Board Reforms And Dividend Policy:Worldwide Evidence

Miller&Modigliani(1961)argued that dividend was irrelevant and implied that dividend policy did not matter.However,subsequent studies have shown that dividend policy does matter and that the market reacts to dividend policy of firms.It has also been established that dividend policy is one of the governance tools used by board of corporations to safeguard the interests of outside investors in modem corporate settings.It is expected that,all other things being equal,board reforms will improve the ability and the capacity of the board of corporations to effectively use dividend policy as a governance tool in reducing agency problems as far as possible.Using data from 36 diverse countries,I find evidence that board reforms are positively associated with increased likelihood of firms to pay dividends and the amount of dividends paid.I also find that the positive association between board reforms and dividend policy is more pronounced in countries with stronger legal enforcement institutions.I interpret these findings as being supportive of the Outcome Model by La Porta et al.,(2000)which sees dividend policy as a corporate governance tool used by shareholders to prevent corporate insiders from engaging in selfish activities.It also means that the impact of board reforms on dividend policy is,to large extent,dependent on how laws that protect investors are enforced in a country.Where legal enforcement institutions are strong,board reforms can be effectively enforced to achieve their desired outcomes.In countries with weak legal enforcement institutions,the impact of board reforms on dividend policy is attenuated due to deficiencies in enforcing the provisions in board reforms.