Political risk and dividend policy: Evidence from international political crises

Tao Huang, Fei Wu, Jin Yu and Bohui Zhang
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Tao Huang: Jiangxi University of Finance and Economics, Nanchang, China
Fei Wu: Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University, Shanghai, China
Jin Yu: University of New South Wales UNSW, Sydney, Australia
Bohui Zhang: University of New South Wales UNSW, Sydney, Australia

Journal of International Business Studies, 2015, vol. 46, issue 5, 574-595

Abstract: We examine the impact of political risk on firms’ payout policy. Using a large international sample across 35 countries over the period from 1990 to 2008, we find that global political crises raise the market perceived uncertainty and cost of external financing. Using crisis events as a proxy for political risk, we document that past dividend payers are more likely to terminate dividends and that non-payers are less likely to initiate dividends during periods of high political risk. These findings suggest a precautionary incentive of managers in response to political shocks. Further analysis shows that the effect of political risk on payout policy is stronger for multinational corporations, but can be attenuated by country-specific institutional settings, such as more stable political systems and stronger investor legal protection.

Date: 2015
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