Firm performance and dividend risk: testing the moderating role of corporate governance

Purpose Grounded in agency and signalling theory, the research posits that smoothened dividends are a function of fiscal and governance quality. The study tests this premise by exploring the role of firm performance and strong governance on dividend risk, which is the chance of a cut or omission of dividend payment. The motivation for this research is driven by the growth in dividend-centric investment strategy, for which the stability of dividend is paramount. Design/methodology/approach By developing a nuanced model, the research aims to quantify the joint influence of governance quality and firm performance in mitigating dividend risk. Leveraging a comprehensive dataset of 2,900 global firms from 2009 to 2023, the study offers empirical analysis, incorporating robustness checks and sub-sample analysis to ensure the validity of the findings. Findings The results confirm that stronger governance ensures stable dividends to the investors, indicating a strong presence of agency theory. A similar positive effect was observed for firm performance in the reduction of dividend risk. The moderation model further uncovered the presence of adverse effects of catering, indicated by an increase in dividend risk due to the joint presence of strong governance and firm performance. In highly profitable companies, governance may shift focus towards satisfying shareholders through increased payouts to reduce agency concerns associated with excess free cash flow. Originality/value The study is the first of its kind to research dividend risk and the moderating role of corporate governance in it.