Do Market Power, Board Composition and Ownership Concentration Influence Dividend Policy? (An Empirical Study of Malaysian Industrial Sector) Hashim Khan, Norkhairul Hafiz Bajuri, Saif-Ur-Rehman, Lee Bee Yoke, Faisal Khan
Do Market Power, Board Composition and Ownership Concentration Influence Dividend Policy? (An Empirical Study of Malaysian Industrial Sector) Hashim Khan1, Norkhairul Hafiz Bajuri2, Saif-Ur-Rehman3, Lee Bee Yoke4, Faisal Khan4 1 Corresponding Author, PhD Student at Department of Management, Faculty of Management, University Technology Malaysia
[email protected]/
[email protected] 2 Senior Lecturer, Faculty of Management, University Technology Malaysia 3 Associate Professor, Faculty of Management, University Technology Malaysia 4 PhD Students, Faculty of Management, University Technology Malaysia
Abstract This paper reports on empirical investigations into the relationship between dividend policy and market power, ownership structure and board composition of the firms, using a sample of 178 firms from Malaysian industrial sector listed on Bursa Malaysia. With globalization, the business environment in which a firm operates has become more competitive. This elevates a motivating question: does a firm’s market power in its product market have an effect on its dividend policy, that is, is the competitive structure of the industry within which the firm operates important for financial policy? The study uses three measures of market power, the degree of import competition, the Lerner Index and the HerfindahlHirschman index and concludes that market power contributes positively in dividend policy of the firms, both in terms of the determinants of dividend policy and probability of paying a dividend. Moreover, the study provides evidence that it’s the business risk through which market structure influences the dividend decision: more competitive firms are exposed to high levels of market risk and are less likely to pay dividends than firms with market power. The high level of institutional and government ownership concentration also mitigates the agency conflicts through influencing the dividend policy. The results of the empirical analysis reveal that firms make higher dividend payouts as the institutional and government ownership, board size and board independence increase. The firm’s profitability, life cycle and growth opportunities also impact dividend policy, while firms with high levels of market risk are less likely to distribute dividends. Keywords: dividend policy, market power measures, agency theory, TOBIT and LOGIT models, Malaysian industrial sector
1.
Introduction
Since the publication of dividend irrelevancy hypothesis, dividend policy has remained one of the most debatable issues in corporate finance. It’s not only the amount involved and the rhythmic nature of dividend payout that make the topic critical, but also the complex associations with most investment and other financial policies [5]. The controversy stems from the irrelevance theory of [66] based on the assumption of a perfect market. In emerging markets, the perfect market assumption seems to be a reverie [68]. Quite a few hypothetical models are used to clarify corporate dividend policy. As per signaling models, managers are equipped with more information about the firm’s future prospects than outside stakeholders, and they have the options and incentives to convey the information to investors [35]. Any abrupt change in dividend policy is used to mitigate information between managers and stakeholders [27]. Similarly, agency model explains that dividend payout can be used as a constraint on discretionary management action and better aligns the interests of stockholders [48]. With globalization, firms are potential candidates of business risk, so financial policies are imposed to accommodate business risk; financial risk is always present on the surface of all business risk, so a change in an industry or firm’s competitiveness should prompt changes in its financial policies. Macroeconomic theory documented that firm’s market competitiveness affects the risk to which it is exposed; the risk allied with operating earnings. Some prominent studies explored the premise that
International Journal of Information Processing and Management(IJIPM) Volume 5, Number 3, August 2014
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Do Market Power, Board Composition and Ownership Concentration Influence Dividend Policy? (An Empirical Study of Malaysian Industrial Sector) Hashim Khan, Norkhairul Hafiz Bajuri, Saif-Ur-Rehman, Lee Bee Yoke, Faisal Khan
future earnings stability is viewed as one of the most significant determinants of dividend policy [63, 11]. Corporate governance in Malaysia varies with respect to ownership structure and the nature of the firms in each sector. Certain companies have ownership dispersed among individuals and small shareholders, while overall control is concentrated in the hands of big market players. The dilemma seems to be in line with countries having a “common law” legal system- UK, USA [58] companies with high ownership concentration of large market players [74]. Such companies are administrated or dictated by these large stockholders in all perspectives and management is just a tool to run the affairs. High ownership concentration imposes high costs on small investors wishing to exercise their control and cash flow rights. In contrast, large shareholders have privileges of economies of scale and abridged conventional gratis proviso problems. If we look at the positive aspects of block holders, they improve the firm’s performance by playing a mitigating role [57]. The study aims to investigate the dividend policy of Malaysian industrial product sector with a desire to accomplish the following objectives; 1. Does market power influence the firm’s dividend policy? 2. Does the composition of the board matter when making financial policy decisions such as the dispersion of dividends? 3. Does ownership concentration play a mitigating role in reducing agency conflicts? 4. Which of the firm’s characteristics play a defining role in dividend policy? 5. What are the probable factors that influence management decisions in formulating dividend policy?
