The Simultaneous Effect of Corporate Ownership on Dividends and Capital Structure: Malaysian Evidence

Abstract

Most of the researchers analyzed the impact of ownership structure on dividends and capital structure decisions separately. Drawing upon preceding empirical studies, the interdependence between dividends and capital structure raises the potential of the endogeneity bias when interdependent factors are segmented. Therefore, this study examined the effect of corporate ownership structure on capital structure and dividend policy simultaneously. This study utilized 407 Malaysian-listed firms over the period from 2012 to 2016 and adopted simultaneous modelling using 2SLS and 3SLS regression techniques. The results changed markedly in sign, magnitude and significance when moving from OLS estimator to 2SLS and 3SLS estimators. The findings show that both dividend and capital structure policies have positive interdependence. The substantial, family, government and foreign ownership affect dividends positively and capital structure negatively. The study provides various theoretical and practical implications to improve corporate governance and corporate financial policies. This study contributes to the growing literature on corporate finance and corporate ownership. Particularly, it provides simultaneous investigation on the effect of family, government and foreign ownership on dividends and capital structure for Malaysian firms.

The Simultaneous Effect Dividend Policy and Debt Policy

“…The amount of dividends depends on the amount of profit earned by the company and the dividend policy or decision regarding the amount of the profit share that will be distributed to shareholders and the part that will be retained by the company as retained earnings (Levy & Sarnat, 1990) The separation of institutional ownership conditions and the separation of shareholder interests can explain the phenomenon of substitution of debt and dividend policies by the agency theory. Therefore, the types and composition of firms' ownership structures are essential factors influencing agency problems (Saleh et al, 2020). The condition of high institutional ownership indicates that there is control over agency conflict, so the role of debt and dividend policies in controlling agency is no longer needed.…”