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Ownership concentration and dividend policy in Japan

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Author Info

  • Kimie Harada
  • Pascal Nguyen

Abstract

Purpose – The purpose of this paper is to test two agency-based hypotheses regarding the effect of ownership concentration on dividend policy using a large sample of Japanese firms. Design/methodology/approach – Level regressions associating payout rates to ownership concentration are run. Different measures of payout are used to ensure the robustness of our findings. Endogeneity of ownership is taken into account. The choice of instruments is carefuly motivated and their statistical power and exogeneity are checked. How ownership concentration affects the propensity to increase dividends following changes in variables correlated with free cash flows is also examined. Findings – The results are consistent with rent extraction by large shareholders. Ownership concentration is associated with significantly lower dividends in proportion to earnings as well as relative to book equity. An endogenous relation between ownership concentration and dividend payout is established, but the results are not statistically different. Firms with concentrated ownership are also less likely to increase dividends when earnings increase or when debt decreases. Practical implications – Large shareholders do not appear to use dividend policy to remove excess cash and impose greater financial discipline on managers. Instead, the results underline the conflicts of interest between majority and minority shareholders. Originality/value – The endogeneity of ownership is controlled for using firm age and the industry's average ownership concentration as instruments. The effect of ownership concentration on dividend changes following changes in proxies for free cash flows is also analyzed.

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Bibliographic Info

Article provided by Emerald Group Publishing in its journal Managerial Finance.

Volume (Year): 37 (2011)
Issue (Month): 4 (April)
Pages: 362-379

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Handle: RePEc:eme:mfipps:v:37:y:2011:i:4:p:362-379

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Related research

Keywords: Corporate finances; Corporate governance; Distribution; Dividends; Japan;

References

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  1. Luc Renneboog & Grzegorz Trojanowski, 2007. "Control structures and payout policy," Managerial Finance, Emerald Group Publishing, vol. 33(1), pages 43-64.
  2. Prowse, Stephen D, 1992. " The Structure of Corporate Ownership in Japan," Journal of Finance, American Finance Association, vol. 47(3), pages 1121-40, July.
  3. Eugene F. Fama & Kenneth R. French, . "Testing Tradeoff and Pecking Order Predictions about Dividends and Debt.”," CRSP working papers 506, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  4. Harada, Kimie & Nguyen, Pascal, 2005. "Dividend change context and signaling efficiency in Japan," Pacific-Basin Finance Journal, Elsevier, vol. 13(5), pages 504-522, November.
  5. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1998. "Agency Problems and Dividend Policies Around the World," Harvard Institute of Economic Research Working Papers 1839, Harvard - Institute of Economic Research.
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  7. Claessens, Stijn & Djankov, Simeon, 1999. "Ownership Concentration and Corporate Performance in the Czech Republic," Journal of Comparative Economics, Elsevier, vol. 27(3), pages 498-513, September.
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  10. Andrei Shleifer & Robert W. Vishny, 1996. "A Survey of Corporate Governance," NBER Working Papers 5554, National Bureau of Economic Research, Inc.
  11. Shlomo Benartzi & Roni Michaely & Richard Thaler, 1997. "Do Changes in Dividends Signal the Future or the Past?," CRSP working papers 455, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  12. Jensen, Gerald R. & Solberg, Donald P. & Zorn, Thomas S., 1992. "Simultaneous Determination of Insider Ownership, Debt, and Dividend Policies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 27(02), pages 247-263, June.
  13. Michael J. Barclay & Clifford W. Smith & Ross L. Watts, 1995. "The Determinants Of Corporate Leverage And Dividend Policies," Journal of Applied Corporate Finance, Morgan Stanley, vol. 7(4), pages 4-19.
  14. Dittmar, Amy & Mahrt-Smith, Jan & Servaes, Henri, 2002. "Corporate Liquidity," CEPR Discussion Papers 3499, C.E.P.R. Discussion Papers.
  15. Demsetz, Harold & Lehn, Kenneth, 1985. "The Structure of Corporate Ownership: Causes and Consequences," Journal of Political Economy, University of Chicago Press, vol. 93(6), pages 1155-77, December.
  16. Shleifer, Andrei & Vishny, Robert W., 1986. "Large Shareholders and Corporate Control," Scholarly Articles 3606237, Harvard University Department of Economics.
  17. Claessens, Stijn & Djankov, Simeon & Lang, Larry H. P., 2000. "The separation of ownership and control in East Asian Corporations," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 81-112.
  18. Baba, Naohiko, 2009. "Increased presence of foreign investors and dividend policy of Japanese firms," Pacific-Basin Finance Journal, Elsevier, vol. 17(2), pages 163-174, April.
  19. Jorge Farinha, 2003. "Dividend Policy, Corporate Governance and the Managerial Entrenchment Hypothesis: An Empirical Analysis," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 30(9-10), pages 1173-1209.
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