How Relevant is Dividend Policy Under Low Shareholder Protection?

Abstract

This paper reopens 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. Previous studies observe the concentrated ownership structures of Continental European firms, and infer that in the presence of a large controlling shareholder, dividends need not function as an agency control device. We examine the typical stakeholder-oriented regime of the Netherlands, and find that (i) the payouts of Dutch firms are low due to their habitual use of powerful anti-shareholder provisions, and that (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 and ensure greater focus on shareholder value. Moreover, the highest dividends are actually 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.

Keywords: Dividend policy, corporate governance, anti-shareholder provisions, ownership and control

JEL Classification: G35, G32, G30