Litigation Risk, Ownership Structure and Payout Policy: An Agency 
Theory Perspective

Abstract

The study aims to investigate the relationship between litigation risk, ownership structure and payout policy in the light of agency theory. The study analyzed a data set of 690 non-financial Chinese firms spanning 2013–2021, by employing two-stage dynamic panel data methodology. The results reveal that litigation risk adversely impacts dividend payouts, while managerial ownership has a similar negative effect. Conversely, institutional and concentrated ownership exhibit positive associations with dividend yield. Furthermore, managerial and institutional ownership moderates the link between litigation risk and dividend payout ratio, while concentrated ownership strengthens this link. These findings confirm the presence of agency theory dynamics in emerging economies, providing valuable insights for corporate decision-makers, regulators and investors. By considering the moderating role of ownership structure, this research enhances our understanding of the multifaceted relationship between litigation risk and payout policy, facilitating better-informed strategic decisions and policy formulation. The study provides valuable implications for corporate managers and individual investors for constructing a diversified portfolio in the context of emerging economies.