Ownership Structure and Dividend Policy | Nagajeyakumaran Atchyuthan - elecciones2013.info
This paper examines the possible association between ownership structure, corporate governance and firms dividend payout policy. It is also one of the very first. Apr 30, the dividend policy in Morocco. The results of our study show a positive and significant relationship between ownership structure and dividend. PDF | Dividend policy and ownership structure have generally been studied as two separate and distinct areas in the field of corporate finance. Very few studies .
Bebchuk and Gomes argue that when the authorized and institutional Jensen and Meckling argued that agency frameworks do not offer adequate safe haven association takes place when the principle for outside investors, concentrated ownership engages the agents to perform some of their duties on their behalf.
Agency cost arises Explanation of Variables in the Context of because of conflicting interests of the managers literature and owners. Short et al argue that dividend policy perform crucial role in reducing Foreign ownership agency costs which have arisen from the Foreign ownership refers to the percentage of conflicting interests of both the parties.
According to Rozeff dividend payment is According to Chaiforeign ownership a device to reduce agency cost. Jensen has important impact on the dividend policy of suggested that dividend payment could create the concerned firm.
On the other hand, shareholders Institutional ownership prefer dividends to retained earnings. If profits Institutional ownership means to the sum of are not paid to the shareholders in form of percentage of the banks, insurance dividend, the managers might change their companies, investment firms, pension funds and intentions towards the benefits of the other large scale financial institutions out of total management or they can engage the resources capital shares of the firm.
Institutional into unprofitable projects. Han et al argued that payment as a device to reduce agency costs. Carvalhal — to be the sum of proportion of managers, da-Silva et al argued that the agencies problems executives, directors and their families divided between the managers and the shareholders can by the total capital shares of the firm.
By managerial ownership and dividend policy is observing Japanese firms, Stouraitis et al found relevant because it may help to reduce the that the dividend payout policy can be used to conflict of interests between the management manage the overinvestment problems of the firm and shareholders.
While on the other hand, and observed that the conflicting interests Mahadwartha observed the negative between the managers and shareholders about association of the dividend policy and leverage the dividend policy vary according to the growth policy to the managerial ownership in his study.
Firm size measured with income and expenses. Income is Redding stated in his study that large money generated from the activities of the corporations are more probable to pay dividend business. According to Titman et al, large firms are more possible to be diversified 3. Primary objective factors can assist the firms in paying higher Analyze the impact of ownership structure dividend to their concerned shareholders.
Secondary objectives Profitability is the primary goal of all the business ventures. Without profitability a To identify the relationship between business entity would not be able to the will not ownership structure and dividend policy. So measuring current To identify the critical factors of the firms and past profitability and projecting future size and dividend policy. There is a relationship between the foreign Data for this study has been collected from ownership and the dividend payout the data base of the Colombo Stock Exchange reports, balance sheet analysis H2: There is a relationship between the report of the individual firm websites.
The institutional ownership and the dividend payout sample of the study includes 8 firms which H3: There is a relationship between the have been randomly selected from hotels and Travels sector which are listed in managerial ownership and the dividend payout Colombo Stock Exchange from the CSE 7. All those methods used to analyze the data and the firms has selected in the sample for which definition of the variables used in the study.
According to this study correlation co-efficient analysis is under taken to find out the relationship between Where the ownership structure and dividend policy. That indicate what relationship exists among variables. Correlation is significant at the 0. Above correlation table describe the relationship between the ownership structure and dividend policy.
Constantfs, mas, ints, fors Here Error Beta t Sig. This result is consistent with the The estimated coefficient on foreign ownership incentive alignment hypothesis of Jensen is not significant at the conventional levels. This result is also Therefore, the result reject our hypothesis H1consistent with the empirical findings of implying that there is no significant relationship Dixon et al.
The estimated coefficient on institutional Therefore, the result reject our hypothesis a better understanding of dividend policy H2implying that there is no significant decisions in the Sri Lankan context.
This relationship between the institutional ownership study analyses the relationship between and the dividend policy. Their results support the positivity of relationship between institutional and insider ownership and dividend where it used to mitigate agency problem. La Porta et al. They conclude that, in countries with high legal protection, the minority shareholders receive higher dividends. Moreover, rapid growth firms pay lower dividends than those of less growing firms, which supports the idea that, when the company investment opportunities are good, shareholders prefer not to obtain dividends.
By using dividend models of Lintnre ; Waud ; and Fama and Babiakthey conclude that a positive association between dividend payout policy and institutional ownership may go beyond increasing the dividend payout ratio. They also found some evidence to support a negative association between dividend payout policy and managerial ownership.
Maury and Pajuste ; Farinha conclude that a negative relationship between ownership concentration and dividend. Hofler et al study this relationship for a sample of German corporations and show that institutional ownership is not significant in determining dividend payout.
