Infectious diseases, dividend policy, and independent directors: Evidence from textual analysis

Area of Science:

• Corporate Finance
• Public Health
• Risk Management

Background:

• Corporate dividend policies are crucial for investor returns.
• Infectious diseases introduce significant economic uncertainty.
• Previous research has not fully explored the impact of broad infectious disease uncertainty on corporate finance.

Purpose of the Study:

• To investigate the effect of infectious disease uncertainty on corporate dividend policy.
• To determine if corporate governance mechanisms, like board independence, influence this relationship.

Main Methods:

• Utilized a unique text-based measure for infectious disease uncertainty, encompassing COVID-19, SARS, MERS, and Ebola.
• Analyzed a large dataset of 287,151 firm-year observations from 1985 to 2021.
• Employed robustness checks to address potential endogeneity issues.

Main Results:

• Increased uncertainty from infectious diseases significantly reduces dividend payouts.
• A higher proportion of independent directors on corporate boards mitigates the negative impact of disease uncertainty on dividends.
• Findings suggest agency conflicts contribute to dividend reductions during disease uncertainty.

Conclusions:

• Infectious disease uncertainty poses a significant challenge to corporate dividend stability.
• Effective corporate governance, particularly board independence, can buffer firms against the financial repercussions of pandemics.
• Future research should explore specific governance strategies in managing disease-related financial risks.