2.
Malaysia Economy: Industrial Sector
The study focuses on the industrial sector in Malaysia, known as the backbone of the economy. As the oil and natural-gas sector has caused an increase in production and demand, industrial sector output increased by 5.8% during the fiscal year 2012. The performance highlights the ability of Malaysia to shake off the chilly blasts that are approaching from the export sector as a consequence of the global economic slowdown. In the same year, mining output grew by 6.1%, representing a substantial gain compared to 3.5% in September, while crude oil output rose by 4.6%. Mining output seems to be fickle but has been predominantly so during the past two years due to production problems and maintenance shutdowns. Due to the large weight carried by the overall industrial production index in Malaysia, manufacturing plays a key role in boosting the economy. In the last year, the shocks of feeble worldwide demand were obvious in the electronic products sector and bellwether electrical, where output begged off by 1.5%. In contrast, chemical, plastic, rubber and chemical sectors seems to be holding up very fine, with output escalating by 7.1%. The strength of domestic demand in general and from the construction sector in particular caused a boost in the overall industrial production index. There is a continuous investment boom in property and the offshore oil and gas sector as shown by pour increase of 46% in fabricated metal products. A 46% surge in fabricated metal products shows that the investment boom in property and the offshore oil and gas sector is continuing. Other categories showed that government cash handouts to certain groups are helping to bolster household spending. During 2012, a significant surge was observed in footwear, manufacturing of transport and furniture equipment by 55.4%, 14.3% and 19.4% respectively. 3.
Board composition
Board composition is always a major cause of concern for stakeholders. All management activities and power stem from the firms’ corporate board. Corporate board size, composition and structure determine its overall transparency [23]. The presence and strength of independent directors is desirable because of their experience and wealth of knowledge, as well as their autonomy from corporate ownership and management. [20] argued that the inclusion of independent directors augments the viability of corporate board and the severance between the roles of CEO and chairman [29]. [71] stated that dividend payout is the most appropriate device to tackle agency cost conflicts. The minority shareholders are the victims of these conflicts and always in need of protection. The independent non-
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Do Market Power, Board Composition and Ownership Concentration Influence Dividend Policy? (An Empirical Study of Malaysian Industrial Sector) Hashim Khan, Norkhairul Hafiz Bajuri, Saif-Ur-Rehman, Lee Bee Yoke, Faisal Khan
executive directors may be able to monitor the management role, thus dampening, in principle, the demand for dividend payout. The charisma of independent directors constitutes an effective monitoring device which enables them to protect the rights of shareholders. The literature is endowed with two competing views about the effectiveness of corporate board. The first view holds that large boards allow directors to specialize, which can result in more efficient monitoring [57], and therefore dividend payout is not needed as a monitoring device. The other view states that large boards seem to be ineffective due to lack of co-ordination among members [52]. This may lead to an intense need for higher dividend payouts to mitigate agency conflicts.
4.
