Judicial Efficiency and Dividend Policies: An International Evidence

This paper investigates the effects of a country's judicial efficiency on corporate dividend policies internationally for 67 countries over the period 1987-2019. The results show an inverse relation between judicial efficiency and the propensity to pay, and the size of dividends. This relationship is consistent with a managerial fear hypothesis, which suggests that quicker judicial action in potential law proceedings cautions corporations in paying dividends to avoid a possible default. Moreover, firms with weak creditor rights pay smaller dividends whereas companies with strong shareholder rights pay more dividends. Creditor rights support the substitution hypothesis of agency costs of debt whereas shareholder rights support the outcome hypothesis of agency cost of equity. The findings have implications that enforcement of law, judicial efficiency, is equally important along with the content of law.