Karathanassis and Chrysanthopoulou extend the study of Short et aland examine the relationship between ownership structure and corporate dividend policy. Their results show inverse relationship between the strong presence of institutional portfolios and the high degree of concentration of the managerial ownership and the dividend change between the two most recent time periods was brought out.
By using a sample of U. S firms, Bichara conduct a study to examine a theory that links dividends to institutional ownership in a framework of both information signaling and agency costs.
He find that institutions are considered sophisticated investors with superior ability and stronger incentive to be informed about the firm quality compared to retail investors. Institutional investors display monitoring capabilities and can detect and correct managerial pitfalls, thus their presence serves as an assurance that the firm will remain well run.
Moreover, institutional holders respond positively to dividend initiation announcements by adjusting their portfolios through buying or increasing their holdings of the dividend paying stock following the announcement.
In addition, the results reveal that positive abnormal returns to dividend initiation announcements are a decreasing function of institutional holdings in the dividend initiating firm, and that this mitigating effect of institutional ownership on the market reaction to dividend initiations is stronger for firms with higher information asymmetry and more potential for agency problems. Using a sample ofAustralian publicly firms, Setia-Atmaja find that ownership concentration has a significant negative impact on the independence of board, which means that closely held firms have lower proportion of independent directors on the board, and the blockholders may exacerbate the agency problems by paying lower dividends.
They also find that corporations with highly concentrated ownership distribute more dividends. But the threat of intervention by outside shareholders constrains benefits and forces benefits and dividends to move in lockstep. Managers are risk-averse, and their utility function allows for habit formation. They show that dividends follow Lintner's target-adjustment model. They provide closed-form, structural expressions for the payout target and the partial adjustment coefficient. Risk aversion causes managers to underinvest, but habit formation mitigates the degree of underinvestment.
Changes in corporate borrowing absorb fluctuations in earnings and investment. The results of Ramli suggest that controlling shareholders does influence the dividend policy. Also, the presence of other large shareholders in corporations encourages the largest shareholders to pay out higher dividends. In a study made in the Middle East area for the Egyptian Market.
Firms are forced to distribute more dividends to decrease agency costs when big institutional investors exist in ownership structure, while managerial ownership was not significantly associated with dividend payout. Several studies have been made using Jordanian corporations data to study the determinants and the behavior of dividends in Jordan.
Omet finds an empirical evidence shows that Jordanian corporations follow stable dividend policies. Indeed, his results indicate that lagged dividend per share is more important than current earning per share in determining current dividend per share and that the imposition of taxes on dividends did not have any significant impact of dividend behavior of corporations.
Moreover, Al-Malkawi suggests that the proportion of stocks held by insiders and state ownership significantly affect the amount of dividends paid.
Size, age, and profitability of the firm seem to be the main determinants of corporate dividend policy in Jordan. The findings of the study support the agency costs hypothesis and are broadly consistent with the pecking order hypothesis. However, the study does not provide evidence supporting the signaling hypothesis in the Jordan market. Al-Najjar shows that determinants of dividend policy in Jordanian firms are similar to those suggested in developed markets.
Moreover, the study provides evidence suggesting that Jordanian firms have target payout ratios, to which they adjust to their target ratios. In another study, Al- Najjar shows that institutional investors in Jordan consider firms capital structure, profitability, business risk, asset structure, asset liquidity, growth rates, and firm size when they take their investment decisions.
In addition, institutional investors in Jordan prefer to invest in services rather than manufacturing firms. By assuming asymmetric adjustment toward the target dividend payout, Zurigat and Gharaibeh test the partial adjustment model based on Linterusing 38 Jordanian firms. They find that these firms have a target dividend payout with low rate of target adjustment.
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In addition, target adjustment is an asymmetrical process depending on whether dividend payout is above or below target. Dividend adjustment is found to be asymmetric for below-target dividends adjustment as well for above- target with positive and negative earnings. Their findings support the asymmetric information of agency explanation of dividend smoothing.
However, their results show positive and significant relationship between foreign ownership and dividend payout policy. Therefore, this section provides the method and tools used to accomplish the objectives of study.
The population of the study consists of all Jordanian corporations listed in Amman Stock Exchange, with total number of corporations are listed at the end of the year They consist of 15 banks, 26 insurance corporations, service corporations and 67 industrial corporations.
The sample of the study is consist of firms that have been continuously listed on the Amman Stock Exchange during the period The firms should distributed cash dividend for three years as minimum during the period of the study. Data of this study were extracted from the firm's annual reports, the Amman Stock Exchange publications and the Securities Depository Center records.
This section consists of two sub-sections; the first identifies the dependent variable, while the second one presents independent or explanatory variables.
The dependent variable in this study is the dividend policy; mainly we employ the dividend payout ratio as a proxy of dividend policy. Dividends Following Mehrani et al. Dividends Per Share DPS are calculated as the total amount of distributed dividends paid out over an entire year including interim dividends but not including special dividends divided by the number of outstanding shares.
