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Control Structures and Payout Policy

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  • Renneboog, L.D.R.

    (Tilburg University, Center For Economic Research)

  • Trojanowski, G.

    (Tilburg University, Center For Economic Research)

Abstract

Purpose - This paper seeks to examine whether or not divident policy is influenced by the firm's corporate control structure, investigating the relationship between the dynamics of earnings payout and the voting power enjoyed by different types of shareholders. This allows one to test a set of hypotheses derived from agency and pecking order theories. Design/methodology/approach - A large panel of UK firms for the 1990s and is analyzed that the payout policy is significantly related to control concentration. The problem of control measurement is addressed and the use of Banzhaf indices advocated as a relevant measure of voting power in the analysis of corporate policy choices. The traditional framework proposed by Linter is extended and an econometrically sound approach to modeling the dynamics of the total payout suggested. Where most – even recent – studies on payout policy show some methodological flaws, state-of-the-art dynamic panel data estimation procedures are applied. Findings - Expectedly, profitability is a crucial determinant of payout decisions, but the presence of strong block holders or block holder coalitions weakens the relationship between the corporate earnings and the payout dynamics. Block holders appear to realize that an overly generous payout may render the company liquidity constrained, and, consequently, result in suboptimal investment policy. Practical implications - The results challenge some of the implications of the agency theories of payout, and favor a pecking-order explanation for the observed patterns. The analysis of payout dynamics reveals also that companies adjust payout policies to changes in earnings only gradually, which is consistent with “dividend smoothing”. In fact, the results suggest a presence of a more general phenomenon of the “total payout smoothing”. Originality/value - According to one's bet knowledge, this is the first study employing those game theory-based concepts in the context of corporate payout policies.<
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Suggested Citation

  • Renneboog, L.D.R. & Trojanowski, G., 2005. "Control Structures and Payout Policy," Discussion Paper 2005-61, Tilburg University, Center for Economic Research.
    • Handle: RePEc:tiu:tiucen:4f19c697-4a33-4213-84aa-aad0aea4a366
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    8. Julio Pindado & Chabela De La Torre, 2006. "The Role of Investment, Financing and Dividend Decisions in Explaining Corporate Ownership Structure: Empirical Evidence from Spain," European Financial Management, European Financial Management Association, vol. 12(5), pages 661-687, November.

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    More about this item

    Keywords

    Payout policy; dividend payout; share repurchases; partial adjustment; ownership and control; voting power; Banzhaf power indices; corporate governance; free cash flow; pecking order;
    All these keywords.

    JEL classification:

    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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