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How relevant is dividend policy under low shareholder protection?

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Author Info
Renneboog, L.D.R.
Szilagyi, Peter G. (Tilburg University, Center for Economic Research)

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Abstract

This paper reopens the debate on the substitutability of dividends and shareholder control in mitigating free cash flow concerns, by examining dividend behavior when shareholder control is restricted in the firm. We consider the stakeholder-oriented governance regime of the Netherlands, where shareholdings are concentrated, but shareholder rights are often severely restricted by a legally imposed governance regime and anti-shareholder devices such as Dutch-style poison pills. We find that dividend payouts are generally low, unresponsive to earnings changes and show little relationship with size, leverage, and investment opportunities. Shareholder power restrictions affect dividend behavior to varying degrees, but those that do are used by the vast majority of Dutch listed firms. Once accounting for these, we find no evidence that strong shareholders would allow firms to relax their dividend policy, as has been proposed in the existing literature. As shareholders, institutional investors and managers actually force higher payouts. Thus, it seems that dividends often complement rather than substitute shareholders efforts to alleviate agency concerns. This finding is unlikely to be specific to the Netherlands, and could possibly be extended to other stakeholder-oriented governance regimes.

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Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 73.

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Date of creation: 2006
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Handle: RePEc:dgr:kubcen:200673

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Find related papers by JEL classification:
G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
G30 - Financial Economics - - Corporate Finance and Governance - - - General

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  1. Jong, A. de & Poel, A.M. van der & Wolfswinkel, M., 2007. "Corporate Governance and Acquisitions: Acquirer Wealth Effects in the Netherlands," Research Paper ERS-2007-016-F&A Revision, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni. [Downloadable!]
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