Geopolitical risk and corporate dividend policy

Purpose The purpose of this study is to investigate the direct impact of geopolitical risk on the dividend policy of Indian firms. Design/methodology/approach The study uses Tobit regression model to examine the impact of geopolitical risk on the dividend policy of 212 Indian firms from 2015 to 2024. The dividend policy is measured by the dividend-yield ratio and the geopolitical risk is measured by the GPR index of Caldara and Iacoviello (2022). The study controls for five firm-specific factors – firm-size, leverage, profitability, growth-opportunities and free cash flows; and four macroeconomic factors – inflation, exchange rate, industrial production and interest rate. Several additional tests are performed to ensure the robustness of results. Findings The results indicate a significant negative impact of geopolitical risk on dividend policy. This finding is consistent with the hypothesis that firms retain earnings during uncertainty to guard themselves against such adverse events. The findings are in contrast to signalling and agency theory, which suggest that firms should distribute more dividends during uncertain periods. The findings are robust to alternative specifications. Originality/value Empirical studies investigating the impact of geopolitical risk on corporate financial decisions remain scarce. The empirical question of how firms adapt their dividend policy during heightened geopolitical risk has remained unanswered. While an indirect link has been outlined by past studies, a direct impact of geopolitical risk on dividend policy has remained sparse. The study fills this gap by directly studying the relationship between geopolitical risk and dividend policy and presents new evidence in the Indian context.