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Abstract
We present a direct test of the relationship between large shareholders’ ownership and
dividend payout in a weak legal investor protection environment while recognizing the
formulate four mutually exclusive hypotheses for the relevance of large shareholders’ ownership
stake that differ in terms of large shareholders’ incentives. We find a significant negative
relationship between the percentage of firm’s capital owned by largest shareholders and dividend
payout in a way that exacerbates the agency problem between large and minority shareholders.
This result remains robust to different proxies for the dividend behavior and different model
specifications.
2015
1
Economist, General Budget Department, Ministry of Finance.
2
Associate professor of Finance, Department of Finance, School of Business, The University of Jordan.
1
Introduction:
It is well documented that in countries where legal protection of investor rights is weak,
corporate ownership structure is more concentrated (La Porta et al. 1998, LaPorta et al. 1999, and
Claessens et al. 2000, among others) and dividend payout ratios are significantly lower (La Porta et
al. 1998, La Porta et al. 1999, La Porta et al. 2000, and Brockman and Unlu, 2012). However, the
firm level evidence on the relationship between ownership structure and dividend payout remains
unclear. We argue that this is due to that both the extant empirical research and the proposed
explanations overlook the interaction between large shareholder’s ownership stake and firm’s
growth opportunities despite growing evidence that indicates the existence of such interaction. So,
we focus on the relation between ownership structure and dividend payout conditional on firm’s
investment opportunities.
of the quality of the country’s legal system, the incentives of controlling shareholders differ not
only across different legal systems but, more importantly, across firms when the country’s legal
system is inefficient in protecting investor rights (Durnev and Kim, 2005, Black, de Carvalho, and
Gorga, 2012). The peculiarity of weak legal investor protection has been noted both theoretically
and empirically. Most notable is the lack of any clear association between firm’s dividend payout
and its investment opportunities. La Port et. al. 2000, show that in common law countries, growing
firms pay lower dividends while in civil law countries where corporate ownership is more
concentrated, growing firms may pay lower or higher dividends. A possible explanation for this
latter result is provided by Gomez, 2001 who shows that the absence of legal restrictions that limit
large shareholders’ ability to take self-serving actions does not necessarily mean that they will do
so. When such restrictions are absent, large shareholders have greater leeway in choosing between
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using firm’s earnings to maximize shareholders’ wealth and using them to extract private benefits.
Thus, not paying dividends can be the result of large shareholders’ decision to reinvest firm’s
earnings in value adding projects or using them to entrench themselves. Disentangling these two
results requires conditioning large shareholder’s decision on the firm’s growth opportunities.
To the extent that large shareholder's ownership stake represents his ability to expropriate
minority shareholders, the behavior of firm’s dividend payout ratio serves as an indicator of
whether the controlling shareholder is diverting firm’s resources towards extracting private
benefits or using firm’s earnings to maximize shareholders’ value.3 The controlling shareholder's
choice depends not only on his ownership stake but also firm’s growth prospects. Thus, previous
research controls for firm’s investment opportunities when examining the relationship between
firm’s ownership structure and its dividend payout. We argue that this treatment introduces
ambiguity in understanding such relationship when legal protection of shareholder rights is weak
because the absence of legal deterrence of controlling shareholder’s self-serving actions implies an
interaction between firm’s capital owned by large shareholders and its investment opportunities
that cannot be captured by merely controlling for firm’s investment opportunities. Our empirical
analysis enables us to resolve this ambiguity by noting that firm's growth opportunities can result
in nonlinear relationship between firm's capital owned by large shareholders and its payout ratio in
management’s actions.
Based on previous research, we formulate four mutually exclusive hypotheses for the
relevance of firm’s ownership structure in a weak investor protection country as far as dividend
3
Faccio et. al ( 2001) find evidence of expropriation by controlling shareholders of minority shareholders based on the
relationship between dividend behavior and ownership and control structure.
