Do terrorist attacks matter to dividend policy?

Abstract

AbstractResearch Question/IssueMotivated by the importance of dividend policy in corporate finance as well as the rising frequency and severity of terrorism in society, this study aims to investigate whether and how dividend policy is influenced by terrorist attacks.Research Findings/InsightsUsing a comprehensive sample of terrorist attacks occurring in the United States between 1994 and 2015, we find that relative to firms located in safety areas (nonimpact firms), firms headquartered in terrorism‐affected areas (impact firms) are more likely to pay dividends and pay higher amount of cash dividends. We further find that the effect of terrorist attacks on dividends is driven by agency costs of free cash flow.Theoretical/Academic ImplicationsWe contribute to the literature by shedding light on how terrorism affects firms' dividend preferences. We highlight that uncertainty caused by terrorism heightens the need for dividend payouts in the presence of free cash flow. Our paper also adds to the existing literature by showing that better corporate governance quality as defined by a more independent board featuring CEO–chairman separation and greater presence of independent directors coupled with larger institutional ownership has a crucial role in mitigating the impact of terrorism on corporate payout policy.Practitioner/Policy ImplicationsPublic firms should regard dividend policy as a governance tool that reduces agency costs during times of uncertainty. The results of this study strengthen the idea that institutional investors can play a key role in corporate governance. As such, for investors, as far as agency costs are concerned, investments in firms that have a higher proportion of institutional holdings are sensible.