Rent Extraction by Large Shareholders: Evidence Using Dividend Policy in the Czech Republic

Using cross-sectional analysis of corporate dividend policy we show that large shareholders extract rents from firms and expropriate minority shareholders in the weak corporate governance environment of an emerging economy. By comparing dividends paid across varying corporate ownership structures— concentration, type, and domicile of ownership—we quantify these effects and reveal that they are substantial. We find that the target payout ratio for firms with majority ownership is low but that the presence of a significant minority shareholder increases the target payout ratio and hence precludes a majority owner from extracting rent. In contrast to other studies from developed markets, our unique dataset from the Czech Republic for the period 1996-2003 permits us to take account of the endogeneity of ownership.