Control Structures and Payout Policy

Abstract

This paper examines the payout policies of UK firms listed on the London Stock Exchange during the 1990s. It complements the existing literature by analyzing the trends in both dividends and total payouts (including share repurchases). In a dynamic panel data regression setting, we relate target payout ratios to control structure variables.Profitability drives payout decisions of the UK companies, but the presence of strong block holders or block holder coalitions considerably weakens the relationship between corporate earnings and payout dynamics. While the impact of the voting power of shareholders' coalitions on payout ratios is found to be always negative, the magnitude of this effect differs across different categories of block holders (i.e. industrial firms, outside individuals, directors, financial institutions). The controlling shareholders appear to trade off the agency problems of free cash flow against the risk of underinvestment, and try to enforce payout policies that optimally balance these two costs. Finally, the paper improves upon some methodological flaws of the recent empirical studies of payout policy. . In a dynamic panel data regression setting, we relate target payout ratios to control structure variables.Profitability drives payout decisions of the UK companies, but the presence of strong block holders or block holder coalitions considerably weakens the relationship between corporate earnings and payout dynamics. While the impact of the voting power of shareholders' coalitions (measured by Banzhaf power indices) on payout ratios is found to be always negative, the magnitude of this effect differs across different categories of block holders (i.e. industrial firms, outside individuals, directors, financial institutions). The controlling shareholders appear to trade off the agency problems of free cash flow against the risk of underinvestment, and try to enforce payout policies that optimally balance these two costs. Finally, the paper improves upon some methodological flaws of the recent empirical studies of payout policy.JEL classification: G35, G32, G30.

Ownership-Control Discrepancy and Dividend Policy: Evidence from Tunisia

“…According to Trojanowski (2004), and Renneboog and Trojanowski (2005), a number of empirical studies have computed voting power by the size of the stake controlled by different blockholders. In such case, a shareholder with 30% of votes in widely held corporation is more likely to practice an effective control over the firm, while a shareholder with 35% of vote in firm with greater controlling blockholders does not hold sufficient rights to exercise significant influence over management decisions.…”

“…For a given ownership structure, a block representing 20% of the votes in a company, which has widely dispersed shareholdings is likely to yield effective control over the company with concentrated ownership (Crama et al 2003). While a block of 25% in a company with a majority shareholder may not give its holder significant influence (Trojanowski and Renneboog, 2005).…”

“…Earlier studies indicate that excess control generally implies higher earnings management, a transfer of resources from the firm to the controlling shareholder through self-dealing transactions (Johnson et al (2000)) and value Using a dynamic panel data of U.K firms, Trojanowski and Renneboog (2005) analysed the effect of control structure on target payout ratio. They found that controlling shareholders are concerned with the trade-off between the risk of underinvestment and the agency problems of free cash flow.…”