s1042443120300688

DOI: 10.1016/j.intfin.2020.101184

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