Aristotelis Stouraitis Lingling Wu Department of Economics and Finance City University of Hong Kong September 16, 2004
* Contact information: Aristotelis Stouraitis (the author who will attend the conference and present the paper), Tel: (852) 2788 8450, Fax: (852)2788 8806, Email: email@example.com. Lingling Wu, Tel: (852)2788 7393, Email: firstname.lastname@example.org. Address : Department of Economics & Finance, City University of Hong Kong, 83 Tat Chee Avenue, Kowloon Tong, Hong Kong
The Impact of Ownership Structure on the Dividend Policy of Japanese Firms with Free Cash Flow Problem
Abstract This paper, using 986 observations of listed Japanese firms between the years 1992 to 2000, explore the implications of the free cash flow hypothesis concerning the disciplinary role of ownership structure in dividend policy. We find evidence in support of the hypothesis that a positive relation exists between dividends and free cash flow and it’s greater for low-growth firms than for the high-growth firms. The results also show that the impact of managerial ownership and bank ownership on dividend yield is positive particularly for the low growth firms. This is inconsistent with the view that the managerial ownership and institutional ownership reduce the need for the dividend mechanism. Finally, there is evidence that the Keiretsu classification affects relations between ownership structure and dividend payouts. Overall, the dividend policy appears to be used by Japanese low-growth firms to control the overinvestment problem. Free cash flow hypothesis is to some degree supported.
JEL classification codes: G32
Keywords: Ownership Structure, Dividend Policy, Free Cash Flow
1. Introduction Why does a firm pay dividends? This question has been the subject of debate for many years, In the pre-Miller and Modigliani era, it was believed that increasing dividends would always increase market value. Miller and Modigliani (1961) establish that in a perfect capital market, given an investment policy, dividend is irrelevant in determining share value. Empirically, however, we have observed that a change in dividend policy does have a significant impact on the share price. Different researchers have concentrated on different types of imperfections in the market in order to rationalize why dividends matter. Of these, a plausible idea is that corporate dividend policy addresses agency problems between shareholders and managers (Rozeff, 1982; Easterbrook, 1984; Jensen, 1986). According to these agency theories, unless profits are paid out to shareholders as dividends, they may be committed to unprofitable projects that provide private benefits for the managers. Rozeff (1982) and Easterbrook (1984) argues that the payment of dividends expose companies to the possible need to raise external funds, and hence subjects them to greater monitoring by capital markets. Jensen (1986) argues that paying dividends reduces the discretionary resources under managerial control and so helps to mitigate the overinvestment problem. In this study, we examine the implication of the free cash flow hypothesis in corporate dividend policy, and focus specifically on cross-sectional relations between dividend payout policy and ownership structure and free cash flow. Given the severity of the overinvestment problem, relations between dividend payouts and ownership structure, free cash flow may be conditioned on the existence of growth opportunities. This research examines how the sensitivity of relations between dividend payouts and ownership structure, free cash flow varies cross-sectionally with growth opportunities. Previous studies have shown that in countries like the US, firm ownership is relatively dispersed, leading to a limited ability of owners to monitor or control management’s use of free cash flow. Thus...