How relevant is dividend policy under low shareholder protection?

Abstract

This paper contributes to the debate on why firms pay lower dividends in the stakeholder-oriented governance regimes of Continental Europe than in the market-oriented Anglo-American world. We examine the stakeholder-oriented regime of the Netherlands, before sweeping governance reforms in 2004 defused some major anti-shareholder provisions widely employed by Dutch firms. We find that (i) the payouts of Dutch firms are low due to their habitual use of anti-shareholder provisions, and (ii) dividends and shareholder control are complementary rather than substitute mechanisms in mitigating agency concerns. We find no evidence that controlling shareholders would allow firms to relax their dividend behavior. On the contrary, they demand higher rather than lower dividends to counterbalance the negative impact of anti-shareholder provisions. The highest dividends are paid by firms controlled by corporate insiders, along with institutional investors with superior monitoring skills and incentives. These findings are unlikely to be specific to the Netherlands and could possibly be extended to other stakeholder-oriented regimes.

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