Ownership structure
As corporations adopt a more democratic decision making style in their (financial, management), distribution of stocks have immense importance. The voting rights of shareholders enable them to influence management and to force them to act in their best interest. At the same time, the shareholdings pattern also matters when it comes to self-reliance in management and protection of self-interest. The majority voting right gives the block-shareholders the privilege to exercise power and discretion over core corporate decisions, like dividend decisions [35]. In this vein, [19] argued that dividends mitigate equity agency problems by assisting primary capital market monitoring of the firm’s performance and activities [24]. The agency theory predicts that outsiders have preference for dividends over retention policy, because it might reduce the discretionary cash flow available for selfinterest [19, 48, and 67]. The preference is even stronger in emerging markets where the protection for shareholders in weaker and shareholders perceive a greater risk of expropriation by insiders in such economies [65]. In contrast, in the presence of other monitoring mechanism like government and large block holders, dividends are of less priority in resolving agency conflicts [19]. On the other side, certain facts which must be considered that institutional investors have positive influence on dividend policy of the firms to augment managerial monitoring by outside capital markets, particularly if they consider their own undeviating monitoring efforts to be too costly and inadequate [23].The government also plays and institutional role in monitoring management, so it is likely that the arguments above may also be relevant [37]. As per results, the expected sign may be positive or negative because earlier theoretical evidence seems to be inclusive. In case of managerial ownership, the managers are expected to align these available resources for their best interest. In case of the presence of monitoring mechanisms, the dividends seem to be a secondary device in monitoring agency conflicts [26]. Despite these facts, empirics provide mixed evidence [2, 40]. Table 1. Ownership structure 2003
2004
2005
2006
2007
2008
18.361
18.361
18.361
17.566
17.426
4.875
5.898
4.875
5.3865
5.216
TOP5
42.324
42.756
43.324
43.540
INS
42.636
43.210
41.767
DINST
29.982
28.976
29.982
FINST
12.654
14.234
11.785
12.2878
IND
29.774
29.856
31.774
22.815
DIND
18.342
19.44
18.342
18.891
7.432
8.416
7.432
7.924
20.086
22.65
19.217
20.2118
GOV INSIDER
FIND FORGN
5.
2009
2010
2011
17.164
16.367
15.921
15.921
5.8532
4.84925
5.2501
5.5746
43.468
44.256
44.052
45.482
45.806
41.767
41.767
41.468
43.421
42.767
42.834
29.4792
28.646
28.015
29.765
29.613
29.985
13.120
13.453
13.656
11.153
12.849
31.468
33.4375
32.545
31.537
32.888
18.718
18.0475
19.251
18.744
18.420
7.764
7.391
8.294
7.7928
7.4683
20.880
20.843
21.95
18.946
20.317
Market Power and Dividend Policy of the Firms
In an imperfectly competitive economy, a firm observes a downward-sloping demand curve for its own product, pointing out that the market price of its own product will boost when the firm lessens supply.
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Do Market Power, Board Composition and Ownership Concentration Influence Dividend Policy? (An Empirical Study of Malaysian Industrial Sector) Hashim Khan, Norkhairul Hafiz Bajuri, Saif-Ur-Rehman, Lee Bee Yoke, Faisal Khan
The market power of a firm can be determined by its ability at the profit-maximizing output level to influence a product price over its marginal cost. Moreover, having the capacity to somewhat influence its product price, the firm becomes strong enough to stabilize the ebb and flow of its operating income in the face of exogenous economy-wide or firm-specific shocks to which it is exposed in a market. The market power results in reduction of a business risk to which a firm is exposed in a specific industry, producing a lower idiosyncratic or systematic volatility of stock returns as a result. A more critical description would suggest that the market power of a firm specifies its ultimate potential to exploit consumers and misallocation of resources due to the absence of healthy competition. The empirics define market power of firms in different ways. According to 74], a firm enjoys market power if it has large market capitalization or it belongs to a concentrated firm. [28] measured market power by the Lerner index of the firm and market concentration of the industry that the firm belongs to. According to [47], a firm with higher market power is measured by belonging to industries with lower industry turnover or import penetration, or having higher return on assets. Several theoretical and empirical studies investigated the impact of firm’s market power on its risk. In this vein, [74] reported a negative association between market power and the CAPM beta. He documented that a firm enjoying market power is able to absorb major changes in political, social and economic events, and hence has less exposure to systematic risk. [73, 7 and 8] brought about this idea when analyzing the association between price uncertainty and cost of capital. Firms with market power face finite price-elasticity of demand; the economic charges generated from the most constructive output decision allow the firm to mitigate the impact of economy-wide distress. [46] used the