The Impact of Investment Opportunities and Investor Protection on the Dividend Policies of Ultimate Owners

Haw, I. M., Leung, O., Liu, Y., and Wu, W. 2018. The Impact of Investment Opportunities and Investor Protection on the Dividend Policies of Ultimate Owners. NTU Management Review, 28 (1): 175-212. doi:10.6226/NTUMR.201804_28(1).0005

In-Mu Haw, Professor, Department of Accounting, Texas Christian University
Olivia Leung, Principal Lecturer, Faculty of Business and Economics, University of Hong Kong
Yang Liu, Lecturer, Department of Accounting, Hong Kong Shue Yan University
Woody Wu, Professor, School of Accountancy, Chinese University of Hong Kong


Given the findings of two influential studies of higher dividend payouts in countries with strong investor protection (La Porta et al., 2000) and firms with controlling shareholders (Faccio et al., 2001), this study examines the governance role of legal institutions in the dividend payout policy of the ultimate owners of firms in which shareholder power is not aligned with the “divergence” force. Based on a broad firm-level ultimate ownership data set from 22 East Asian and Western European countries, we find the coefficients of the interactions among the legal protection of investors, control divergence, and investment opportunities to be negatively and significantly associated with dividend payouts, which suggests that the high dividends paid by controlling shareholders with control divergence are lowered when the reinvestment opportunities of firms are good in countries with strong legal protection. Our findings imply that the enhancement of legal institutions, especially in emerging markets in which governance systems are weak, can mitigate the efforts of controlling shareholders to mask their expropriation activities from minority shareholders. Our results indicate that shareholder “power” and the “divergence” force of controlling shareholders cancel each other out. 


dividend policiesinvestment opportunitieslegal institutionsultimate owners

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