Does Corporate Governance Affect Dividend Policy

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Does Corporate Governance Affect Dividend Policy?

• Oskar Kowalewski
• Ivan Stetsyuk
• Oleksandr Talavera

International Research Conference on Corporate
Governance in Emerging Markets November
15-17th, 2007
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Motivation

• What determine the dividend policy in a
  transition country (Poland)?
• Does corporate governance have an impact on
  corporate dividend policy in a transition country
  (Poland)?

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Survey of Dividend Theories

• Free Cash Flow Theory
• Dividends may mitigate agency costs by
  distributing free cash flows that otherwise would
  be spent on unprofitable projects by the
  management
• Easterbrook (1984) Jensen (1986) Zwiebel
  (1996) Laporta, Lopez-de-Silanes, Shleifer, and
  Vishny (2000) DeAngelo, DeAngelo, and Stulz
  (2004)

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Survey of Dividend Theories

• Signaling Theory
• Lintner (1956) partial adjustment process towards
  a target payout ratio and communicate the level
  and growth of earnings or future prospects of the
  company to investors
• Bhattacharya (1979) Miller and Rock (1985)
  Bernheim and Wantz (1995) Amihud and Murgia
  (1997)

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Survey of Dividend Theories

• Ownership Theory
• Dividend may signal conflicts between large
  controlling shareholder and minority shareholders
• Shleifer and Vishny (1997) Gugler (2003) Gugler
  and Yurtoglu (2003)

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Country studies on corporate governance and
performance

• Gompers, Ishii, Metrick (2003) using 1500 US
  listed companies present that CG results in
  higher annual returns than in companies with weak
  corporate governance rights.
• Black, Jang, Kim (2003) based on a study of 526
  Korean firms present that higher corporate
  governance standards increase the value of the
  company. A best to worst governance improvement
  predicted a 44 increase in company valuation as
  measured by Tobins Q.

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Country studies on corporate governance and
performance

• Black (2001) a worst-to-best improvement in
  corporate governance practices would predict a
  700 fold in market value for a Russian company
• Drobetz, Schillhofer, Zimmerman (2003) using
  German companies present that companies with
  highly corporate governance standards enjoy
  higher firm valuations. An increase in the
  Corporate Governance ratings by 3 points results
  in an increase of market capitalization by 12.5
  percent.

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Cross-country studies on corporate governance
and performance

• La Porta, Lopez-de-Silanes, Shleifer and Vishny
  (2000) test the substitution and outcome model on
  a cross section study of 4,000 companies from 33
  countries.
• Durnev and Kim (2002) find that higher scores on
  both the CLSA corporate governance index and the
  SP disclosure and transparency index predict
  higher firm value for a sample of 859 large firms
  in 27 countries
• Klapper and Love (2002) present similar results
  using the CLSA index for a sample of 495 large
  firms in 25 countries.

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Data

• Corporate Governance Index (TDI) based on
• financial statements and annual reports
• issuance prospects
• fillings to regulatory agency (KPWiG)
• company internet site, newspapers
• Ownership and financial indicators based on
• Euromoney ISI Emerging Markets
• Notoria

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Data

• Corporate governance index on 155 listed
  companies
• In the panel regression the number of companies
  reduced to 110 with 760 observations
• The period of analysis 1998 2004 and control
  for two sub-periods1998-2001 and 2002-2003

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Transparency and Disclosure Index
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TDI - Board structure and procedures
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TDI - Disclosure
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TDI - Shareholders
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Dependent variable

• Dividend payout measures
• dividends to cash flows
• dividends to earnings
• dividends to sales

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Explanatory variable

• Free cash flow hypothesis
• return on assets
• Tobins Q
• Ownership hypothesis
• control rights of the ultimate shareholder
• cash flow rights of the ultimate shareholder
• one share one vote rule dummy
• domestically owned companies dummy

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Explanatory variable

• Signaling hypothesis
• one period lagged dividend payout ratio
• Control variables
• long term debt of assets
• growth rate of sales
• assets (size)
• years of listing (maturity)
• industry and time dummies

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Descriptive Statistic
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Mean Difference Test
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Our methodology

• Pooled OLS regression
• Pooled Probit regression
• Pooled Tobit regression

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Pooled OLS Results (dividends to cash flows)
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Pooled Probit Results
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Pooled Tobit Results (dividends to cash flow)
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Results
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Robustness Checks

• Control for endogenity and causality applying
  instrumental variables.
• Dividend measures based on assets and equity
• Corporate Governance standards
• Polish Forum for Corporate Governance Rating
• WSE Best Practice Code
• Control Variables ADR, age, fixed assets,

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Results Robustness Checks
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Conclusions

• The results presents that there is a strong
  relationship between corporate governance,
  ownership and corporation performance and
  dividend policy.
• Corporate governance upgrading seems to be in the
  interest of the private investors and the public
  interest.