more sophisticated techniques of asset pricing tests and concluded that firms belonging to more intense industries earn lower return on investments after scheming for generally-accepted risk factors. In this vein, quite a few recent papers have reported some significant results. [28] concluded that firms having higher market power are exposed to minor individual volatility. Their explanation is that market power enables firms to evade firm-specific shocks and to trim down the information uncertainty countenanced by its investors. More so, [47] stated that the boost in individual return instability over the past four decades is linked with a simultaneous boost in the individual volatility of basic cash flows of the firm, while the latter is intimately linked to rigorous rivalry caused by globalization and deregulations. In another study, [68] contributed significantly by setting up a rational expectation model under asymmetric information to confirm these topical empirical findings, where firms having more market power are able to shift exogenous shocks in their product markets to ultimate customers and lessen the shock on its profits. Firm specific risk has always been one of the main determinants of dividend policy. In this vein, the field survey of [63] stated that conformist managers are typically loath to amplify dividends that will consequently have to be upturned owing to negative cash flow. In recent times, [11] stated that almost two-thirds of the CFOs of firms who are paying dividend regard constancy of future earnings as a main determinant of the firm’s dividend policy. In recent times, [12] stated that almost two-third of the CFOs of the firms who are paying dividend regard constancy of future earnings as a main determinant of dividend policy of the firm, just following the reliability with historic dividend policy. In addition to this, [13] also found that the stability of future cash flow is a main factor that influences the dividend policy of the firm. Several recent empirical studies also investigated the association between the firm’s dividend policy and both idiosyncratic and systematic risk of its stock return. In testing the information content of dividend changes, [33] reported that dividend cuts reduce the risk. They construed the result as evidence than the firm has gone into the maturity stage of its lifecycle, where its growth opportunities are limited and the underlying assets of the firm play an imperative role in formulating the value of the firm. Moreover, they stated that dividend changes convey information regarding the risk attached to future cash flows of the firm. Following these seminal studies, [44] concluded that firms exposed to high idiosyncratic and systematic risks are less likely to distribute cash dividends among their shareholders. In a similar context, [9] stated that firms exposed to more idiosyncratic risk are likely to smooth their dividend payout ratio as a result of information asymmetries. Further, idiosyncratic risk needs to be explained more that systematic risk. In addition, [15] stated that a firm’s cash flow uncertainty is the main determinant of dividend policy. The existing literature clearly states that there is a strong association between risk and dividend policy of the firm. It remnants to narrate these results to the basic, which concludes this risk, which we surmise is in part the continuation of market power.
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Do Market Power, Board Composition and Ownership Concentration Influence Dividend Policy? (An Empirical Study of Malaysian Industrial Sector) Hashim Khan, Norkhairul Hafiz Bajuri, Saif-Ur-Rehman, Lee Bee Yoke, Faisal Khan
5.1.
The Herfindahl-Hirschman Index (HHI)
The Herfindahl-Hirschman index is known as the Herfindahl index. It is a statistical measure of the concentration of each firm in a given market. It has received significant attention in the literature due to its importance for analysis. The main feature of the Herfindahl-Hirschman index is that it can be used to measure concentration in the diversity of contexts. For instance, it can be used to measure the market concentration and concentration of income in a specific industry like U.S. households; the degree of concentration of production (output) of a firm in industrial market or banking sector. In this vein, a number of economic theories and empirical evidence stated that the other things remain constant; the market concentration of a firm is a very sensitive element of the entire market structure and the main determinant of market competition at firm level. The main characteristic of the HHI is that it takes into account the total number of firms operating in a market, and their market concentration, by incorporating their relative size (market share) in a market. In order to calculate HHI, we take the square of market share of all firms operating in a market and then sum up the square as below:
= ( ) … … … … … … … … … . ()
Where market share of firm i is represented byMS and the number of firms is represented by n. The above mentioned formula is used to calculate HHI in a market. In the case where only one firm occupies the entire portion of an industry, the index value will be maximum of 1 or 10000 (1002). This value declines when the number of firms N increases in a sector and totally reverses in case with mounting disparity amongst the given number of firms.
5.2.
