| Theories suggest that the external corporate governance environment affects corporate dividend policies. In the two essays, I investigate how corporate dividend policies respond to improvements in the external corporate governance environments.;My first essay extends and tests the implications of two extant static agency models making opposite predictions. The outcome model predicts an increase in dividends when external corporate governance improves, because shareholders are better able to force managers to disgorge cash. In contrast, the substitute model suggests that an improvement in external corporate governance reduces the role of dividends in controlling agency costs, leading to a decrease in dividends. In contrast to prior findings in cross-sectional tests, I provide evidence that improvements in equity market discipline and accounting disclosure as well as insider trading law enactment are associated with both lower cash dividend ratios and lower sensitivity of dividends to free cash flow. Overall the evidence supports the substitute model.;Theories since Miller and Modighani (1961) have long suggested that dividend changes convey information about firm's future earnings. My second essay investigates whether and how the relationship between dividend changes and future earnings responds to improvements in mandatory accounting disclosure. I find that improvements in accounting disclosure decrease the usefulness of dividends in forecasting future profitability. The decline of the information content of dividends concentrate in firms in which the signaling role of dividends is more important. |
