Purpose -This study examines the agency problem of expropriation using dividends in politically connected firms and the relevance of institutional investors in limiting this problem.The growing presence of institutional investors offers a unique opportunity to test their roles in politically connected firms and its importance in the context of dividend payouts and expropriation.Design/methodology/approach-This study employs the Tobit regression to test the association between political connection, institutional investors and dividend payouts. Results are also robust to the three-stage-least squares regressions method.Findings -Based on a random sample of 2458 Malaysian firms-year observations for the period of 2004-2009. The results reveal that politically connected firms have an inclination to pay lower dividends, while institutional ownership are associated with higher dividend payouts. Furthermore, our findings reveal that higher levels of institutional ownership moderates the negative relationship between politically connected firms and dividends.Implications-Findings has an important implication to regulators as it suggests that the institutional investors can influence the dividends payout in politically connected firms through active monitoring and thus alleviating agency problems. This also provides a positive feedback on the regulators' governance initiatives that quest to strengthen the roles of institutional investors.Originality/value -This study is the first to examine the effectiveness of the monitoring role of institutional investors in the context of expropriation by politically connected firms from the perspective of dividend payouts. JEL Classification: G35, G30, G23