Macro-Environment and Dividend Policy

Abstract

This chapter analyzes how the macro-environment determines corporate dividend decisions. First, political factors including political uncertainty, economic policy uncertainty, political corruption, and democracy may have two opposite effects on dividend decisions. For example, firms learn democratic practices to improve their corporate governance, but dividend policy may be the outcome of strong corporate governance or the substitute for poor corporate governance. Second, firms in countries of high national income, low inflation, and highly developed stock markets tend to pay more dividends. A monetary restriction (expansion) reduces (increases) dividend payments, as economic shocks like financial crises and the COVID-19 may negatively affect corporate dividend policy through higher external financial constraint, economic uncertainty, and agency costs. On the other hand, they may positively influence corporate dividend policy through agency costs of debt, shareholders' bird-in-hand motive, substitution of weak corporate governance, and signaling motive. Third, social factors including national culture, religion, and language affect dividend decisions since they govern both managers' and shareholders' views and behaviors. Fourth, firms tend to reduce their dividends when they face stronger pressure to reduce pollution, produce environment-friendly products, or follow a green policy. Finally, firms have high levels of dividends when shareholders are strongly protected by laws. However, firms tend to pay more dividends in countries of weak creditor rights since dividend payments are a substitute for poor legal protection of creditors. Furthermore, corporate dividend policy changes when tax laws change the comparative tax rates on dividends and capital gains.

Citation

Tran, Q.T. (2024), "Macro-Environment and Dividend Policy", Dividend Policy, Emerald Publishing Limited, Leeds, pp. 67-84. https://doi.org/10.1108/978-1-83797-987-520241008