3
payout ratios across firms cannot be attributed to differences in ownership concentration
(Ownership structure irrelevance hypothesis). Such differences in payout may, however, still be
due to differences in firms' investment opportunities. La Porta et al. 2000, argue that firms may
pay larger dividends in order to build a reputation of protecting minority shareholders’ rights to
substitute the absence of legal measures. This argument applies more to firms that have higher
growth opportunities and/or larger ownership percentage by large shareholders because these firms
are in more need to build such reputation (substitution hypothesis). If large shareholders’ interests
are aligned with those of minority shareholders and, therefore, they provide close monitoring of
managers’ actions and decisions, then, firm’s ownership concentration and its dividend payout
ratio should be negatively (positively) related when the firm is endowed with ample (poor)
investment opportunities (monitoring hypothesis). Last, if large shareholders are entrenched and
behave in rent-seeking manner, then, their ownership percentage would be negatively associated
with its dividend payout ratio regardless of firm's investment opportunities (entrenchment
hypothesis).
We test the empirical predictions of the above hypotheses using data from Jordan as it is
one of the emerging markets where commercial laws are not only poor but also inefficiently
enforced. Yet, the Jordanian stock market is one of the emerging markets that are closest to
becoming efficient and has relatively the lowest volatility (Lagoarde-Segot, 2009). Jordan is also
one of the Middle East and North African (hence, MENA) countries from where empirical
evidence on corporate ownership structure and dividend behavior is limited. Thus, this paper
4
Using several econometric techniques that account for unobservable firm-specific factors,
we find that ownership concentration is negatively related with dividend payout ratio. This result is
further emphasized as this negative relationship is robust for controlling for firm’s investment
opportunities with insignificant parameter for the interaction between ownership concentration and
the amount of investment opportunities. Thus, these results are consistent with the predictions of
the entrenchment hypothesis since firms disgorge less dividends as the percentage of firm’s capital
owned by large shareholders increases regardless of firm’s growth opportunities. In other words,
dividend payout is used by controlling shareholders to exacerbate the agency problem with
Furthermore, we find that the existence of multiple large shareholders renders the negative
The contributions of this paper are twofold. First, we show that ignoring the conditional
nature of the impact of firm’s ownership structure on its dividend payout can result in misleading
conclusions. Second, we show that the widely accepted notion of concentrated ownership being a
substitute for legal measures that are designed to protect investor rights is not true in each and
The paper proceeds as follows: in the next section we present an overview of the
institutional governance in Jordan. In section three, we present the literature review and develop
our hypotheses. Section four describes the data and methodology. Section five presents the
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Institutional Governance and Corporate Ownership in Jordan
Compared to developed and other emerging markets, Jordan is quite different. The legal
and economic structures in Jordan are not properly institutionalized to better arrange principal-
agent relationships. Despite the government’s efforts to improve the country’s legal environment,
there are many loopholes and overlaps in the commercial laws enacted by the different
jurisdictional institutions and the judicial and court system is weak and ineffective in resolving any
disputes that may arise. Also, market mechanisms that can discipline corporations and encourage
value-maximizing actions by corporate managers and insiders like mergers and acquisitions and
management by active institutional shareholders or debt holders is negligible as active and expert
institutions in managing equity portfolios who might seek taking over inefficiently managed firms
are absent and long term debt financing by corporations whether in the form of public or bank debt
is rather limited. Compared to other emerging markets, on the other hand, Lagoarde-Segot, (2009)
finds that while emerging markets are generally inefficient, the Jordanian equity market is one of
those emerging markets that are moving rapidly towards information efficiency with the lowest
market volatility. Thus, the Jordanian market offers an ideal setting for testing the association
between corporate ownership structure and dividend policy in an emerging market where minority
shareholders’ rights protection is weak because, unlike previous research, it enables us to focus on
the monitoring role of large shareholders implied by the firm’s dividend payout behavior as
The corporate ownership structure in Jordan is highly concentrated in the hands of few
shareholders who, in most of the cases, are families. These controlling families also provide
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members of the board of directors and managers. Bino et al. 2016 show that although indirect
control mechanisms (like cross holding and pyramids) are used in Jordan, they only result in small
deviations between ownership and control. This enables us to focus on the cash flow rights as the
main mechanism of controlling the firm but makes us at the same time unable to use the deviations
between ownership and control to measure large shareholder’s ability to expropriate minority
shareholders.
The classical agency theory argues that corporate insiders have the incentive to use firm’s
resources to extract private benefits rather use them to maximize shareholder value or return firm’s
cash to owners when no feasible uses of such funds are available (Jensen and Mekling, 1976).
Insider’s ability to do so is not irrelevant of the quality of the country’s legal environment because
legal systems that effectively protect investor rights increase insider’s personal cost of diverting
firm’s resources to serve her self-interests by increasing the possibility of being litigated for theft.