DPS can be calculated by using the following formula: Dividends over a period usually 1 year S: Shares outstanding for the period as deloused in companies guide for corporation i. Shleifer and Vishny and Allen and Michaely argue that large institutional investors are more willing and able to monitor corporate management than are smaller and more diffuse owners.
Therefore, for institutional controlled firms, we expect a high dividend payout.
The Relationship between Ownership Structure and Dividend Policy: An Empirical Investigation
The empirical analysis uses a dummy variable MANwhich equals 1 when the percentage managerial ownership is higher than the mean percentage of the sample and equals 0 otherwise. Firm Size Larger firms may have more resources and hence the ability to pursue socially responsible activities. Thus, they may have the scope to achieve economic efficiency. The literature indicates that the potential impact of firm size on corporate performance is unclear.
Smith and Watts document that firms with more assets in place have higher dividend payout ratios. However, Gadhoum shows that the signaling efficiency of dividends diminishes for the larger firms, since larger firms produce much information than smaller one. Therefore, the inclusion of size may be best regarded as a simple control variable, with no particular sign expectation. Following Beiner et al and Chaing Free cash-flow FCF According to Jensenfree cash-flow hypothesis suggest that if firms have excess cash, it is better to pay this cash as dividend in order to reduce managerial discretionary funds and, thus, avoid agency costs of free cash-flow.
RozeffJensen et al. The measure of free cash flow has developed from Crutchley study of dividend policy as part of managerial decision-making.
In addition, Alli et al. They define FCF as the funds available to managers before discretionary capital investment decisions.
This includes net income, depreciation, and the interest expense of the firm.
The Relationship between Ownership Structure and Dividend Policy: An Empirical Investigation
Needed capital expenditure is subtracted from these cash flows to account for investment in positive-NPV projects.
Future growth opportunities Too insufficient cash to distribute dividend, and consequently making dividend and growth opportunity are negatively related. Jensen concludes that the use of debt may reduce the need for using dividend to mitigate the agency conflicts between shareholders and dividend. Moreover, some debt contracts include protective covenants limiting the payout.
Following Kouki and Guizanifinancial leverage is defined as the long term debt deflated by the book value of equity. Hence, the current study hypothesizes that the financial leverage and dividend payout are negatively related. The current study tries to investigate the possible relationship between ownership structure and corporations dividend policy.
These empirical models are modified by interactive dummy variables to account for the possible effects of institutional ownership and managerial ownership and dividend policy Rozeff, ; Easterbrook, There is a significant body of empirical literature to suggest a negative link between the two i. The current study hypothesized that a positive relationship between the presence of institutional ownership and dividend payout ratio and a negative relationship between the presence of managerial ownership and dividend payout ratio.
It has been argued that the presence of institutional ownership and managerial ownership has a significant impact on corporations dividend policy. This argument can be explained using the following equation: This dummy variable is used to construct the interaction dummy term which will be added to equation a as additional explanatory variable. The same procedure will be followed to construct the variable that will be used in equation a to investigate the impact of managerial ownership on dividend policy.
By adding new interaction dummy terms of institutional and managerial ownership the model can be reformalized as follows: This model will be tested under the hypotheses that institutional ownership is positively linked to the dividend payout ratio, whereas managerial ownership is expected to be negatively linked to dividend payout ratio.
The theoretical framework links the change in dividend policy to the change in earnings, assuming that for any year, t, the target level of dividend, D, for firm i at time t is related to profits, E ti, by a desired payout ratio, r can be explained using the following equation: To investigate the impact of institutional ownership and managerial ownership on dividend policy, this study uses the interaction dummy form dummy variable which equals 1 for firms having institutional ownership and zero otherwise.
This dummy variable is used to construct the interaction dummy term which is added to equation B as an additional explanatory variable. Interaction dummy variable is constructed by multiplying the dummy variable by the earnings Eti. The same is followed to construct the variable will be used in the equation B to investigate the impact of managerial ownership on dividend policy.
By adding new interaction dummy terms of institutional and managerial ownership, the model can be re-formalized as follows by assuming that corporations have different target payout ratios requation B becomes: These models will be tested using pooled and panel data analysis techniques, where panel data analysis are usually estimated by fixed effect and random effect techniques Gujarati, ; Green,while pooled data are tested using Ordinary Least Square OLS regression.
To identify the best one for analyzing the current data set, the study uses Breusch and Pagan Lagrange multiplier LM for testing random effects models against pooled OLS model under the null hypothesis that the cross—sectional variance components are zero. The significant Lagrange multiplier LM test leads to the rejection of the null hypothesis, and suggests that the individual effect is not equal to zero and that the estimate coefficients obtained from pooled model are not consistent.
Hausman test is used to discriminate between fixed effects and the random effects model.