Article2018

The mediating effect of dividend payout on the relationship between internal governance and free cash flow

38 citations0/0 files storedCorporate Governance

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Corporate Finance and Governance Auditing, Earnings Management, Governance Corporate Governance and Financial Management

Abstract

Purpose This paper aims to examine the mediating effect of dividend payout on the relationship between internal governance mechanisms (board of directors and ownership structure) and the free cash flow level. Design/methodology/approach Linear regression models are used to investigate such relationships applying data from a sample of 207 non-financial firms listed on the Gulf Cooperation Council countries’ stock markets between 2009 and 2016. To test the significance of mediating effect, the author uses the Sobel test. Findings The author finds a partial mediation effect of dividend on the relationship between both board independence and managerial ownership and the level of free cash flow. The results confirm the major role of outside directors in corporate governance. This governance mechanism contributes to the protection of shareholders’ interests through a generous dividend policy. However, the author finds that large managerial shareholdings increase the level of free cash flow through lower dividend payouts. This result suggests that powerful managers follow their preference of retaining excess cash to their own interests. Practical implications This paper offers insights to policy-makers of emerging economies interested in the development of the corporate governance. This study provides guidance for firms in the construction and implementation of their own corporate governance policies. Originality/value The main contribution of the present paper is to examine the dividend payout as a potential mediating variable between internal governance mechanisms and free cash flow. Moreover, it highlights the issue of efficient management of substantial funds inSharia-compliant and non-Sharia-compliant firms.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1983Separation of Ownership and Control 1978Specification Tests in Econometrics 1986Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers 2021Econometric Analysis of Panel Data 1980Agency Problems and the Theory of the Firm 1996Agency costs of free cash flow, corporate finance, and takeovers 1993The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems

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2021Ownership structure and audit quality: the mediating effect of board independence 2020Corporate governance and dividend policy in Sri Lankan firms: a data triangulation approach

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