Implicit in this traditional view of the agency problem is the assumption that corporate ownership
and control are aligned. Recent research shows that this is not the case in many countries
especially the less developed countries (La Ports et. al, ). Ownership and control can deviate
from each other when firms are owned using shares with superior voting and/or indirect ownership
mechanisms like cross holding ( ) and/or pyramids ( ). The indirect control mechanisms are
more frequently used in counties with weak minority shareholders’ protection laws ( ). When
corporate ownership and control are separate and ownership or control and management are
aligned, large shareholders’ incentives may deviate from those of minority shareholders’ leading to
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The existence of conflicts of interest between large and minority shareholders does not
necessarily imply that large shareholders will expropriate minority shareholders’ rights because
large shareholders can choose not to do so even when the legal system is weak in terms of
preventing controlling shareholders from taking self-serving actions (Gomes, 2000). In fact, the
existence of large shareholders has been found able to resolve the conflict of interest with minority
shareholders and, thus, provide them the protection that is not provided by the legal system. Such
evidence comes from both Eastern and Western Europe (Faccio et. al 2001, Gugler et. al 2014). An
exception is the East Asian countries where large shareholders intensify rather than mitigate
The evidence on the role of large shareholders in mitigating the agency problem with
minority shareholders is based mainly upon its association with firm’s dividend payout.
Furthermore, in countries with effective legal protection of investor rights, dividend payout ratio
decreases as the firm grows while in countries with weak legal investor protection, the association
between payout ratio and firm’s growth produces mixed results (La Porta et al.2000). Therefore, in
firms can be better able to explain differences in dividend payout behavior. 4 In this paper, we
investigate the association between ownership structure and dividend payout ratio on the firm-level
in a country where minority shareholders’ rights protection is weak. Unlike previous research, we
allow the ownership concentration to interact with firm's growth opportunities instead of simply
In this section, we formulate four mutually exclusive hypotheses as far as the association
4
Klapper and Love (2004) show that firm-level corporate governance provisions are more important in weak investor
protection environments. Black et al (2012) call for flexible approach to governance that allows for firm characteristics
to determine the effectiveness of governance mechanism rather than merely relying on country-specific characteristics.
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Ownership structure irrelevance hypothesis:
If neither firm’s investment opportunities nor its ownership structure can explain
H1: Firm’s dividend policy is irrelevant of its investment opportunities or ownership structure.
Substitute model:
La Porta et. al, 2000 argue that The substitute model predicts that in countries where
investor protection is weak, firms need to build reputation of protecting investor rights by paying
dividends on regular basis. Furthermore, firms with more investment opportunities are in more
need to build such reputation. On the firm level, Jiraporn and Ning, 2006, find evidence of
We argue that firms with larger ownership concentration are more likely to have large
H2: Regardless of firm’s investment opportunities, firms with larger ownership concentration will
Monitoring hypothesis
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In doing so, we account for the magnitude of firm’s growth opportunities and at the same time
If the existence of large shareholders aligns their interests with those of minority
shareholders at which time large shareholders provide monitoring in a way that guarantees that
management actions and decisions are aimed at shareholder value maximization that is increasing
H3: When firm’s investment opportunities are high (low), firms with larger ownership
Entrenchment hypothesis
H4: Firms with higher ownership concentration will pay less dividends regardless of their
investment opportunities.
Table 1: This table shows the predicted signs for ownership concentration and the control variables.
