Cost Of Debt And Dividend Policy: Evidence From The MENA Region

Omar Farooq · Imad Jabbouri

21 citations0/0 files storedJournal of Applied Business Research (JABR)

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Corporate Finance and Governance Financial Analysis and Corporate Governance Financial Reporting and Valuation Research

Abstract

How does dividend policy effect cost of debt in emerging markets? Does it increase the perceived conflict of interests between creditors and shareholders or vice versa? This paper seeks to answer these questions by documenting the relationship between dividend payout ratios and cost of debt in emerging markets. Using a dataset from the MENA region, we document a significantly negative relationship between dividend payout ratios and cost of debt during the period between 2005 and 2011. We argue that high dividend payouts reduce information asymmetries. Consequently, creditors demand lower return for providing their capital to firms. We also show that the negative relationship between dividend payout ratios and cost of debt are more pronounced in firms with higher information asymmetries. It indicates that value relevance of high dividend payout ratios is more in firms that have higher information asymmetries. These firms have scarcity of information. Therefore, whenever information environment improves, it is highly valued by creditors.

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References

1986Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers 1997A Survey of Corporate Governance 1996Agency costs of free cash flow, corporate finance, and takeovers 1981The relationship between return and market value of common stocks 2003Earnings management and investor protection: an international comparison 1992The investment opportunity set and corporate financing, dividend, and compensation policies 1998Agency Problems and Dividend Policies Around the World 1984Two Agency-Cost Explanations of Dividends

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