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Mandatory dividend rules: Do they make it harder for firms to invest?

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  • Martins, Theo Cotrim
  • Novaes, Walter

Abstract

What are the costs and benefits of mandatory dividend rules? On the one hand, they make it harder for controlling shareholders to divert corporate assets. On the other hand, they reduce the internal funds available for firms to invest, possibly leading to the loss of valuable projects. To assess this trade-off, we look at investment and dividend decisions in a sample of public firms in Brazil. We show that a significant fraction of these firms use loopholes of Brazil's mandatory dividend rules to avoid paying dividends. And yet, the dividend rules are effective. They help explain why the average dividend yield in Brazil is higher than in the U.S., without making it harder for firms to invest.

Suggested Citation

  • Martins, Theo Cotrim & Novaes, Walter, 2012. "Mandatory dividend rules: Do they make it harder for firms to invest?," Journal of Corporate Finance, Elsevier, vol. 18(4), pages 953-967.
    • Handle: RePEc:eee:corfin:v:18:y:2012:i:4:p:953-967
    DOI: 10.1016/j.jcorpfin.2012.05.002
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    Cited by:

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    2. Ana C. Silva & Gonzalo A. Chavez & Roy A. Wiggins III, 2015. "Earnings Management, Country Governance, and Cross-listing," Global Journal of Emerging Market Economies, Emerging Markets Forum, vol. 7(1), pages 4-20, January.
    3. Dan Yang & Linyin Cheng & Guojun Wang & Yuetang Wang & Lu Zhang, 2020. "Investor protection and cost of debt: Evidence from dividend commitment in firm bylaws," Corporate Governance: An International Review, Wiley Blackwell, vol. 28(5), pages 294-308, September.
    4. Forti, Cristiano & Schiozer, Rafael F., 2015. "Bank dividends and signaling to information-sensitive depositors," Journal of Banking & Finance, Elsevier, vol. 56(C), pages 1-11.
    5. Tao, Qizhi & Nan, Runxi & Li, Haoyu, 2016. "Information content of unexpected dividends under a semi-mandatory dividend policy: An empirical study of China," The North American Journal of Economics and Finance, Elsevier, vol. 37(C), pages 297-318.
    6. He, Wen & Li, Chao Kevin, 2018. "The effects of a comply-or-explain dividend regulation in China," Journal of Corporate Finance, Elsevier, vol. 52(C), pages 53-72.
    7. Lin, Jing & Li, Fang & Zheng, Steven Xiaofan & Zhou, Mingshan, 2023. "Minority shareholder voting and dividend policy," Journal of Banking & Finance, Elsevier, vol. 148(C).
    8. Nie, Jing & Yin, Libo, 2022. "Do dividends signal safety? Evidence from China," International Review of Financial Analysis, Elsevier, vol. 82(C).
    9. Sepúlveda Velásquez, Jorge & Tapia Griñen, Pablo & Pastén Henríquez, Boris, 2023. "Mandatory dividends and economic policy uncertainty: A challenge for investment opportunities," Finance Research Letters, Elsevier, vol. 52(C).
    10. Ed-Dafali, Slimane & Patel, Ritesh & Iqbal, Najaf, 2023. "A bibliometric review of dividend policy literature," Research in International Business and Finance, Elsevier, vol. 65(C).
    11. Colombo, Jéfferson A. & Caldeira, João F., 2018. "The role of taxes and the interdependence among corporate financial policies: Evidence from a natural experiment," Journal of Corporate Finance, Elsevier, vol. 50(C), pages 402-423.
    12. Aviner Augusto Silva Manoel & Marcelo Botelho da Costa Moraes & Juliano Augusto Orsi de Araujo, 2024. "The effects of financial constraints on the market value of cash in a mandatory dividend context," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(1), pages 1012-1041, January.
    13. Bolin Liu, 2022. "Semi-mandatory Dividend Policy and Investment Efficiency: Evidence from Listed Companies in China," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 12(2), pages 1-4.
    14. Ricardo D. Brito & Paulo Sergio O. Ribeiro & Antonio Z. Sanvicente, 2021. "The Substitute Model of Dividends at Work: a change in minority shareholder protection," Working Papers, Department of Economics 2021_25, University of São Paulo (FEA-USP).
    15. Wei, Xiaoquan & Wang, Chunfei & Guo, Yunnan, 2019. "Does quasi-mandatory dividend rule restrain overinvestment?," International Review of Economics & Finance, Elsevier, vol. 63(C), pages 4-23.
    16. Gonzalez, Maximiliano & Molina, Carlos A. & Pablo, Eduardo & Rosso, John W., 2017. "The effect of ownership concentration and composition on dividends: Evidence from Latin America," Emerging Markets Review, Elsevier, vol. 30(C), pages 1-18.
    17. Briano-Turrent, Guadalupe D.C. & Li, Mingsheng & Peng, Hongfeng, 2020. "The impact of family-CEOs and their demographic characteristics on dividend payouts: Evidence from Latin America," Research in International Business and Finance, Elsevier, vol. 51(C).
    18. Alexandros Sikalidis & Konstantinos Bozos & Antonios Chantziaras & Christos Grose, 2022. "Influences of family ownership on dividend policy under mandatory dividend rules," Review of Quantitative Finance and Accounting, Springer, vol. 59(3), pages 939-967, October.
    19. Saens, Rodrigo & Tigero, Tamara, 2021. "Mandatory dividend rules and the investment decision: The case of Chile," The North American Journal of Economics and Finance, Elsevier, vol. 56(C).
    20. Tao, Qizhi & Wei, K.C. John & Xiang, Xueman & Yi, Biao, 2022. "Board directors' foreign experience and firm dividend payouts," Journal of Corporate Finance, Elsevier, vol. 75(C).
    21. Wang, Guojun & Wang, Yuetang & Yang, Dan & Cheng, Linyin, 2022. "Dividend commitment and bond yields: An examination of wealth transfer effects," Finance Research Letters, Elsevier, vol. 47(PB).

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    More about this item

    Keywords

    Mandatory dividend rules; Minority shareholders' rights; Investment;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • G39 - Financial Economics - - Corporate Finance and Governance - - - Other

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