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Performance Positive Positive Positive Positive
The sample includes only non-financial firms that were publicly listed and traded on
Amman Stock Exchange (ASE) over the period 2004-2013. Financial firms are dropped because,
at least, the leverage ratio of financial firms varies greatly from non-financial firms in addition to
the nature of their financial statements due to the nature of their business. The sample period
includes the year 2009 in which the adverse impact of the global spike in inflation that
accompanied the financial crisis of 2008 was felt as witnessed by the sudden negative growth
The initial sample is made of 155 corporations while the final sample firms are 89. We
exclude thirty nine firms because they had insufficient or incorrect financial statements data or had
no ownership data. We also exclude five other firms because they are controlled by the
government. The remaining twenty two firms were dropped for various reasons including: capital
reduction, capitalization of profits and distributing free shares, fluctuations in foreign exchange
rates in some countries and also the prices fluctuations of some related global industrial
commodities, financial excesses and managerial problems in addition to increase consumption and
Following BØhren et al (2012), the payout ratio is calculated as dividend per share divided
mechanism, we use the percentage of firm’s capital owned by largest three or five owners as proxy
for ownership concentration following Claessens et al (2000), and CEO duality measured as
dummy variable that is equal to 1 if the CEO is also the chairman of the board of director and zero
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otherwise following Larcker et al (2011), Masulis et al (2007). We control for the expected growth
in firms operations and measure it, first, as the relative increase in the book value of assets during
the year, (BØhren et al, 2012). Asset growth is the relative increase in total assets over the year,
and second, as Tobin’s Q measured as sum of market value of equity minus book value of equity
plus total assets divided by total assets. We also control for firm’s performance measured first, as
the return on assets and second, as the return on equity (Brav et al 2008, Cremers and Nair 2005,
Giroud and Mueller 2011), firm size measured as the log of book value of total assets ( Masulis, et
al 2007 and Xavier and Mueller 2011, BØhren, et al, 2012), and leverage measured as a firm’s
book value of long-term debt and short-term debt (total debt) divided by its book value of total
Where:
SGit : is firm’s growth in sales calculated as the logarithm of current year sales divided by
SGI it : is a dummy variable that is equal to one if the firm’s growth in sales was higher than
the industry median growth in sales in the particular year and zero otherwise.
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Controlsit : is a matrix of control variables that include: firm’s size measured as the natural
assets, firm’s leverage measured as total liabilities divided by total assets, and firm’s cash
it : is a random disturbance term.
Empirical results:
Robustness Tests:
In this section, we run several robustness checks to verify the validity of our results. First,
our results may be sensitive to the way dividend payment is measured. Therefore, we repeat the
analyses by measuring ownership concentration by the percentage of firm’s capital owned by the
largest three, instead of five, shareholders. The results (not reported) are qualitatively similar to
those reported in tables 4 and 5 except that the parameter estimates for the ownership variable are
slightly smaller. We also run the tobit regression using three other measures of dividend payment
which are dividends divided by firm’s book value of equity, market value of equity, and sales,
respectively. The results of tobit regression in Tables 6 show that the negative relationship between
ownership concentration and dividend payment is robust to the different ways of measuring the
dividend payment.
One more issue we address here is the possibility that our results of negative relationship
between ownership concentration and payout ratio might be driven by the sample of firms that do
not pay dividends at all. Therefore we exclude 21 firms that did not pay any dividends during the
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References
Bino, A., Abu-Ghunmi, D., Tayeh, M., & Shubita, D. (2016). Large Shareholder’s Identity and
Stock Price Synchronicity: Evidence from a MENA Market. International Journal of Financial
Research 7, 135-153.
Bøhren, Ø, Josefsen, M. G., & Steen, P. E. (2012). Stakeholder Conflicts and Dividend
Policy. Journal of Banking & Finance.
Chae, J., Kim, S., & Lee, E. J. (2009). How Corporate Governance Affects Payout Policy Under
Agency Problems and External Financing Constraints. Journal of Banking & Finance, 33, 2093-
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Banking & Finance, 34, 35.-361
Claessens, S., Djankov, S., & Lang, L. H. (2000). The Separation of Ownership and Control in
East Asian Corporations. Journal of Financial Economics, 58, 81-112.
Jiraporn, P., Ning, Y. (2006). Dividend Policy, Shareholder Rights, and Corporate Governance.
Journal of Applied Finance, 16, 24-36.
Jensen, G. R., Solberg, D. P., & Zorn, T. S. (1992). Simultaneous Determination of Insider
Ownership, Debt, and Dividend Policies. Journal of Financial and Quantitative analysis, 27,
247-263.
Jensen, M. C. and W. H. Meckling (1976). Theory of the Firm: Managerial Behavior, Agency
Costs and Ownership Structure. Journal of Financial Economics 3: 305-360.
Jiraporn, P., Kim, J. C., & Kim, Y. S. (2011). Dividend Payouts and Corporate Governance
Quality: An empirical investigation. Financial Review, 46, 251-279
La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. (2000) (a). Investor Protection and
Corporate Governance. Journal of Financial Economics, 58, 3-27.
