Corporate dividend payout policy

Journal of Banking & Finance 27 (2003) 1297–1321 www.elsevier.com/locate/econbase Corporate governance, dividend payout policy, and the interrelation between dividends, R&D, and capital investment
Klaus Gugler

*

Department of Economics, University of Vienna, WP No. 9803, Br€nnerstrasse 72, 1210 Vienna, Austria u Received 12 October 2000; accepted 5 November 2001

Abstract
This paper investigates the relationship between dividends and the ownership and control structure of the firm. For a panel of Austrian firms over the 1991/99 period, we find that statecontrolled firms engage in dividend smoothing, while family-controlled firms do not. The latter choose significantly lower target payout levels. Consistently, state-controlled firms are most reluctant and family-controlled firms are least reluctant to cut dividends when cuts are warranted. The dividend behavior of bank- and foreign-controlled firms lies in between stateand family-controlled firms. This is consistent with the expected ‘‘ranking’’ of information asymmetries and managerial agency costs. The above results hold for firms with good investment opportunities. We find that firms with low growth opportunities optimally disgorge cash irrespective of who controls the firm.
Ó 2002 Elsevier Science B.V. All rights reserved.
JEL classification: G3; L2; D9
Keywords: Corporate governance; Dividend policy; Simultaneous equations

1. Introduction
In March 1999, Richard Schenz, the CEO of OMV AG, the largest Austrian corporation, announced a dividend increase of 10% despite the fact that ordinary earnings had declined by 47%. In April 2000, Claus Raidl, the CEO of B€hler–Uddeholm o AG, an Austrian steal company, announced an earnings drop of 31%, nevertheless
*

Tel.: [phone]; fax: [phone].
E-mail address: [e-mail] (K. Gugler).

0378-4266/02/$ - see front matter Ó 2002 Elsevier Science B.V. All rights reserved. doi:10.1016/S0378-4266(02)00258-3 1298

K.

References: Amihud, Y., Murgia, M., 1997. Dividends, taxes, and signaling: evidence from Germany. The Journal of Finance LII (1), 397–408. Allen, F., Michaely, R., 1995. Dividend policy. In: Jarrow, R. et al. (Eds.), Handbooks in OR & MS, vol. Barca, F., Becht, M. (Eds.), 2001. The Control of Corporate Europe. Oxford University Press, Oxford. Beer, E., Ederer, B., Goldmann, W., Lang, R., Passweg, M., Reitzner, R.N., 1991. Wem geh€ rt Osterreichs o € Bergl€f, E., Perotti, E., 1994. The Governance structure of the Japanese financial Keiretsu. Journal of o Bernheim, B.D., Wantz, A., 1995. A tax based test of the dividend signaling hypothesis. American Economic Review 85, 532–551. Black, F., 1976. The dividend puzzle. Journal of Portfolio Management 2, 5–8. Boehmer, E., 1998. Who Controls Germany? An Exploratory Analysis, Institut f€ r Handels und u Bound, J., Cummins, C., Griliches, Z., Hall, B.H., Jaffe, A., 1984. Who does R&D and who patents? In: Griliches, Z Charkham, J., 1994. Keeping Good Company. A Study of Corporate Governance in Five Countries. Dewenter, K.L., Warther, V.A., 1998. Dividends, asymmetric information and agency conflicts: Evidence from a comparison of the dividend policies of Japanese and US firms Dhyrmes, P., Kurz, M., 1967. Investment, dividends and external finance behavior of firms. In: Ferber, R. Easterbrook, F.H., 1984. Two agency cost explanations of dividends. American Economic Review 74 (4), 650–659. Eisner, R., 1964. Capital expenditures, profits, and the acceleration principle. In: Models of Income Determination, Studies in Income and Wealth 28 Eisner, R., 1967. A permanent theory for investment: some empirical explorations. American Economic Review 57, 363–390. Elston, J., 1993. Firm Ownership Structure and Investment: Theory and Evidence from German Panel Data, Wissenschaftszentrum, Berlin. Faccio, M., Lang, L.H.P., Young, L., 2001. Dividends and expropriation. American Economic Review 91 (1), 54–78. Fama, E.F., 1974. The empirical relationship between the dividend and investment decisions of firms. Fama, E., Babiak, H., 1968. Dividend policy: An empirical analysis. Journal of the American Statistical Association, 1132–1161. Fama, E., French, K., 2001. Disappearing dividends: changing firm characteristics or lower propensity to pay? Journal of Financial Economics 60, 3–43. Fazzari, S.M., Hubbard, R.G., Petersen, B.C., 1988. Financing constraints and corporate investment. Franks, J., Mayer, C., 1997. Ownership, Control and the Performance of German Corporations, London Business School and University of Oxford. Fudenberg, D., Tirole, J., 1995. A theory of income and dividend smoothing based on incumbency rents. Gaver, J.J., Gaver, K.M., 1993. Additional evidence on the association between the investment opportunity set and corporate financing, dividend, and compensation policies Grabowski, H.G., 1968. The determinants of R&D in three industries. Journal of Political Economy 76, 292–306. Grabowski, H.G., Mueller, D.C., 1972. Managerial and stockholder welfare models of firm expenditures. Gugler, K., 1997. Corporate Governance and Investment, WP No. 9705, University of Vienna. Gugler, K., 1998. Corporate ownership structure in Austria. Empirica 25, 285–307. Gugler, K. (Ed.), 2001. Corporate Governance and Economic Performance. Oxford University Press, Oxford. Gugler, K., Kalss, S., Stomper, A., Zechner, J., 2001. The separation of ownership and control: An Austrian perspective Gugler, K., Mueller, D.C., Yurtoglu, B.B., 2000a. Marginal q, Average q, Cash Flow and Investment, WP 0002, University of Vienna. Gugler, K., Stomper, A., Zechner, J., 2000b. Corporate Governance, Ownership, and Board Structure in Austria, Zeitschrift f€ r Betriebswirtschaft, Erg€nzungsheft 1/2000, pp Hall, B., Liebman, J., 1998. Are CEOs really paid like Bureaucrats? Quarterly Journal of Economics 113 (3), 653–691. Hansen, L., 1982. Large sample properties of generalized methods of moments estimators. Econometrica 50, 1029–1054. Harhoff, D., 1996. Financing constraints in R&D––a panel data study of German firms 1987–1994, Discussion Paper, ZEW, Mannheim. Hoshi, T., Kashyap, A., Scharfstein, D., 1990. The role of banks in reducing the costs of financial distress in Japan Hoshi, T., Kashyap, A., Scharfstein, D., 1991. Corporate structure, liquidity, and investment: Evidence from Japanese industrial groups Himmelberg, C.P., Petersen, B.C., 1994. R&D and internal finance: A panel study of small firms in hightech industries. The Review of Economics and Statistics 76, 38–51. Hopt, K.J., Kanda, H., Roe, M.J., Wymeersch, E., Prigge, S., 1998. Comparative Corporate Governance. Hubbard, R.G., 1998. Capital-market imperfections and investment. Journal of Economic Literature XXXVI, 193–225. Jaffe, A.B., 1986. Technological opportunity and spillovers of R&D: Evidence from firmsÕ patents, and market value Jensen, M.J., 1986. Agency costs of free cash flow, corporate finance, and takeovers. American Economic Review 76, 323–329. Jensen, G.R., Solberg, D.P., Zorn, T.S., 1992. Simultaneous determination of insider ownership, debt, and dividend policies