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Relations Among Financing Decision, Dividend Policy and Ownership

Relations Among Financing Decision, Dividend Policy and Ownership. Nia Christina 16598. Article from CRP. Title: Interrelationships among capital structure, dividend, and Ownership: Evidence from South Korea. Theory used by the article / research:.

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Relations Among Financing Decision, Dividend Policy and Ownership

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  1. Relations Among Financing Decision, Dividend Policy and Ownership Nia Christina 16598

  2. Article from CRP • Title: Interrelationships among capital structure, dividend, and Ownership: Evidence from South Korea

  3. Theory used by the article / research: • Pecking order theory, management prefers internal funds to leverage, in part because liquid assets can be spent in a more discretionary and potentially sub-optimal manner. • Asymmetric information, managers are willing to use leverage and or dividends as a means of providing a positive signal to capital markets

  4. Hypothesis of research: • Causality may proceed in either direction between each pair of variables. • Many previous studies have found conflicting result, even when controlling for the possibility of simultaneity.

  5. Variable use in research: • Firms leverage (LEV) • Dividends (DIV) • Firm’s ownership (OWN) • Firm’s cash flow (CF) • Firm liquidity (CR) • Profitability (PRO) • Firm’s size (SIZE)

  6. Method of analysis: • 3 SLS method is preferred over the ordinary least square (OLS) method as the letter leads to biased and inconsistent parameter estimates when a system has interdependent endogenous variable.

  7. Result of analysis • The debt equation result See some striking differences in sign, magnitude, and significance particularly with regard to the ownership, dividend, and profitability variable. • The dividend equation results The Own and LEV coefficient estimates are both significantly positive, implying that not only are debt and dividend policy complementary, but also the higher ownership level leads to higher dividend, possibly to prevent entrenched managers from acting in a manner inconsistent with stockholder. • The ownership equation results • The CF and CR variables have negative and significant coefficient estimates implying that liquidity is not significant determinant of managerial ownership. • SIZE is not significant • CF statically significant

  8. Conclusions: • The higher levels of ownership and dividends negatively affect leverage. • Ownership and leverage both positively impact dividend. • Leverage negatively associated with ownership, while dividend positively impact ownership.

  9. Article from students • Title: Board composition, ownership structure and dividend policies in an emerging market

  10. Theory used by the article / research: • Signaling models are based on the assumption that managers have more information about the firm’s future cash flows than do individuals outside the firm, and they have incentives to signal that information to investors • The Agency model uses dividend policy to better align the interests of shareholders and corporate managers

  11. Hypothesis of research: • Dividend policy (dividend decision and ratio) of top Egyptian listed companies is significantly associated with board of directors’ composition. • Dividend policy (dividend decision and ratio) of top Egyptian listed companies is significantly associated with ownership structure.

  12. Variable use in research: • The dividend policy: • dividend decisions (DIVDECISION) • dividend paid (DIVRATIO) • Board of directors’ composition • board size (BOARDSIZE) • board independence (INDEPENDENCE) • dual role (DUALROLE) • Ownership structure • managerial ownership ratio • blockholder ownership ratio • institutional ownership ratio • free float ratio

  13. Method of analysis • OLS regression model, they construct 2 empirical model to test the hypothesis. • The Pearson’s correlation matrix

  14. Result of analysis • The Pearson’s correlation matrix (Table II) shows that the degree of correlation between the independent variables is either low or moderate, which suggests the absence of multicollinearity between independent variables. • Table III, Companies with higher return on equity and higher institutional non-governmental ownership were more likely to take a decision of distributing dividends. • Table IV, dividend payout ratio is also positively associated with institutional non-governmental ownership and firm performance (return on equity)

  15. Conclusions: • Strong support was found for the signalling model, from the significant association between dividend and firm performance • Partial support was obtained for agency theory, from the significant positive association between dividend and institutional ownership. • In the emerging market of Egypt, top performing Egyptian listed companies with higher block institutional ownership, which implies lower agency costs paid higher dividends to attract capital during the transitional period of Egypt.

  16. Thank You

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