Dividend Payout Policies in Founder Owned Firms: Evidence From India

Abstract

In this paper, we examine the role of dividends as a corporate governance mechanism in founders’ controlled firms to mitigate agency conflicts between founders and minority shareholders in the Indian context. We show that at higher level of ownership where founders possess effective control over the firm, the minority shareholders face greater information asymmetry problem; therefore, founders are more likely to pay dividends to signal less expropriation of minority shareholders. Consistent with the extant literature, we show that this relationship is driven by the agency problem between controlling and minority shareholders. We confirm this argument by showing that the positive relationship between founder ownership and dividend policy is more pronounced for business group firms, financially mature firms, and firms having lower debt and low-growth opportunities.

Keywords: Founder; Dividend; Expropriation; Agency Cost; Minority Shareholders; India

JEL Classification: G23, G32, G35