Lerner’s Index
The source of Lerner Index of monopoly power is derived from the paper “Review of Economic Studies” written by Abba Lerner. By classifying the societal loss from monopoly as the difference between price and marginal cost, rather than the “usually accepted” (p. 161) relationship between price of the product and average cost, Lerner forwarded concentration from the monopolist’s profits to the locative inadequacy twisted by the detection of those profits. In a paper, [68] stated that Lerner’s insight “seems simple, I am sure that no one at Harvard of Chicago would be able to explain to me at that time why P=MC was a useful thing” (p. 173). The main feature of the Lerner Index is that it identifies the “degree of monopoly” of the variation between firm’s price and marginal cost at the profit-maximizing rate of productivity. As per Lerner, it can be stated “the higher the wedge between P and MC the higher the monopoly power”. The monopoly power of a profit-maximizing firm diverges directly and merely with its individual elasticity of demand. The benchmark described by Lerner for measuring monopoly power and conferring the well being of the overall economy is “the social optimum that is reached in perfect competition” (1934, p. 168). Further he argued that this benchmark is feasible in an imaginary cutthroat equilibrium in which the majority of firms produce with steady return to its level and with marginal costs identical to those of the firm who’s (PMC)/P−monopoly power he looks to for measurement. On the other hand, technological conditions are such that this hypothetical competitive equilibrium would not be feasible because the index is mainly a gauge of the firm’s disappearance from the social optimal perspective. Based on this rationale, [72] stated that, “Lerner’s index is a tool to determine market imperfection rather than oligopoly power or monopoly” (p. 105). Lerner was sure that his index would be a suitable method for evaluating the monopoly power of a firm in a monopolistically competitive equilibrium. He documented that P = AC or zero profits did not release such a firm from the monopoly power that upholds a “discrepancy . . . from the social optimum” (1934, p. 173) since P > MC. Lerner ascribed this deviation to the less-than-infinitely elastic demands that come with distinguished products. The main characteristics of the Lerner index is that it serves the same reason in homogeneous or differentiated-product oligopolies, with or without free entry, and in homogeneous-product markets with a main firm Every time, the Lerner Index indicates the extent to which the firm’s capacity to set its prices or influence the product price diverts from most socially favorable outcome as defined by marginal cost pricing model. Lerner index highlighted the deficiency of substitute measures. He pointed out that the measures based on size distribution or number of firms is awkward since these measures need to overcome the harm caused by complicated market-definitions.
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Do Market Power, Board Composition and Ownership Concentration Influence Dividend Policy? (An Empirical Study of Malaysian Industrial Sector) Hashim Khan, Norkhairul Hafiz Bajuri, Saif-Ur-Rehman, Lee Bee Yoke, Faisal Khan
At the same time, these measures are unable to reflect the firm-specific demand elasticity that stiffens the firm’s resolve to raise prices by reducing output. In literature, several other measures of monopoly have been proposed on the basis of Lerner’s RES paper, but none is able to surpass the Lerner Index. [28] also differentiated an additional measure as “at top ‘incidental evidence’ of the occurrence and use of monopoly power” (p. 508). In the same way, [70] developed a profitability index to measure the degree of monopoly, but the use of accounting data to measure a firm’s profit creates other problems. Many other authors also highlighted the problems of using accounting data to measure firm’s profit [72] conducted his research by using financial market and accounting data to test the Lerner index and the Lerner Index was qualified. The Lerner index calculation is often made too mechanical, as it is important to consider several problems that are stated in empirical estimation when the results are significant. The selected criteria influence the calculation when less or more concepts are used in calculation of cost and revenue. Hence, it is recurrent to believe only costs and financial revenue and to skip other trading costs and revenue. In the case of traditional intermediation activity of loans-deposits, for example, the model ignores the banking activity of granting loans. It’s the structure-conduct-performance approach that leads to an attempt to estimate quantitatively the market power discretion of a pocket of firms in a specific industry in which such firms are operating. The structure-conduct-performance approach has led to attempts to quantitatively estimate the market power concentrated in the hands of a few firms in an industry. On the basis of analysis, it can be stated that market power creates a gap between price and marginal cost of a firm. This induced Abba Lerner to propose the Lerner index of Monopoly Power (LMP), which is as follows: =
5.3.
……………… (2)
Import Penetration
As a result of increased globalization, the market power of the firm in influenced by domestic firms and foreign rivals dealing in similar products or the same industry at the same time. The literature supports that international trade boosts competitive stress for local firms, because foreign contribution pushes down the market price of products in local markets and therefore trims down the monopolistic power of local firms [41, 40]. As a result, this aggressive and competitive pressure from international import contenders should be a crucial aspect in the analysis of market power. The most appropriate measure of industry-level competitive stress from foreign competitors is import penetration, defined as the proportion of domestic demand met by imports [78]. More precisely, the import penetration of industry I at year t is defined by the following formula:
6.
