The Influence of Corporate Governance Quality and Growth Opportunities on Firms’ Payout Policy

Abstract: This paper examines the effect of corporate governance quality on firms’ payout policy. We analyze a global sample of 3,904 firms (25,773 firm-year observations) over the period 2002-2016. I find that corporate governance quality is positively related to payout ratios, consistent with the perspective of the free cash flow hypothesis (Jensen, 1986) and the outcome dividend model (LLSV, 2000). Moreover, consistent with findings of Mitton (2004) the positive relationship between firm’s corporate governance and dividend payout mainly holds for countries with strong shareholder or creditor protection, suggesting that firm-level corporate governance and country-level protection rights are complements rather than substitutes. This study also shows that firms with high corporate governance quality are less likely to disburse cash to their shareholders when controlling for country-level shareholder rights. Furthermore, this study contributes to the existing literature by investigating share repurchases and finds that well governed firms distribute less cash through share repurchases and total payout when they experience high growth opportunities. Moreover, the results suggest that countries that experience stronger shareholder and creditor rights reduce the positive impact that corporate governance quality has on share repurchases and total payout.