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La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. (2000) (b). Agency Problems and
Dividend Policies Around the World. Journal of Finance 60: 1-33.
La Porta, R., Lopez-de-Silanes, F., & Shle ifer, A. (1999). Corporate Ownership Around the
World. Journal of Finance, 54, 471-517.
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Figure 1: Shows mean payout ratio for all firm-years across the four categories of the
largest shareholder’s ownership percentage shown in the horizontal axis.
Figure 2: shows the mean payout ratio across the Figure 3: shows the mean ownership concrntration
growth categories shown in the horizontal axis. across the growth categories shown in the horizontal axis.
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Table 2: Correlation Analysis. All variables are as defined earlier. *, **, *** denote significance at the 10%, 5%and 1% levels, respectively.
CBA Leverage Tobin’s q SG ROE ROA Size Own5 Own3 Largest Div To MV Div To BV Div To Sales Payout
Div To Sales
.522**
Div To BV
.602** .500**
Div To MV
.776** .552** .615**
Largest
.000 .066 .064 -.035
Own3
.844** .001 .113** .109** -.047
Own5
.958** .732** -.024 .085* .109** -.053
Size
.022 .081* .023 .210** .313** .214** .227**
ROA
.311** .107** .133** .123** .409** .512** .308** .304**
ROE
.773** .299** .063 .090* .086* .392** .413** .303** .311**
SG
.089* .043 .008 .017 .015 .008 -.035 -.020 -.035 -.062
Tobin’s q
.055 .267** .291** .144** .259** .243** .133** .112** .386** .307** .132**
Leverage
-.154** -.013 -.268** -.099** .326** -.059 -.039 -.053 -.049 -.015 -.307** -.109**
CBA
-.279** .389** .030 .287** .256** .079* .207** .205** .090* .249** .391** .308** .198**
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Table 3: Descriptive statistics (Zero v.s Non-Zero Payout Firms).
All variables are as defined earlier. Mean difference tests are T-tests while median differences
are Wilcoxson signed rank tests. *, **, *** denote significance at the 10%, 5%and 1% levels,
respectively.
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Table 4: Panel A shows the results for the association between ownership concentration and dividend payout. The
dependent variable in all specifications is firm’s dividend payout ratio except in the logit regression where the
dependent variable is defined as a dummy variable that is equal to 1 if the firm paid dividends in the particular year
and zero otherwise. Alone is a dummy variable that is equal to one if the largest shareholder is the only shareholder
who owns at least 5% of the firm’s capital and zero otherwise. All other variables are as defined earlier. T-statistics
are calculated using White Heteroskedasticity robust standard errors. *, **, *** denote significance at the 10%, 5%,
and 1% levels, respectively.
Logit Tobit Fixed Effects Fixed Effects Pooled Variables
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Table 5: The association between growth in sales and dividend payout. The dependent variable in all specifications
except in the logit regression is firm’s dividend payout ratio. In the logit regression, the dependent variable is
payment of dividends measured as dummy variable that is equal to 1 if the firm paid dividends in the particular year
and zero otherwise. SGI is a dummy variable that is equal to 1 if the firm’s growth in sales was higher than the
industry median growth in sales for all firms in the particular year and zero otherwise. SGIOWN is the interaction
term calculated as the product of SGI and largest. All other variables are as defined earlier. T-statistics are calculated
using White Heteroskedasticity robust standard errors. *, **, *** denote significance at the 10%, 5%, and 1% levels,
respectively.
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Table 6: Tobit regression results. The dependent variables are dividends to book value of equity (Div to BV),
dividends to sales ratio (Div to Sal), and dividends to market value of equity (Div to MV). All other variables are as
defined earlier. T-statistics are calculated using White Heteroskedasticity robust standard errors. *, **, *** denote
significance at the 10%, 5%, and 1% levels, respectively.
Panel A
Dependent variables
Div to BV Div to Sal Div to MV
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Table 7: Panel A shows the results for the association between sales growth and dividend policy. Panel B shows the
association between ownership concentration and dividend payout when ownership concentration is interacted with
firm’s investment opportunities. All other variables are as defined earlier. T-statistics are calculated using White
Heteroskedasticity robust standard errors. *, **, *** denote significance at the 10%, 5%, and 1% levels, respectively.
Panel A
Logit Tobit Fixed Effects Fixed Effects OLS Variables
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