Corporate dividend payout policy

Topics: Dividend yield, Dividend, Dividends Pages: 25 (11976 words) Published: April 20, 2014
Journal of Banking & Finance 27 (2003) 1297–1321

Corporate governance, dividend payout
policy, and the interrelation between
dividends, R&D, and capital investment
Klaus Gugler


Department of Economics, University of Vienna, WP No. 9803, Br€nnerstrasse 72, 1210 Vienna, Austria u
Received 12 October 2000; accepted 5 November 2001

This paper investigates the relationship between dividends and the ownership and control structure of the firm. For a panel of Austrian firms over the 1991/99 period, we find that statecontrolled firms engage in dividend smoothing, while family-controlled firms do not. The latter choose significantly lower target payout levels. Consistently, state-controlled firms are most reluctant and family-controlled firms are least reluctant to cut dividends when cuts are warranted. The dividend behavior of bank- and foreign-controlled firms lies in between stateand family-controlled firms. This is consistent with the expected ‘‘ranking’’ of information asymmetries and managerial agency costs. The above results hold for firms with good investment opportunities. We find that firms with low growth opportunities optimally disgorge cash irrespective of who controls the firm.

Ó 2002 Elsevier Science B.V. All rights reserved.
JEL classification: G3; L2; D9
Keywords: Corporate governance; Dividend policy; Simultaneous equations

1. Introduction
In March 1999, Richard Schenz, the CEO of OMV AG, the largest Austrian corporation, announced a dividend increase of 10% despite the fact that ordinary earnings had declined by 47%. In April 2000, Claus Raidl, the CEO of B€hler–Uddeholm o

AG, an Austrian steal company, announced an earnings drop of 31%, nevertheless *

Tel.: +43-1-4277-37467; fax: +43-1-4277-37498.
E-mail address: (K. Gugler).

0378-4266/02/$ - see front matter Ó 2002 Elsevier Science B.V. All rights reserved. doi:10.1016/S0378-4266(02)00258-3


K. Gugler / Journal of Banking & Finance 27 (2003) 1297–1321

dividends increased by 2% points. Both, OMV and B€hler–Uddeholm have one thing o
in common: they are ultimately owned and controlled by the state, i.e. by the Republic of Austria. This paper tries to answer the questions why dividends are sometimes not cut when cuts are warranted and more generally why some firms smooth dividends, despite the potential costs involved for shareholders. 1 It argues that the answers to these questions can be found by examining company corporate governance structures. The causes and consequences of different corporate governance systems in place all over the world have been the subject of extensive scrutiny in recent years. In most Anglo-Saxon countries like the US or UK, law often postulates fiduciary duties for management such as loyalty to shareholders, and governance is exerted mainly via ‘‘markets for corporate control’’ in the form of takeovers, proxy fights, or LBOs. In contrast, governance systems in non-Anglo-Saxon countries differ remarkably. In Japan, keiretsus and cross-shareholdings are common governance devices while law requirements for management are rather weak. In Continental Europe, as in Germany, Italy, France or Austria, a concentrated ownership structure is the distinguishing feature, and corporate law again plays a minor role. 2 Indeed, La Porta et al. (1999) assert that in most countries other than the USA or UK ownership and (even more so) control is concentrated in the hands of a few owners. Moreover, since the structure of capital markets and corporate governance systems is so much different, the determinants of key corporate decision variables are likely to differ as well. This paper asserts that dividend payments are dependent on the identity of the controlling owner of the firm. Besides tremendous ownership concentration, a peculiarity of the corporate governance system in Austria is that the state still holds many controlling equity blocks in non-financial...

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