Disclosure and dividend policy

Abstract

[ACCESS RESTRICTED TO THE UNIVERSITY OF MISSOURI AT REQUEST OF AUTHOR.] My dissertation examines the relation between firm disclosure and dividend policy. It draws on recent research which contends that firm disclosure policy plays a governance role in that it improves the flow of firm-specific information and hence allows for greater external monitoring. This governance perspective offers two competing views on the impact of disclosure on dividend policy. The "outcome view" suggests that an expanded disclosure policy will induce firms to disgorge their cash flows in the form of dividends. The alternative "substitution view" suggests that disclosure and dividend policies are substitute mechanisms for creating reputational bonding with outside investors. As such, it anticipates a negative association between disclosure and dividend policies. In evaluating these competing views, my dissertation presents evidence of a positive disclosure-dividend relation. This is consistent with the outcome view that disclosure limits diversion of firm resources by inducing managers to distribute a firm's cash flows. I find this relation to hold across multiple measures of disclosure policy. My results are also robust after taking into account the endogeneity of disclosure policy. To further distinguish between the competing views, I examine the impact of disclosure on the investment opportunities-dividend relation. The outcome view suggests that disclosure would induce firms to distribute cash in excess of their investment opportunities. However, the substitution view does not provide a prediction on this issue because it anticipates firms to distribute dividends, irrespective of investment opportunities, to create a reputational bonding. My evidence provides affirmative support of the outcome view.