( ) =
− +
… … ()
Firm’s Characteristics (Control Variables)
Earlier studies focused on several firm characteristics that may explain their dividend policies. In this vein, [22] focused on profitability, size and growth potential as the main determinants of dividend policy. Similarly,[17 stated that retained earnings are one of the main determinants of dividend policy.[44] and reported that a firm’s idiosyncratic and systematic risk can elucidate the propensity of the firm to pay dividend. In the same vein, some authors reported business risk as one of the main determinants of dividend policy [4, 45] (Jensen et al., 1992; Holder et al., 1998; Ho, 2003; Aivazian et al., 2003). Moreover, [4] also highlighted market-to-book ratio of the firm as another important determinant of dividend policy because firms with high market-to-book value find it easy to finance their projects with funds provided by money markets and are more intent on distributing dividend. Large Malaysian firms seem to be more diversified and less likely to be exposed to the risk of financial distress. This characteristic enables them to distribute more dividends [45, 39, 43, and 4]. Mature firms are likely to distribute more dividends as compared to their counterparts. There is a positive significant relationship between a Malaysian firms age its dividend policy. This evidence is in line with the finding of Salas and [12, 18,). The firm’s capacity to pay dividend depends on profitability because
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Do Market Power, Board Composition and Ownership Concentration Influence Dividend Policy? (An Empirical Study of Malaysian Industrial Sector) Hashim Khan, Norkhairul Hafiz Bajuri, Saif-Ur-Rehman, Lee Bee Yoke, Faisal Khan
the profit of that specific year has been regarded as a primary indicator of dividend payout [4, 63 21]. Moreover, high financial leverage means that a firm is exposed to high levels of risk. This may result in a lower dividend payout ratio [5, 35]. In addition, a few debt covenants also restrict the firm’s ability to distribute dividend, because the firms are committed to do so in order to protect the lender. Furthermore, [50] pointed out that debt can be used as a surrogate for dividend in reducing agency problems. Asset tangibility may be a potential factor that can have an impact on dividend policy. According to [9], tangible assets can be used as collateral for debt. Similar views were also reported by [6]. Therefore, firms with high levels of tangible assets are less reluctant to cut the dividend payout. The study also focused on the impact of ownership structure on dividend policy of the Malaysian firms. In case of higher government ownership, firms are more likely to pay dividend because government is expected to play a role in monitoring management [30 37 6 37]. [37] argued that firms having high government ownership find it easy to finance their investment projects, and eventually, allow the firm to distribute high dividend.
7.
Methodology and Data Sources
This section deals with variables, samples and regression models.
7.1.
Data
The sample size consists of 178 firms from the industrial production sector listed on Bursa Malaysia. This includes 68 firms that didn’t distribute dividend during the period 2002 to 2011. The inclusion of non-dividend paying firms removes the selection bias. As the industrial production sector is of significant importance to the Malaysian economy, the inclusion of a large sample will help to present a truer picture of the \dividend policy prevailing in the sector.
7.2.
Model
In order to analyze the determinants of dividend policy, this study used two different perspectives of dividend policy. The first perspective represents the firm’s decision to pay dividend which is predicted by a dummy variable equal to one if the company distributes a dividend; otherwise, it is zero. The second perspective used in this study is the dividend payout ratio (DPR) of the firm in that year [69]. In order to test the association between dividend policy and board size, three board measures are used: board size (BSIZE), board independence (BIND) and its dual role (DROLE). Board size is measured by the total number of directors in the board; board independence is measured by independent directors to total strength and lastly board dual role (BDUAL). Secondly, four different measures of ownership structure are used to test the association between dividend and ownership. These measures include the percentage of shares held by government (GOV), insider (INSIDER) ownership ratio, institutional (INST) ownership ratio and percentage held by individuals (IND). Three market power measures are used to test their influence on the firm’s dividend policy. These are The Herfindahl-Hirschman index (HHI), import penetration (IP) and Lerner index (LI). Six control variables are used to justify the impact of ownership structure, board composition and market power measurement on the firm’s dividend policy. The variables and their construction are shown in table 2. For regression, the study uses the following models to test the determinants of dividend policy of the Malaysian firms. In order to test the relationship between dependent and independent variables, the study used the following model: DPR =a +b1 * Control variables +b 2 * Ownership Structure +b 3 * market power measures+b 4 * board composition+e.............................................................................. (1) The variables are described in table1.The study aimed to analyze data in two major steps: (1). The magnitude of influence of these factors on dividend policy by using pooled TOBIT and (2) What are probable factors that influence the management to pay dividend by using pooled LOGIT model?.
