Mandating a dividend distribution policy disclosure over fixed dividend policy: a shareholder value perspective

Shareholders may never be able to perfectly assess the optimal dividends paid by the firm. While fixing a certain dividend percentage by regulators, is one way to ensure shareholders' dividend rights, mandating a dividend distribution policy (DDP) could be a unique alternative. This study examines the stock market reaction to a regulation that mandated a set of Indian firms to disclose their DDP. Using an event study coupled with Regression discontinuity design, we find that shareholders appreciate the value of the firms affected by the regulation by 1.15% on average, which is roughly 2-2.5% higher than firms unaffected by the regulation. This suggests that mandating information disclosure on dividend payouts can alleviate issues related to shareholders' right for dividends without affecting firms' investment decisions. Also, retained earnings play a price-differentiating role in dividend-paying and non-dividend paying firms.