The Impact of Ownership Structure on the Dividend Policy of Japanese Firms with Free Cash Flow Problem
The Impact of Ownership Structure on the Dividend Policy of Japanese Firms with Free Cash Flow Problem
Aristotelis Stouraitis Lingling Wu Department of Economics and Finance City University of Hong Kong September 16, 2004
* Contact information: Aristotelis Stouraitis (the author who will attend the conference and present the paper), Tel: (852) 2788 8450, Fax: (852)2788 8806, Email: efstoura@cityu.edu.hk. Lingling Wu, Tel: (852)2788 7393, Email: 50004340@student.cityu.edu.hk. Address : Department of Economics & Finance, City University of Hong Kong, 83 Tat Chee Avenue, Kowloon Tong, Hong Kong
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The Impact of Ownership Structure on the Dividend Policy of Japanese Firms with Free Cash Flow Problem
Abstract This paper, using 986 observations of listed Japanese firms between the years 1992 to 2000, explore the implications of the free cash flow hypothesis concerning the disciplinary role of ownership structure in dividend policy. We find evidence in support of the hypothesis that a positive relation exists between dividends and free cash flow and it’s greater for low-growth firms than for the high-growth firms. The results also show that the impact of managerial ownership and bank ownership on dividend yield is positive particularly for the low growth firms. This is inconsistent with the view that the managerial ownership and institutional ownership reduce the need for the dividend mechanism. Finally, there is evidence that the Keiretsu classification affects relations between ownership structure and dividend payouts. Overall, the dividend policy appears to be used by Japanese low-growth firms to control the overinvestment problem. Free cash flow hypothesis is to some degree supported.
JEL classification codes: G32
G34
G35
Keywords: Ownership Structure, Dividend Policy, Free Cash Flow
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1. Introduction Why does a firm pay dividends? This question has been the subject of debate for many years, In the pre-Miller and Modigliani era,
Aristotelis Stouraitis Lingling Wu Department of Economics and Finance City University of Hong Kong September 16, 2004
* Contact information: Aristotelis Stouraitis (the author who will attend the conference and present the paper), Tel: (852) 2788 8450, Fax: (852)2788 8806, Email: efstoura@cityu.edu.hk. Lingling Wu, Tel: (852)2788 7393, Email: 50004340@student.cityu.edu.hk. Address : Department of Economics & Finance, City University of Hong Kong, 83 Tat Chee Avenue, Kowloon Tong, Hong Kong
-1-
The Impact of Ownership Structure on the Dividend Policy of Japanese Firms with Free Cash Flow Problem
Abstract This paper, using 986 observations of listed Japanese firms between the years 1992 to 2000, explore the implications of the free cash flow hypothesis concerning the disciplinary role of ownership structure in dividend policy. We find evidence in support of the hypothesis that a positive relation exists between dividends and free cash flow and it’s greater for low-growth firms than for the high-growth firms. The results also show that the impact of managerial ownership and bank ownership on dividend yield is positive particularly for the low growth firms. This is inconsistent with the view that the managerial ownership and institutional ownership reduce the need for the dividend mechanism. Finally, there is evidence that the Keiretsu classification affects relations between ownership structure and dividend payouts. Overall, the dividend policy appears to be used by Japanese low-growth firms to control the overinvestment problem. Free cash flow hypothesis is to some degree supported.
JEL classification codes: G32
G34
G35
Keywords: Ownership Structure, Dividend Policy, Free Cash Flow
-2-
1. Introduction Why does a firm pay dividends? This question has been the subject of debate for many years, In the pre-Miller and Modigliani era,