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Does political economy reduce agency costs? Some evidence from dividend policies around the world

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  • Choy, HiuLam
  • Gul, Ferdinand A.
  • Yao, Jun

Abstract

This study shows that firms in proportional-electoral countries pay out lower dividends and that the correlation between a firm's growth potential and dividend payout ratio is weaker in proportional-electoral countries. However, firms in proportional-electoral countries that cross-list in majoritarian system countries, tend to pay out higher dividends and the negative relation between growth potential and dividend payout tend to be stronger than their peers that do not cross-list. For a few countries that changed their electoral system towards a more proportional system, we observe a decrease in dividend payout ratio and a weaker relation between growth and dividends after the change. Overall these results indicate that a country's political system affects the severity of agency problems. Further, the effect of legal origin on dividend policy reverses once we include the political economy variables in the regressions. We also document that the electoral system not only affects the amount of dividends paid by a firm but also the form of payment.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Empirical Finance.

Volume (Year): 18 (2011)
Issue (Month): 1 (January)
Pages: 16-35

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Handle: RePEc:eee:empfin:v:18:y:2011:i:1:p:16-35

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Web page: http://www.elsevier.com/locate/jempfin

Related research

Keywords: Political economy Dividend Investor protection Legal protection;

References

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Cited by:
  1. Firth, Michael & Gong, Stephen X. & Shan, Liwei, 2013. "Cost of government and firm value," Journal of Corporate Finance, Elsevier, vol. 21(C), pages 136-152.
  2. Kao, Lanfeng & Chen, Anlin, 2013. "How product market competition affects dividend payments in a weak investor protection economy: Evidence from Taiwan," Pacific-Basin Finance Journal, Elsevier, vol. 25(C), pages 21-39.

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