Economic Policy Uncertainty And Dividend Policy: Evidence From Japan

Abstract

This paper investigates the impact of economic policy uncertainty (EPU) on the dividend policy of Tokyo Stock Exchange-listed firms over the 1991–2019 period. The empirical results document a positive association between EPU and dividend payouts. Further analysis shows that the transmission channels amplifying this relation include keiretsu affiliation, growth opportunities, profitability and cash holdings. Free cash flow problems, on the other hand, weaken the positive effect of EPU on dividend policy in Japan, lending support to the rent extraction hypothesis. Interestingly, trade policy uncertainty is the only categorical index of EPU that has a negative impact on dividend policy. My study contributes to the literature by providing alternative explanations for the relationship between EPU and dividend policy, as well as highlighting the complex nature of this association, as observed in how components of EPU impact corporate payout behaviors in different ways.