Local corruption and dividend policy: Evidence from Vietnam

Abstract

Some prior studies show that firms in high corruption countries tend to save more cash in order to make unofficial payments. This implies that managers in a corrupt environment are more flexible to use firms’ cash. Therefore, managers may take advantage of this opportunity to expropriate shareholders by restricting dividend policy. However, other studies find that shareholders may recognize this expropriation behavior and thus shareholders in countries of high corruption pressure managers to pay more dividends. In this paper, we investigate how local corruption influences dividend policy in Vietnam — an emerging market with weak corporate governance. Using a sample of 5,160 observations from firms listed in Vietnamese stock market from 2007 to 2017, we find that local corruption positively affects both the likelihood to pay dividends and payout ratio. Moreover, our research findings show that state ownership mitigates this effect and this effect is stronger in financial unconstrained firms.