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Institutional Investors, Payout Policy, and Agency Costs

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  • Ricky William Scott

Abstract

This paper seeks to determine if institutional investors influence corporate payoutpolicies. Specifically, this study testswhether institutional investors encourage higher payouts in firms with higherfree cash flow and poor growth opportunities. Firm and year fixed effectregressions examining the effect of changes in institutional investor levels tosubsequent changes in payout levels are used. For robustness, difference-GMM regressions and regressions for different time periods are ran on the samerelationship. Increased institutional ownership leads to increases in total payouts, especially in firms with high free cash flow and poor investment opportunities. According to agency-based free cash flow theory, stockholders should prefer that the management of firms with higher free cash flow and poor investment opportunities increase payouts to shareholders. The results indicate that institutional shareholders reduce agency costs by encouraging management to raise payouts, thus benefiting institutional investors and non-institutional shareholders.

Suggested Citation

  • Ricky William Scott, 2014. "Institutional Investors, Payout Policy, and Agency Costs," Accounting and Finance Research, Sciedu Press, vol. 3(3), pages 1-43, August.
    • Handle: RePEc:jfr:afr111:v:3:y:2014:i:3:p:43
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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