SMEs and dividend payout policy in case of poor legal environment

ABSTRACT

This article investigates the dividend informational content hypothesis, showing how managers react to a poor legal environment through positive and credible messages to investors. We analyze private and public limited companies between 2015 and 2019, exploring the relation between their dividend payout policies and the courts’ ability to enforce creditor rights in case of insolvency. Based on our results, we can observe a positive relation between judicial delay and the SMEs’ decisions on dividend payouts, meaning that as the inefficiency of courts increases, small businesses are ever more likely to pay out dividends so that they can send a positive message to the local capital market. On the other hand, our results cannot confirm the same relation for public limited companies, which operate n the global capital market, highlighting the key role of local ties.

KEYWORDS:

• Payout policy
• SME
• manufacturing industry
• financial constraints
• legal environment

Disclosure statement

No potential conflict of interest was reported by the authors.

Data availability statement

There are three main sources of information in this work: DG-Stat (Italian Ministry of Justice’s database), AIDA (Bureau van Dijk´s database), and CERIS Rating (CNR-IRCrES’s database).

DG-Stat provides detailed information on insolvency procedures at the first instance level (mortgage foreclosure of movable and real estate assets), and there is free access at the Ministry of Justice (https://dgstat.giustizia.it/).

AIDA contains financial and administrative information about Italian manufacturing companies, and an authorized access by Bureau van Dijk is necessary (https://www.bvdinfo.com).

CERIS Rating evaluates firms’ short-term solvency through credit rating scores, and there is free access on demand at the IRCrES institute (https://www.ircres.cnr.it).

Notes

¹ SMEs are firms with fewer than 250 employees and an annual turnover below or equal to 50 million euro (source: EU Commission Recommendation No. 2003/361).

² Note that, for the sake of simplicity, we define “dividend” as the payment of net profit by private limited companies to their owners.

³ For an in-depth investigation of this financial ratio, see the European Committee of Central Balance Sheet Data Offices (ECCBSO). Link: https://www.eccbso.org.

⁴ ${\lambda }_i=\frac{\varphi \left(h^e\right)}{\mathrm{\Phi }\left(h^e\right)}$ where $\mathit{\varphi }\left(\cdot \right)$ is the probability density function of a standardized normal distribution, $\mathrm{\Phi }\left(\cdot \right)$ is the cumulative distribution of a standardized normal distribution and $h^e$ is the predicted value from the probit model (i.e., from the selection equation).

⁵ As highlighted by Bryan et al. (2019), δ defines the importance of the unobservables relative to the observables in influencing the treatment effect. When δ = 1, the observables and the unobservables are equally important and affect β in the same direction; when 0 < δ < 1, the unobserved factors are less important than the observed factors (and the opposite holds true when δ > 1).

⁶ Note that, in accordance with Agostino and Trivieri (2014), these additional models introduce some fixed effects to detect heterogeneity among the observations (i.e., productivity sector, geographical macro area, and year).

⁷ Note that, as stated in the Italian legislation on insolvency (Articolo 26, Codice di procedura civile – R.D. 28 ottobre 1940, n. 1443, Aggiornato al 29/04/2022), the competent court is identified according to the location of the seized assets. Hence, considering public limited companies, we might expect different competent courts and several parallel procedures. Moreover, public limited companies gather their external financial resources in the global capital market, in which a country’s overall legal environment and its performance are assessed.