Effect of institutional ownership on dividends: An agency-theory-based analysis

Abstract

This study examines the effect of institutional ownership on dividend payouts through the lens of agency theory. We hypothesize that only institutions with certain traits are likely to monitor. Monitoring institutions will use dividend payouts as a tool to mitigate firms' agency problems, conditional on those firms' financial performance. We find that (1) there is a positive relation between lagged long-term institutional ownership with a large stake and the dividend payout ratio; (2) the positive relation is more salient in firms with high agency costs; and (3) the positive relation is more salient when external monitoring is weak. These findings support that (1) concentrated and long-term institutional investors play a monitoring role and (2) monitoring institutions use dividend payouts as a monitoring device. Our findings are robust to endogeneity tests, level and change models, alternative income-based dividend payout measures, alternative measures of long-term institutions, and sub-period analyses.

How Does CEO Age Affect Firm Risk?

“…In order to calculate the measure of earnings management, we follow the modified Jones () model, which is perhaps the best available measure of earnings management (see Dechow et al ., ; Guay et al ., ; Chung et al ., ; Davidson et al ., ; Chang et al ., ). Total accruals ( TAC ) are divided into non‐discretionary accruals ( NDAC ) and discretionary accruals ( DAC ).…”

“…Similarly, we classify firms with discretionary accruals below the industry median as the “low earnings management” firms. These firms are believed to exhibit fewer agency problems (for an excellent discussion this, see Chang et al ., ).…”

“…Following Chang et al . (), we interpret firms in more competitive industries (low HI) as likely to have fewer agency problems. Firms in less competitive industries (High HI) by contrast are likely to have a greater number of agency issues.…”

Corporate Governance and Dividend Payout Policy: Beyond Country‐level Governance

“…First, Fenn and Liang (2001) find that management stock ownership is not associated with dividend payout. Second, studies supporting a positive relation use institutional ownership as a governance measure (e.g., Short, Zhang, and Keasey 2002;Chang, Kang, and Li 2016) or state antitakeover laws and the difference-in-differences approach (Francis, Ifekhar, and Kose 2011). Third, studies supporting a negative relation use institutional ownership (e.g., Amihud and Li 2006;Grinstein and Palvia 2010;Dutta et al 2015), the GIM index developed by Gompers, Ishii, and Metrick (2003) (e.g., Jiraporn and Ning 2006;John, Knyazeva, and Knyazeva 2015), CEO stock ownership, and executive stock option (Hu and Kumar 2004) or conservative accounting (Louis and Urcan 2015).…”

Dividendos, propriedade e governança corporativa: evidências no mercado brasileiro

“…Contudo, os conflitos de interesse podem não existir apenas na relação entre acionistas e gestores. Estudos anteriores mostraram que em ambientes onde existe uma elevada concentração acionária, o relacionamento entre os acionistas minoritários e majoritários pode ser repleto de interesses conflitantes com relação ao fluxo de caixa livre, tanto quanto no relacionamento entre gestores e acionistas comuns (ANG, COLE e LIN, 2000;HARADA e NGUYEN, 2011;CHANG, KANG e LI, 2016). Alguns países que possuem como características a concentração de propriedade são, por exemplo: Brasil (HOLANDA e COELHO, 2012;CRISÓSTOMO e BRANDÃO, 2016); Canadá (ADJAOUD e BEN-AMAR, 2010); e Índia (LAHIRI, 2018).…”