Information Disclosure, Product Market Competition and Payout Policy

Research Question/Issue: La Porta et al. (2000) examine the impact of corporate governance on dividend policies by testing two hypotheses, the outcome hypothesis and the substitution hypothesis. The former argues that firms with better governance may pay higher dividends to mitigate agency problems, while the latter states that firms with poor governance may pay higher payouts to establish the good reputation. Given that information disclosure and product market competition are two governance mechanisms, one internal and the other external, the follow-up questions to consider are how different governance mechanisms affect corporate payout policy? How does information disclosure interact with product market competition in affecting the corporate payout policy? Does the former complement or substitutes the latter in reducing the conflicts of interests between managers and shareholders, thereby affecting dividend payout?Research Findings/Insights: We examine the effects of information disclosure and product market competition on payout policy. Using a unique and comprehensive information rating scheme based on 114 measures over five dimensions of information disclosure at each publicly listed firm in Taiwan from 2005 to 2014, we find that information disclosure and product market competition alone affect a firm’s payout decisions. When examining both effects together, we find that information disclosure and product market competition complement each other in affecting corporate dividend policy.Theoretical/Academic Implications: Our questions are motivated by the existing empirical papers that suggest agency problems may not be adequately mitigated alone by the governance mechanisms such as accounting information, product market competition, and increased disclosure levels mandated by the Securities and Exchange Commission (Shleifer and Vishny, 1997; Sloan, 2001; Solomon and Lublin, 2004). By considering the joint effect of information disclosure and product market competition on a payout policy, our study sheds light on the debate over whether monitoring complements information disclosure (Bens, 2002) or disclosure of voluntary information inhibits a firm’s competitive position (Healy and Palepu, 1993; Elliott and Jacobson 1994).Practitioner/Policy Implications: First, we find that firms with higher information disclosure tend to increase payout amount. Second, we find that firms operating in the competitive market are more likely to have higher corporate payouts, which supports the outcome hypothesis. More importantly, combining the effects of information disclosure and product market competition reveals that these two governance mechanisms complement each other in reducing agency problems, thereby increasing the level of dividend payouts. Our results suggest that the governance mechanism of information disclosure can be more effective for firms in competitive industries