Impact of Ownership Structure on Corporate Dividend Policy and Performance

Abstract

This dissertation studies the impact of corporate ownership structure on dividend payout and firm performance. The dissertation ties these variables to test whether policy intervention with respect to blockholding and higher managerial ownership is required in Pakistan. This dissertation develops and tests two main hypotheses about insiders’ ownership in listed firms. The first hypothesis is related to finding evidence of expropriation of minority shareholders by insiders whereas the second hypothesis is related to quantification of the expropriation effects on firm value. In the first part, this dissertation posits that the relevance and indeed the assumptions of the dividends cost minimization model ought to be restricted to those countries where shareholders rights are well protected. Alternatively, this study proposes an “investor power” hypothesis, which is closely akin to the La Porta et al.’s (2000) “outcome hypothesis”. The investor power hypothesis states that the determining factor of dividends payout in a weak legal system is not the minimization of agency costs; instead it is the presence of certain powerful outside investors who can force firms to pay out dividends. Using two variants of the dividends cost minimization model and a modified version of the dividends partial adjustment model on a data set for 183 Pakistani listed firms, the empirical results partially support the investor power hypothesis. Results of the mean-comparison tests as well as the regression models show that dividend-payout ratio decreases with the ownership percentage of individual shareholders and the incumbent managers. The empirical results indicate that there is only weak evidence that institutional investors can force managers to pay dividends. Among the other variables, dividend payout ratio increases with the size of a firm and ownership percentage of associated companies, and decreases with financial leverage, coefficient of variation of net income, and growth opportunities. In the second part, the dissertation hypothesizes that the market places expropriation premium on the stocks of the firms where large insiders are present. In addition to poor market performance, such firms are expected to show poor accounting performance due to various forms of expropriations. These hypotheses are tested with the help of OLS (ordinary least square) and 2SLS (two-stage least square) regressions while controlling for other explanatory variables that have been identified in the literature. The results indicate that both the market- and accounting- based measures of performance are negatively related to the ownership percentage of incumbent managers. Among the control variables, Tobin’s Q increases with growth opportunities and tangibility of assets, whereas it decreases with firm size, market risk, firm-specific risk, and ownership percentage of institutional shareholders.