Law, Ownership, Corporate Governance , and Dividend Payout Policy: Evidence from 33 Countries

Topics: Dividend yield, Finance, Stock Pages: 5 (1780 words) Published: October 6, 2012
Miller and Modigiliani (1961) prove that dividend policy is irrelevant to share value in perfect and efficient capital markets. In this setup, no rational investor has a preference between dividends and capital gains. However, dividend payout policy is still discussed extensively until now. In this proposal, I use a sample of companies from 33 countries around the world to shed light on the relationship among legal origin, insider holdings, corporate governance, and dividend payout policy. This idea mainly comes from Professor Shiu in corporate finance class at NCU. La Porta, Lopez-de-Silanes, Shleifer, and Vishny (1998, henceforth referred to as LLSV) examine laws differ around the world give investors limited bundle of rights. Countries of the common-law traditions tend to protect investors more than the civil-law. LLSV (1998) remind us the importance of law to investor protection around different countries. After LLSV (1998), LLSV (2000a) find that a common element explaining these differences is how well investors, both shareholders and creditors, are protected by law from expropriation by the managers and controlling shareholders of firms. Moreover, they show that common law counties assign higher valuations to publicly-traded stock. LLSV (2000b) state that the agency approach is highly relevant to an understanding of corporate dividend policies around the world. Firms operating in countries with better protection of minority shareholders would pay higher dividends. Their results support the version of the agency theory in which investors in good legal protection countries use their legal powers to extract dividends from firms, especially when reinvestment opportunities are poor. However, LLSV (2000b) just test the dividend payout ratio of many firms in different law. Therefore, I deeply study dividend payout policy across different countries. In my proposal, I use legal origin, inside ownership, and corporate governance, totally three surfaces, to clarify the relationship between the agency problem and dividend payout policy. I examine a larger sample of countries around the world. I adopt the same sample following LLSV (200b). I divide 33 countries into two groups, named common-law group and civil-law group. The common-law group implies shareholders would have better shareholder protections. On the contrary, the civil-law group means shareholders have poor shareholder protections. In this proposal, I concern some questions listed as follows. First, would firms in stronger investor protection countries increase the dividend payout ratio when insider ownership increases the stockholding ratio? Moreover, is dividend payout policy monotonic increasing with corporate governance index? Second, in worse investor protection countries, would firms have the reverse direction to decrease the dividend payout ratio when insider ownership increases the stockholding ratio? I also investigate whether there is a monotonic decreasing function between the dividend payout policy and insider ownership in the civil-law group. I hope to find out some empirical evidences to support my hypothesis. Better corporate governance and stronger legal investor protection environment will reduce the agency problems. Following the interest of convergence theory (Morck et al., 1988), the insider shareholders have higher shareholding ratio would lead to higher market valuation. Therefore, the main hypothesis in my proposal is that firms would have higher dividend payout ratio when the insider shareholders have higher shareholding ratio based on better corporate governance and stronger legal investor protection. The remainder of this proposal is organized as follows. Section 2 reviews relative literatures about the agency problem, law, corporate governance, and some dividend payouts. Section 3 introduces data and methodology used in this study. Section 4 presents the predict results and conclusions.

2. Literature Review
I study the dividend policy...
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