The Impact of Institutional Ownership on Dividends - An Agency Theory Based Analysis

31 Pages Posted: 7 Oct 2014

See all articles by Kiyoung Chang

Kiyoung Chang

University of South Florida Sarasota-Manatee - College of Business

Eun Kang

California State University San Marcos

Ying Li

University of Washington, Bothell - Business

Date Written: October 5, 2014

Abstract

This study addresses the debate over the relation between institutional ownership and dividend payout through the lens of the agency theory. We hypothesize that only institutional investors with certain traits are likely to monitor and conditioning on firms’ financial performance, they will use dividend payout to mitigate the firms’ agency problems. We find the following supporting evidence: (1) there is a positive relation between lagged long-term and concentrated institutional ownership and dividend payout ratio; (2) the positive relation is more salient when the firm has high agency costs; and (3) the positive relation is more salient when external monitoring is weak. These findings support the monitoring role of institutional investors and dividend payout as an ad hoc monitoring device. We document the interactions of dividend payout with other monitoring mechanisms that are consistent with the predictions from both outcome and substitution models based on agency theory.

Keywords: institution, agency costs, monitoring, competition, dividends

JEL Classification: G23, G32, G35

Suggested Citation

Chang, Kiyoung and Kang, Eun and Li, Ying, The Impact of Institutional Ownership on Dividends - An Agency Theory Based Analysis (October 5, 2014). Available at SSRN: https://ssrn.com/abstract=2506170 or http://dx.doi.org/10.2139/ssrn.2506170

Kiyoung Chang

University of South Florida Sarasota-Manatee - College of Business ( email )

8350 N. Tamiami Trail, SMC-C263
Sarasota, FL 34243-2025
United States
9413594359 (Phone)
9413594367 (Fax)

Eun Kang

California State University San Marcos ( email )

333 Twin Oaks Valley Road
San Marcos, CA 92096-0001
United States
760-750-8223 (Phone)
760-750-3107 (Fax)

Ying Li (Contact Author)

University of Washington, Bothell - Business ( email )

18115 Campus Way NE
Bothell, WA 98011-8246
United States

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