Ownership Structure and Dividend Payout Policy in India

Abstract

This paper examines the possible association between ownership structure, corporate governance and firm's dividend payout policy. It is also one of the very first examples, which tries to detect any potential association in ownership structure, corporate governance and well-established dividend payout models in context of an emerging market (India). The present study examines the payout behavior of dividends and the association of ownership structure for Indian corporate firms over the period 1994-2000 and attempts to explain the observed behavior with the help of well established dividend models of Linter (1956), Waud (1966), and Fama and Babiak (1968). The results consistently support the potential association between ownership structure and dividend payout policy. Though the relationship differs across different group of owners and at different level of shareholding.

Furthermore, we suggest a more generalized model to explain the dividend payout intensity, incorporating firm's financial structure and investments opportunities along with dividends and earnings trend and ownership structure, after controlling for firm's unobserved heterogeneity. We also find evidence of dividends dependence on past dividends after controlling for unobserved firm heterogeneity. We find evidence in support of the hypothesis that a positive association exists between dividends and earnings trend. Debt equity is found to be negative and associated, whereas past investment opportunities are positive and associated with dividends in some cases. Corporate and directors ownership is positive and related in level, and corporate ownership is negative and related in square. Institutional ownership has inverse effects on dividends in comparison to corporate ownership in levels, as well as in its squares. We find no evidence in favor of association between foreign ownership and divided payout growth.

Keywords: Ownership structure, dividend payout, India

JEL Classification: G32, G35