Dividend Policy and Behavior in Emerging Markets: To Pay or Not to Pay

Abstract

From the investor's point of view, returns on their investment are split into two parts: capital gains and dividends. In part, corporate management determines the nature of that split when it decides on a corporate dividend policy. In developed countries, the decision between paying dividends and retaining earnings has been taken very seriously by both investors and managements, and has been the subject of considerable research by economists. As a result, a fairly detailed, if incomplete, picture of dividend policy is available for the major developed countries. This paper carries the dividend debate into the emerging markets. It shows that dividend policy in those markets is often very different from the norms that have been accepted in developed countries. One major difference is that emerging market firms place more emphasis on dividend payout ratios than they do on the level of dividends paid. As a result, dividend payments tend to be more volatile in emerging markets than in developed countries, a factor that investors need to be aware of when investing in these markets. Another point that emerges is that, as these markets develop and open to international capital, dividend policy increases in importance, even if it is not altered in character. Managers are more concerned about their dividend policy now than they were in the past. And this concern is augmented by the role of the government in many of these countries, which acts as a protector of both minority shareholders and creditors by imposing constraints on dividend policy.

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