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Dividend and debt policies of family controlled firms: The impact of board independence

  • Lukas Setia-Atmaja
Registered author(s):

    Purpose – This paper's aim is to examine whether board independence influences debt and dividend policies of family controlled firms. Design/methodology/approach – The paper examines panel data on a sample of Australian publicly-listed firms over the period 2000-2005 using panel (random effects) regression. Findings – Empirical test demonstrates that family controlled firms appear to have higher levels of leverage and dividend payout ratios than their non-family counterparts. More importantly, the result indicates that the positive impact of family control on dividend policy is due to the higher proportion of independent directors on family boards. This underlines the significant role that independent directors play in influencing firm's dividend policies, especially for family controlled firms. The result also supports the notion that independent directors and dividends are complementary government mechanisms. This paper, however, finds little evidence that board independence moderates the relationship between family control and debt. Research limitations/implications – While not all family firms are the same, this research treats them as a homogeneous grouping (i.e. firms are delineated into family versus non-family). The fact that family firms are difficult to identify and define (reflected in the diversity of definitions in the literature) may also affect the validity of studies of family business. For policy makers, the finding could serve to justify initiatives to encourage more independent directors on boards, especially in family controlled firms. Originality/value – This paper provides evidence about the relationship between board independence, dividends and debt from a country with higher levels of private benefits of control, strong legal shareholder protection but less significant role of external governance mechanisms compared to the USA.

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    File URL: http://www.emeraldinsight.com/journals.htm?issn=1743-9132&volume=6&issue=2&articleid=1852684&show=abstract
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    Article provided by Emerald Group Publishing in its journal International Journal of Managerial Finance.

    Volume (Year): 6 (2010)
    Issue (Month): 2 (April)
    Pages: 128-142

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    Handle: RePEc:eme:ijmfpp:v:6:y:2010:i:2:p:128-142
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    1. Fama, Eugene F & Jensen, Michael C, 1983. "Separation of Ownership and Control," Journal of Law and Economics, University of Chicago Press, vol. 26(2), pages 301-25, June.
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    3. Craswell, Allen T. & Taylor, Stephen L. & Saywell, Richard A., 1997. "Ownership structure and corporate performance: Australian evidence," Pacific-Basin Finance Journal, Elsevier, vol. 5(3), pages 301-323, July.
    4. Pattenden, Kerry & Twite, Garry, 2008. "Taxes and dividend policy under alternative tax regimes," Journal of Corporate Finance, Elsevier, vol. 14(1), pages 1-16, February.
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    11. Abeyratna Gunasekarage & Debra K. Reed, 2008. "The market reaction to the appointment of outside directors: An analysis of the interaction between the agency problem and the affiliation of directors," International Journal of Managerial Finance, Emerald Group Publishing, vol. 4(4), pages 259-277, October.
    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. Varouj Aivazian & Laurence Booth & Sean Cleary, 2003. "Do Emerging Market Firms Follow Different Dividend Policies From U.S. Firms?," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 26(3), pages 371-387.
    14. Anup Agrawal & Charles R. Knoeber, . "Firm Performance and Mechanisms to Control Agency Problems between Managers and Shareholders (Revision of 29-94)," Rodney L. White Center for Financial Research Working Papers 08-96, Wharton School Rodney L. White Center for Financial Research.
    15. James S. Ang & Rebel A. Cole & James Wuh Lin, 2000. "Agency Costs and Ownership Structure," Journal of Finance, American Finance Association, vol. 55(1), pages 81-106, 02.
    16. Booth, James R. & Deli, Daniel N., 1996. "Factors affecting the number of outside directorships held by CEOs," Journal of Financial Economics, Elsevier, vol. 40(1), pages 81-104, January.
    17. Villalonga, Belen & Amit, Raphael, 2006. "How do family ownership, control and management affect firm value?," Journal of Financial Economics, Elsevier, vol. 80(2), pages 385-417, May.
    18. Anderson, Ronald C. & Mansi, Sattar A. & Reeb, David M., 2003. "Founding family ownership and the agency cost of debt," Journal of Financial Economics, Elsevier, vol. 68(2), pages 263-285, May.
    19. Anup Agrawal & Charles R. Knoeber, . "Firm Performance and Mechanisms to Control Agency Problems between Managers and Shareholders (Revision of 29-94)," Rodney L. White Center for Financial Research Working Papers 8-96, Wharton School Rodney L. White Center for Financial Research.
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