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Democracy, dividends, and corporate valuation

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  • Bui, Loc T.

Abstract

We examine the impact of institutional democracy on firm value through the lens of dividend policies. Using instrumental variables, we find strong evidence that democracy improves dividends in an international sample of 18,410 unique firms across 63 countries over the 1991–2018 period. This effect is more pronounced for firms with high agency costs, or those in countries with weak legal protection for shareholders. Our evidence is robust to alternative measures of democracy and a battery of tests addressing the challenges associated with the instruments. Furthermore, dividends are capitalized at a higher rate in more democratic countries, especially for firms with high growth options. To the extent that investors are willing to pay a premium for firms that distribute more dividends, the democracy-induced dividends add to corporate value beyond the premium associated with shareholder rights-induced dividends. Overall, our results highlight that institutional democracy is an important, yet unexplored, determinant of corporate valuation.

Suggested Citation

  • Bui, Loc T., 2025. "Democracy, dividends, and corporate valuation," Journal of Corporate Finance, Elsevier, vol. 95(C).
    • Handle: RePEc:eee:corfin:v:95:y:2025:i:c:s0929119925001476
    DOI: 10.1016/j.jcorpfin.2025.102879
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    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
    • P48 - Political Economy and Comparative Economic Systems - - Other Economic Systems - - - Legal Institutions; Property Rights; Natural Resources; Energy; Environment; Regional Studies

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