The effect of investor protection on dividend payout policy

We investigate the effect of investor protection on dividend payout policy in the context of the European Union. We specifically test if the outcome and substitute agency models of dividend payout from La Porta et al. are applicable to European markets in the timeframe from 2014 to 2016. We do so by utilizing Djankov’s shareholder protection indices in logit and ordinary least squares regression models to test if shareholder protection affects the likelihood and amount of dividend payments. We find a positive relationship between shareholder protection variables and dividend payments and payment size, which supports the outcome model of dividends. Furthermore, we found negative relationships between certain shareholder protection variables and dividends what suggests a substitution hypothesis, but we did not find enough proof to support that.