Dividend Payouts and Corporate Governance Quality: Evidence from the Institutional Shareholder Services (ISS)
The Financial Review, Vol. 46, pp. 251-279, 2011
38 Pages Posted: 5 Jul 2010 Last revised: 25 Oct 2011
Date Written: July 4, 2010
Motivated by agency theory, we investigate how a firm’s overall quality of corporate governance affects its dividend policy. Using a large sample of firms with governance data from The Institutional Shareholder Services (ISS), we find that firms with stronger governance exhibit a higher propensity to pay dividends and, for dividend payers, pay larger dividends. The results are consistent with the notion that shareholders of firms with better governance quality are able to force managers to disgorge more cash through dividends, thereby reducing what is left for expropriation by opportunistic managers. We employ the two-stage least squares (2SLS) approach to cope with possible endogeneity and still obtain consistent results. Our results are important as they show that corporate governance quality does have a palpable impact on critical corporate decisions such as dividend policy.
Keywords: Dividend policy, Corporate governance, Agency theory, Agency costs
JEL Classification: G30, G32, G34
Suggested Citation: Suggested Citation