Information asymmetry and dividend policy of Sarbanes-Oxley Act

Abstract

Purpose The literature of financial economics documents a causal relationship between the level of information asymmetry in the firm and its dividend policy. Nevertheless, this relationship suffers endogeneity problems arising from reverse causality and omitted variable bias. The purpose of this study is to examine how the dividend policy reacts to changes in asymmetric information in an exogenous research setting.

Design/methodology/approach To overcome endogeneity concerns, the authors employ the enactment of the Sarbanes-Oxley Act (SOX) in the US in 2002 as a source of an exogenous variation in the level of information asymmetry to study the potential effect that this variation might have on the dividend policy. In doing so, we utilize a difference-in-differences research design, in which the treatment group is US publicly traded firms that were exposed to the policy and the control group is publicly traded companies in the UK where SOX was not enacted. Both countries have similar institutional settings and enforcement of laws, which makes them comparable in this research context.

Findings The authors’ findings show that, compared to UK companies, US firms increase their dividend payments following a reduction in asymmetric information as a result of the SOX enactment.

Originality/value The study contributes to the literature of financial economics by showing that policy makers can mitigate agency conflicts and protect shareholders by improving the corporate information environment and reducing asymmetric information.