Abstract
This study examines how disclosure quality influences the dividend payouts of firms, and provides further evidence concerning the outcome hypothesis and substitution hypothesis. Using a sample of non-financial Saudi Arabian listed firms during 2012-2014, our results provide support for the substitution hypothesis in which outsiders demand higher dividends in a low-quality disclosure environment as a “substitute” for opacity. Further analysis shows that managers pay a higher dividend in an opaque environment not only to establish a reputation among outside capital suppliers but also because they have to disgorge excess cash to circumvent free cash flow problems.
Highlights
This paper examines how voluntary disclosure affects dividend payouts
This study examines the outcome and substitute mechanisms to gain a better understanding of how a firm’s disclosure environment impacts its dividend payout policy
As most prior studies focused on developed countries like the US, the UK and Canada (Meek &Gray, 1989; Meek, Roberts and Gray, 1995; DeAngelo et al, 2006; Lin et al, 2014; 2016), it is essential to investigate disclosure quality and its relation with company dividend policy in a developing country like Saudi Arabia
Summary
This paper examines how voluntary disclosure affects dividend payouts. Corporate voluntary disclosure, being in excess of requirements, represents free choice on the part of managers to provide a clear view to stakeholders about the long-term sustainability of the business, and reduces information asymmetry and agency conflicts between managers and investors (Meek et al, 1995; Yuen et al, 2009;Healy & Palepu, 2001; Boesso & Kumar, 2007). As argued by Jensen (1986), the managers of firms with lower disclosure quality are more likely to pay out less dividend to shareholders, spend the free cash flow on empire building and negative net present value projects, and consume perquisites. The current study contributes to the existing knowledge concerning the relationship between voluntary disclosure and dividend payout policy, in a developing country like Saudi Arabia that has an opaque disclosure environment and low investor protection policy. In countries with high investor protection, the outcome model predicts a positive coefficient for the interactive variable between the disclosure quality and free cash flow because firms with a higher cash flow will be forced to pay high dividends.
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