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Dividend Payouts and Corporate Governance Quality: An Empirical Investigation
Author(s) -
Jiraporn Pornsit,
Kim JangChul,
Kim Young Sang
Publication year - 2011
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.2011.00299.x
Subject(s) - corporate governance , dividend , endogeneity , dividend policy , expropriation , shareholder , business , agency cost , quality (philosophy) , monetary economics , principal–agent problem , cash , accounting , economics , financial economics , finance , econometrics , market economy , philosophy , epistemology
Motivated by agency theory, we investigate how a firm's overall quality of corporate governance affects its dividend policy. Using a large sample of firms with governance data from The Institutional Shareholder Services, we find that firms with stronger governance exhibit a higher propensity to pay dividends, and, similarly, dividend payers tend to pay larger dividends. The results are consistent with the notion that shareholders of firms with better governance quality are able to force managers to disgorge more cash through dividends, thereby reducing what is left for expropriation by opportunistic managers. We employ the two‐stage least squares approach to cope with possible endogeneity and still obtain consistent results. Our results are important as they show that corporate governance quality does have a palpable impact on critical corporate decisions such as dividend policy.