The association between dividend payout and outside directorships

Abstract

If you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors service information about how to choose which publication to write for and submission guidelines are available for all. Please visit www.emeraldinsight.com/authors for more information. About Emerald www.emeraldinsight.comEmerald is a global publisher linking research and practice to the benefit of society. The company manages a portfolio of more than 290 journals and over 2,350 books and book series volumes, as well as providing an extensive range of online products and additional customer resources and services.Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the Committee on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive preservation. AbstractPurpose -The purpose of this paper is to examine whether the number of outside directors on the board of directors and dividend payout are substitutes or complements mechanisms applied by UK firms to control agency conflicts of interest within the firm. Design/methodology/approach -The authors use tobit and logit regression models to examine the extent to which firms with a majority of outside directors on their boards experience significantly lower or higher dividend payout after controlling for insider ownership, profitability, liquidity, asset structure, business risk, firm size, firms' growth rate and borrowing ratio. Findings -Based on a sample of 400 non-financial firms listed at London Stock Exchange for the period from 1991 to 2002, it was found that dividend payout is negatively associated with the number of outside directors on the board of directors. Originality/value -The results suggest that firms pay lower dividends when higher number of outside directors is employed on the board. This evidence is consistent with the substitution hypothesis, which indicated that firms with weak corporate governance need to establish a reputation by paying dividends. In other words, dividends substitute for independent directors on the board. This finding offers novel insights to policy makers interested in agency conflicts of interest within the firm. It also provides evidence on the use of different substitute mechanisms for reducing agency costs.

Corporate governance and cash holdings in MENA: Evidence from internal and external governance practices

“…Independent directors are mostly used in the literature to reflect the board composition or independence (for example, Johnson, et al, 1996;Boone, et al, 2007;Al-Najjar and Hussainey, 2009). It is well documented that independent directors are considered to be a key monitoring tool for firms as they employ strict monitoring policies.…”

The king reports, independent non-executive directors and firm valuation on the Johannesburg stock exchange

“…Those who support more INEDs on corporate boards usually base their arguments on a number of theories, including agency, resource independence, information asymmetry and reputation signaling (Pfeffer, 1973;Baysinger and Hoskisson, 1990;Al-Najjar and Hussainey, 2009). Agency theory suggests that boards dominated by executive directors (insiders) are less accountable (Fama, 1980;Fama and Jensen, 1983a, b;Sonnenfeld, 2002).…”

“…Finally, it has been argued that the appointment of INEDs helps in reducing information asymmetry by credibly signalling insiders' intent to treat outside or potential shareholders fairly, and by implication, guaranteeing the safety of their investment (Hermalin and Weisbach, 1991;Al-Najjar and Hussainey, 2009). It also signals to investors insiders' intent to rely on expert advice, as well as their appreciation of the importance of separating the decision-making and control functions (Fama, 1980;Fama and Jensen, 1983a, b;Jensen, 1993;Dalton et al, 1998), which can impact positively on firm valuation.…”

“…A major proxy for corporate boards' independence and monitoring capacity is the proportion of outside directors (INEDs) (Fama, 1980;Fama and Jensen, 1983a, b;Lipton and Lorsch, 1992;Jensen, 1993). In fact, the ongoing extensive public policy (Pfeffer, 1973;Fama, 1980;Lipton and Lorsch, 1992;Jensen, 1993) and academic (Baysinger and Butler, 1985;Baysinger and Hoskisson, 1990;Dalton et al, 1998;Nicholson and Kiel, 2003;Al-Najjar and Hussainey, 2009) debate on the role and effectiveness of INEDs suggests that the presence of INEDs on corporate boards may influence firm value.…”

Does asymmetric information drive UK dividends propensity?

“…Asset structure is defined as the tangible assets, namely, total assets minus current assets divided by total assets (Aivazian et al, 2003;Al-Najjar and Hussainey, 2009), and is calculated to assess long-term assets' proportion in the firm's asset structure (Aivazian et al 2003a). …”