Abstract
We examine the impact of political risk on firms’ payout policy. Using a large international sample across 35 countries over the period from 1990 to 2008, we find that global political crises raise the market perceived uncertainty and cost of external financing. Using crisis events as a proxy for political risk, we document that past dividend payers are more likely to terminate dividends and that non-payers are less likely to initiate dividends during periods of high political risk. These findings suggest a precautionary incentive of managers in response to political shocks. Further analysis shows that the effect of political risk on payout policy is stronger for multinational corporations, but can be attenuated by country-specific institutional settings, such as more stable political systems and stronger investor legal protection.
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Notes
The odds of a past dividend payer terminating dividends are the ratio of the probability of terminating dividends to the probability of continuing to pay dividends. Note that the transformation from odds to probability is monotonic, that is, the probability increases as the odds increase.
These results are robust to many checks, for example, controlling for macro-economic crises, using alternative measures of dividend payout or alternative measures of political risk, and few other checks. Robustness checks are available from the authors upon request.
See our prior discussion on the international business papers studying MNCs.
Specifically, we construct a dividend payout dummy that is equal to one if a firm pays dividends and zero otherwise for our sample of 112,151 international firm-year observations. We then employ a variance decomposition approach to separate the sample’s total variation into a within-firm component and a between firm component (see, e.g., Graham & Leary, 2011, for a similar analysis of corporate leverage policy).
While we do not rule out the possibility that political crises may affect dividend policy through lowering future expected cash flows, the focus of our article is to investigate the effect of political uncertainty on dividends. To validate the uncertainty channel, we perform several tests on the relationship between political crises and cost of equity capital (more on this below).
In the section “The effect of political crises on dividend policy”, we show in Table 2 that both analyst forecasts dispersion and the implied cost of equity capital tend to increase during periods of high political uncertainty.
One anecdotal example of this argument is that after Fidel Castro’s government took the control of Cuba in year 1959, hundreds of millions of dollars worth of American-owned assets and companies were expropriated.
An extensive discussion of the database and definitions of variables can be found in Brecher and Wilkenfeld (1997).
In the crises sample, some crisis events last more than one calendar year and, therefore, are counted more than once in our sample period. If we remove these repeated crises, we end up with 67 (un-repeated) international political crises
See the definitions of our dividend payout variables in the next subsection and in Appendix A. We expand our sample accordingly when we use the firms’ past two-year (or one-year) history of dividend payments.
Emerging and developed market countries are identified using the MSCI Barra classifications. Developed countries include: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Singapore, Spain, Sweden, Switzerland, the UK, and the US Emerging countries are: Argentina, China, Indonesia, Israel, Malaysia, Peru, Philippines, Poland, Portugal, South Africa, South Korea, Taiwan, Thailand, and Turkey.
In our robustness checks, we also define the dividend termination and initiation dummies on samples based on the firms’ last 2 years, or 1 year, of dividend payments. In addition to examining dramatic changes in dividend policy, we use several variables that capture the change in the dividend-yield ratio (Δdy), the change in the dividend-to-sales ratio (Δdvs), the change in the total payout-to-sales ratio (Δtps), and the change in share repurchase-to-sales ratio (Δrps) as robustness checks.
Note that the difference in crisis summary statistics between Berkman et al. (2011) and our article arises from the fact that we aggregate crises that occurred within the same year to form an annual crisis index but Berkman et al. (2011) use a monthly crisis index. Hence our annual crisis index tends to have large values than the monthly crisis index. For example, the mean of severity index in our article is 15.5 but is 5.9 in Berkman et al. (2011). Our choice of using annual frequency crisis index is in accordance with the panel structure of the financial balance sheet items.
We include the summary statistics for the political crisis variables based on firm-year observations in the table for the sake of completeness. A detailed description of the crisis distribution is provided in Appendix B. In addition, note that in our sample, crises variables are aggregated to annual frequency, whereas those of Berkman et al. (2011) are aggregated to monthly frequency. This explains why the statistics of our crises variables differ from theirs. We can also generate their Figure 1 if we aggregate the crises monthly.
Pearson (Spearman) coefficients of correlation are given in the lower (upper) triangular part of the matrix.
See, for example., Barron, Kim, Lim, and Stevens (1998) the references cited in the article.
Beaulieu, Cosset, and Essaddam (2005) and Boutchkova, Doshi, Durnev, and Molchanov (2012) show that industry return volatility is influenced by political risk. We aggregate firm-level multinationality to form industry level variables and run similar regressions. Industry-level results demonstrate that political risk tends to affect the payout policy of MNCs more than that of DMCs. The results are reported in the Internet Appendix.
Detailed definitions of all country variables are provided in Appendix A.
Private credit refers to financial resources available to the private sector, through loans, purchases of nonequity securities, and trade credits and other accounts receivable.
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Acknowledgements
We would like to thank Renee Adams, Geert Bekaert, Xiaogang Bi, Jonathan Brogaard, Lili Dai, Yan Dong, Wen He, Wei Huang, Russell Jame, Hung Wan Kot, Zhentao Liu, Ron Masulis, Fariborz Moshirian, Lilian Ng, Phong Ngo, Nagpurnanand Prabhala, Yaxuan Qi, Jun Qian, David Reeb (the Finance Area Editor), Konark Saxena, Hua Shang, Jianfeng Shen, Sergey Tsyplakov, Hong Yan, Le Zhang, Wenrui Zhang, Xiaoyan Zhang, two anonymous referees, and seminar participants at Asian Finance Association Annual Meeting 2013, Chinese Finance Annual Meeting 2013, Jiangxi University of Finance and Economics, South-Western University of Finance and Economics, Xiamen University, Nottingham University Ningbo, UNSW Austraila for valuable comments. Fei Wu was supported by the National Natural Science Foundation of China (Grant No.71072083 and 71003012). Bohui Zhang acknowledges research grants from the ARC discovery grant (DP 120104755) and ARC linkage grant (LP130101050) from Australian Research Council, and CIFR research grants (E026 and E028) from the Centre for International Finance and Regulation. All errors are our responsibility.
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Accepted by David Reeb, Area Editor, 16 December 2014. This article has been with the authors for two revisions.
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Huang, T., Wu, F., Yu, J. et al. Political risk and dividend policy: Evidence from international political crises. J Int Bus Stud 46, 574–595 (2015). https://doi.org/10.1057/jibs.2015.2
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DOI: https://doi.org/10.1057/jibs.2015.2