Payout policy and the interaction of firm-level and country-level governance

For a panel of 1880 firms across 21 countries from 2004 to 2008, the impact of firm-level and country-level governance on payout policy is consistent with the La Porta et al. (J Finance 60(1):1–33, 2000) outcome model. In weak legal regimes, dividends increase in firm-level governance. In strong legal regimes, dividends decrease in firm-level governance while share repurchases increase, substituting tax-efficient, flexible share repurchases for rigid dividends. Consistent with the outcome model, payout decreases in growth opportunities when firm-level and country-level governance are high. These results are robust to an instrumental variable approach and alternative firm-level and country-level governance measures.