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Control Structures and Payout Policy

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  • Renneboog, L.D.R.
  • Trojanowski, G.

    (Tilburg University, Center for Economic Research)

Abstract

This paper examines the payout policies of UK firms listed on the London Stock Exchange during the 1990s.It complements the existing literature by analyzing the trends in both dividends and total payouts (including share repurchases).In a dynamic panel data regression setting, we relate target payout ratios to control structure variables.Profitability drives payout decisions of the UK companies, but the presence of strong block holders or block holder coalitions considerably weakens the relationship between corporate earnings and payout dynamics.While the impact of the voting power of shareholders coalitions on payout ratios is found to be always negative, the magnitude of this effect differs across different categories of block holders (i.e. industrial firms, outside individuals, directors, financial institutions).The controlling shareholders appear to trade off the agency problems of free cash flow against the risk of underinvestment, and try to enforce payout policies that optimally balance these two costs.Finally, the paper improves upon some methodological flaws of the recent empirical studies of payout policy.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2005-61.

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Date of creation: 2005
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Handle: RePEc:dgr:kubcen:200561

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Web page: http://center.uvt.nl

Related research

Keywords: Payout policy; dividend payout; share repurchases; partial adjustment; ownership and control; voting power; Banzhaf power indices; corporate governance; free cash flow; pecking order;

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References

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Citations

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Cited by:
  1. Renneboog, L.D.R. & Szilagyi, P.G., 2006. "How Relevant is Dividend Policy under Low Shareholder Protection?," Discussion Paper 2006-019, Tilburg University, Tilburg Law and Economic Center.
  2. Andres, C. & Betzer, A. & Goergen, M. & Renneboog, L.D.R., 2008. "The Dividend Policy of German Firms," Discussion Paper 2008-027, Tilburg University, Tilburg Law and Economic Center.
  3. Szilagyi, P.G., 2007. "Corporate Governance and the Agency Costs of Debt and Outside Equity," Open Access publications from Tilburg University urn:nbn:nl:ui:12-321510, Tilburg University.
  4. Engsted, Tom & Pedersen, Thomas Q., 2010. "The dividend-price ratio does predict dividend growth: International evidence," Journal of Empirical Finance, Elsevier, vol. 17(4), pages 585-605, September.
  5. Truong, Thanh & Heaney, Richard, 2007. "Largest shareholder and dividend policy around the world," The Quarterly Review of Economics and Finance, Elsevier, vol. 47(5), pages 667-687, December.

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