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Custom Firm's Dividend Policy Essay

Corporate governance is the mechanism used by investors to maximize their earnings. Investors’ earnings are in the form of dividends. Therefore, the dividend policy of a firm impacts on the returns on the investment of the shareholders. According to Jahera, Bertus and Yost (n.d.), corporate governance ensures continuous monitoring of managerial decisions. The authors investigated the impact of Sarbanes-Oxley Act on dividend policy in relation to corporate governance. They established that Sarbanes-Oxley Act significantly impacted the relation between corporate governance and dividend policy. They reported that prior to the enactment of Sarbanes-Oxley Act; governance index, outside directors proportion, managerial ownership proportion and board size significantly impacted on dividend payout. The authors reported that there is insignificant relation between these measures of governance and dividend payout in the period following enactment of the Sarbanes-Oxley Act. They attributed this to the fact that the Sarbanes-Oxley Act provided the needed mechanism for ensuring transparency via independency and accountability of audit committees. This illustrates how government regulation can significantly impact the agency costs.

Sarbanes-Oxley Act and Corporate Governance

Clark (2005) postulates that the enactment of Sarbanes-Oxley Act could eventually result in increased shareholder value. Jahera et al. (n.d.) study provides empirical evidence to support this argument. They indicated that following enactment of Sarbanes-Oxley Act, dividend policies no longer rely on the proportion of external directors and shareholders’ rights but instead investors rely on the Act’s protection. The Sarbanes-Oxley Act forces managers to operate firms in a transparency manner and to be accountable for their actions. This ensures that the interests of investors are protected.

According to Albuquerque and Zhu (2012), compliance with Sarbanes-Oxley Act has had beneficial impacts to investors in terms of provision of increased transparency, reliable financial information and increased accountability. These benefits drastically reduce cost of capital. Albuquerque and Zhu (2012), also observe that Sarbanes-Oxley Act reduces cost of equity of a firm by ensuring increased internal controls. This implies that the Act has a direct impact on the investment and hence profitability of a firm. Consequently, the policy has a direct impact on the dividend policy of a firm. Therefore, the dividend policy measures of firm can no longer be dependent upon the corporate governance procedures but rather on the Sarbanes-Oxley Act. This is consistent with Jahera et al. (n.d.) findings.

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The Sarbanes-Oxley Act requires firms to disclose their financial information periodically to promote accountability and transparency. Vojtech (2012) argues that the firm’s perceived value might be increased through manipulation of accounting information. The author however states that dividends can alleviate such practice. The Sarbanes-Oxley Act has seen a change in the announcements made by non-dividend payers as opposed to dividend payers (Vojtech, 2012). This indicates that the Act has brought about transparency in the dividend policy and as such managers have limited claim in its determination. This is consistent with the findings of Jahera et al. (n.d.) which indicate that managerial ownership and governance index were insignificant in determination of dividend policy following implementation of the Sarbanes-Oxley Act.

According to Linck, Netter and Yang (2008), Sarbanes-Oxley Act requires firms to have more outside directors. The requirement for board independency as advocated by Sarbanes-Oxley Act was aimed at enhancing corporate governance. Linck et al (2008) established that boards were significantly larger and independent in post Sarbanes-Oxley Act as compared to the period preceding its enactment. Firms strived to increase the number of external directors in order to comply with Act’s requirement. This could explain the findings by Jahera et al. (n.d.) in which they reported lack of relation between corporate governance measures and dividend policy within firms.

In conclusion, the Sarbanes-Oxley Act enacts measures which override corporate governance measures which previously determined dividend policy of a firm. This explains the findings of Jahera et al. (n.d.) which indicates that there is insignificant relation between corporate governance measures (such as governance index, outside directors proportion, managerial ownership proportion and board size) and dividend policy in the post Sarbanes-Oxley Act era.

Custom Firm's Dividend Policy Essay

Code: Sample20

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