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

Author Info

Listed author(s):
  • 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.

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File URL: http://www.sciencedirect.com/science/article/pii/S0929119912000478
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Article provided by Elsevier in its journal Journal of Corporate Finance.

Volume (Year): 18 (2012)
Issue (Month): 4 ()
Pages: 953-967

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Handle: RePEc:eee:corfin:v:18:y:2012:i:4:p:953-967
DOI: 10.1016/j.jcorpfin.2012.05.002
Contact details of provider: Web page: http://www.elsevier.com/locate/jcorpfin

Keywords: Mandatory dividend rules; Minority shareholders' rights; Investment;

Find related papers by 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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Cited by:

  1. 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.
  2. 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.
  3. 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.

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