Ownership Concentration, Agency Conflicts, and Dividend Policy in Japan
Posted: 30 Aug 2009
Date Written: August 21, 2009
We examine the influence of ownership concentration on payout policy in Japan. According to the monitoring hypothesis, large shareholders prefer higher dividends to mitigate the agency cost of free cash flows. In contrast, the rent extraction hypothesis assumes that large shareholders derive private benefits of control and have therefore a preference for lower dividends. Consistent with the second view, we find that ownership concentration is associated with significantly lower payout. Furthermore, the analysis of dividend adjustments indicates that firms with concentrated ownership are less likely to increase dividends following increases in profitability or reductions in leverage. This suggests that large shareholders do not use dividend policy to remove excess cash and impose greater financial discipline. Instead, the results highlight the diverging interests of majority and minority shareholders in Japanese companies.
Keywords: dividend policy, agency conflicts, large shareholders, private benefits
JEL Classification: G35
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