How Relevant is Dividend Policy Under Low Shareholder Protection?

L.D.R. Renneboog, P.G. Szilagyi

Research output: Book/ReportReportProfessional

Abstract

Abstract: This paper reopens the debate on the substitutability of dividends and shareholder control in mitigating free cash flow concerns, by examining dividend behavior when shareholder control is restricted in the firm. We consider the stakeholder-oriented governance regime of the Netherlands, where shareholdings are concentrated, but shareholder rights are often severely restricted by a legally imposed governance regime and anti-shareholder devices such as Dutch-style poison pills. We find that dividend payouts are generally low, unresponsive to earnings changes and show little relationship with size, leverage, and investment opportunities. Shareholder power restrictions affect dividend behavior to varying degrees, but those that do are used by the vast majority of Dutch listed firms. Once accounting for these, we find no evidence that strong shareholders would allow firms to relax their dividend policy, as has been proposed in the existing literature. As shareholders, institutional investors and managers actually force higher payouts. Thus, it seems that dividends often complement rather than substitute shareholders' efforts to alleviate agency concerns. This finding is unlikely to be specific to the Netherlands, and could possibly be extended to other stakeholder-oriented governance regimes. Keywords: Dividend policy, Corporate governance, Shareholder power restrictions, Ownership and control JEL Codes: G35, G32, G30
Original languageEnglish
Place of PublicationBrussels
PublisherECGI
Publication statusPublished - 2006

Publication series

NameECGI Working Paper
No.128/2006

Fingerprint

Dividend policy
Shareholders
Shareholder protection
Dividends
Governance
Stakeholders
The Netherlands
Investment opportunities
Poison pills
Earnings changes
Substitutability
Corporate governance
Institutional investors
Managers
Ownership and control
Substitute
Key words
Shareholding
Shareholder rights
Free cash flow

Cite this

Renneboog, L. D. R., & Szilagyi, P. G. (2006). How Relevant is Dividend Policy Under Low Shareholder Protection? (ECGI Working Paper; No. 128/2006). Brussels: ECGI.
Renneboog, L.D.R. ; Szilagyi, P.G. / How Relevant is Dividend Policy Under Low Shareholder Protection?. Brussels : ECGI, 2006. (ECGI Working Paper; 128/2006).
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Renneboog, LDR & Szilagyi, PG 2006, How Relevant is Dividend Policy Under Low Shareholder Protection? ECGI Working Paper, no. 128/2006, ECGI, Brussels.

How Relevant is Dividend Policy Under Low Shareholder Protection? / Renneboog, L.D.R.; Szilagyi, P.G.

Brussels : ECGI, 2006. (ECGI Working Paper; No. 128/2006).

Research output: Book/ReportReportProfessional

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AB - Abstract: This paper reopens the debate on the substitutability of dividends and shareholder control in mitigating free cash flow concerns, by examining dividend behavior when shareholder control is restricted in the firm. We consider the stakeholder-oriented governance regime of the Netherlands, where shareholdings are concentrated, but shareholder rights are often severely restricted by a legally imposed governance regime and anti-shareholder devices such as Dutch-style poison pills. We find that dividend payouts are generally low, unresponsive to earnings changes and show little relationship with size, leverage, and investment opportunities. Shareholder power restrictions affect dividend behavior to varying degrees, but those that do are used by the vast majority of Dutch listed firms. Once accounting for these, we find no evidence that strong shareholders would allow firms to relax their dividend policy, as has been proposed in the existing literature. As shareholders, institutional investors and managers actually force higher payouts. Thus, it seems that dividends often complement rather than substitute shareholders' efforts to alleviate agency concerns. This finding is unlikely to be specific to the Netherlands, and could possibly be extended to other stakeholder-oriented governance regimes. Keywords: Dividend policy, Corporate governance, Shareholder power restrictions, Ownership and control JEL Codes: G35, G32, G30

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Renneboog LDR, Szilagyi PG. How Relevant is Dividend Policy Under Low Shareholder Protection? Brussels: ECGI, 2006. (ECGI Working Paper; 128/2006).