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 Structure and Dividend Policy: Evidence from China

“…Likewise, Model 3 indicates that the ownership of the government has a positive relationship with dividend payout ratio, a finding in line with those of Chen et al (2009) and Bradford et al (2013). On the contrary, Model 4 show that the magnitude of dividend payouts is lower when institutions hold more shares, a finding consistent with Renneboog and Trojanowski (2007) but in contrast with Khan (2006) and Thanatawee (2013), andFairchild et al (2014). It is found, in Model 6, that the ownership by foreign investors has a negative impact on dividend payouts, a finding in contrast with Baba (2009) and Jeon et al (2011).…”

“…This finding is consistent with Renneboog and Trojanowski (2007) but in contrast with Khan (2006) and Thanatawee (2013), andFairchild et al (2014). The results in Model 5 and 6, however, do not show any significant impact of individual and foreign ownership on firms' decisions to pay dividends.…”

Investor protection and dividend policy: The case of Islamic and conventional banks

“…Trojanowski and Renneboog (2007) and Zameer et al (2013) show that dispersed ownership structure is positively associated with dividend payout. Other studies show ownership concentration is negatively associated with dividends payout (Gugler and Yurtoglu, 2003;Trojanowski and Renneboog, 2005;Khan, 2006).…”

Are Large Shareholders Conducting Influential Monitoring in Emerging Markets? An Investigation into the Impact of Large Shareholders on Dividend Decisions: The Case of Kuwait

“…Gutierrez and Tribo (2008), examining a Spanish firm, emphasize that if a large shareholder is − to a great extent − larger than the rest, it is likely that the number of small shareholders sharing private benefits will diminish. These explanations are in line with Renneboog and Trojanowski (2007), who examine five European countries; Truong and Heaney (2007), who examine 27 countries around the world; Mancinelli and Ozkan (2006), who examine companies in Italy; and Maury and Pajuste (2002), who examine dividend policies in Finland. These authors find that large shareholders may collude in generating private advantages that are not shared with minority shareholders as indicated by lower dividend payout levels.…”