Articlegreen2007

Control structures and payout policy

Luc D. R. Renneboog · Grzegorz Trojanowski

124 citations0/0 files storedManagerial Finance

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Corporate Finance and Governance Financial Markets and Investment Strategies Financial Analysis and Corporate Governance

Abstract

Purpose This paper seeks to examine whether or not divident policy is influenced by the firm's corporate control structure, investigating the relationship between the dynamics of earnings payout and the voting power enjoyed by different types of shareholders. This allows one to test a set of hypotheses derived from agency and pecking order theories. Design/methodology/approach A large panel of UK firms for the 1990s and is analyzed that the payout policy is significantly related to control concentration. The problem of control measurement is addressed and the use of Banzhaf indices advocated as a relevant measure of voting power in the analysis of corporate policy choices. The traditional framework proposed by Linter is extended and an econometrically sound approach to modeling the dynamics of the total payout suggested. Where most – even recent – studies on payout policy show some methodological flaws, state‐of‐the‐art dynamic panel data estimation procedures are applied. Findings Expectedly, profitability is a crucial determinant of payout decisions, but the presence of strong block holders or block holder coalitions weakens the relationship between the corporate earnings and the payout dynamics. Block holders appear to realize that an overly generous payout may render the company liquidity constrained, and, consequently, result in suboptimal investment policy. Practical implications The results challenge some of the implications of the agency theories of payout, and favor a pecking‐order explanation for the observed patterns. The analysis of payout dynamics reveals also that companies adjust payout policies to changes in earnings only gradually, which is consistent with “dividend smoothing”. In fact, the results suggest a presence of a more general phenomenon of the “total payout smoothing”. Originality/value According to one's bet knowledge, this is the first study employing those game theory‐based concepts in the context of corporate payout policies.

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References

1976Theory of the firm: Managerial behavior, agency costs and ownership structure 1991Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations 1998Initial conditions and moment restrictions in dynamic panel data models 1984Corporate financing and investment decisions when firms have information that investors do not have 1977Determinants of corporate borrowing 1996Agency costs of free cash flow, corporate finance, and takeovers 1986Large Shareholders and Corporate Control 1961Dividend Policy, Growth, and the Valuation of Shares

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