Payout Policy in Korea: A Review of Empirical Evidence

Abstract

There have been fundamental changes in corporate dividend policy over the last several decades. Firms decide whether to pay out the corporations’ earnings to shareholders as dividends and share repurchases or to keep the profits as retained earnings for future investments. Corporate payout policy is a complicated financial decision-making process that considers future growth opportunities and corporate governance, as well as financing conditions in markets. Determining the payout amount is crucial for corporate finance managers since it is directly related to firm value. Korean corporations’ payout policy has changed dramatically since the Asian financial crisis in 1997.Until the Asian financial crisis, the Korean stock market had not experienced the appropriate conditions to test the various hypotheses based on dividend theory because firms did not have an optimal dividend policy based on their needs and capabilities to maximize firm value. However, after 1997, the paradigm shift in the business environment brought about shareholder-value maximization management, transparency enhancement in corporate governance, and investor-favorable regulation changes, making the Korean stock market more qualified for sophisticated empirical tests of payout policy. This paper reviews the empirical evidence on dividends and stock repurchases over the last three decades in Korea that consider market imperfections such as tax, information asymmetry, and agency costs. Also this paper covers the major survey results on dividend policy.