7.3.
TOBIT and LOGIT Model:
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Do Market Power, Board Composition and Ownership Concentration Influence Dividend Policy? (An Empirical Study of Malaysian Industrial Sector) Hashim Khan, Norkhairul Hafiz Bajuri, Saif-Ur-Rehman, Lee Bee Yoke, Faisal Khan
The feature of study is that it focuses on a different aspect of dividend payout. The study is mainly focused on two aspects of dividend policy in a Malaysian context; the firm’s likelihood to distribute dividend and the level of significance of these factors on dividend payout ratio. The study focuses on the seminal work of [22], where the probability of firm’s dividend payout is measured by a dummy variable, which is one if the firm pays dividend in the year t and zero otherwise. The study applies panel and pooled LOGIT models to inspect the determinants of dividend policy in Malaysia (amount and level). The formula of the tobit model is as below:
= + / +
> … … … . () ⋯ =
In the above equation, represents the dividend payout ratio as measured by DPS/EPS (dividend per share/earnings per share). Moreover, the panel and pooled logit models are applied for the purpose of analysis in order to determine the probability of dividend payout. This probability has the following form: = … … … … . . () = ( = = + ( ) + (− ) In equation 2, X β represents the matrix of unknown parameters. Basically, equation 2 is for logistic distribution function. X β Ranges from −∞ to + ∞, P is between 1 and 0. Moreover, Pi is non-linear to X β. If the probability of a firm distributing a dividend is P then (P -1) is the firm’s probability of not distributing dividends expressed as: … … … … … … … … … … () = + ( ) Thus: + ( ) = = … … … () − + (− ) As expressed, (
) is the odds ratios for dividend payout, the ratio of the prospect that the firm will
distribute dividends to the likelihood that it will not distribute dividends. So, the natural log of this ratio is = ( ) = , where L is measured to be logit; hence it’s logit model. The logit
model equation used in the study is as below: = (
) = + ………………. (7)
For the purpose of analysis, the dependent variable is a dummy variable, which takes a value of 1 if the firm pays dividends and zero in case of non-payment of dividend. represents the vector of financial variables for the firms time I and this vector is a composite of variables used in study. 8.
Results and Discussions
8.1.
Descriptive Statistics
The results of the descriptive statistics are shown in table 2 below. The average dividend payout ratio for the year 2004-2005 is 4.42%, 28% of the firms have a chairman with dual board, 12 is the average board size and board independence is 49% on average ranging from 20% to 80% for the selected sample. As far as the ownership structure is concerned, about 17% share of the sample are held by government, 3.52% are held by insiders (directors), 46.72% are owned by institutions and individuals have 33.43% of the paid up capital. Other variables are presented in the table with respect to their values obtained.
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Do Market Power, Board Composition and Ownership Concentration Influence Dividend Policy? (An Empirical Study of Malaysian Industrial Sector) Hashim Khan, Norkhairul Hafiz Bajuri, Saif-Ur-Rehman, Lee Bee Yoke, Faisal Khan
Table 2. Descriptive Statistics of Firms VARIABLES
Total firms(178)
Non-dividend paying firms(68)
Mean
Median
SD
Mean
Median
DPR
4.42
2.04
1.264
HHI
814.34
463.22
LI
0.226
0.325
IP
0.0943
SD
Mean Diff.
556.43
0.226
0.2692
7.542
0.116
2.982
0.642
0.194
4.0942
-0.416
0.0438
0.094
0.0212
0.0019
0.542
0.0731
BSIZE
12.00
6.00
0.043
12.00
6.00
1.231
0.532
BIND
0.49
0.029
0.063
0.045
0.341
0.0261
0.325
BDUAL
0.28
0.0262
0.0472
0.016
0.002
0.04976
0.164
17.05
2.2312
1.051
0.9831
0.7865
1.0121
0.068
3.5213
3.7521
2.125
2.42
1.325
2.49
1.1013
INS
46.72
48.82
27.16
35.24
28.87
26.58
11.48
IND
33.43
30.03
26.08
40.55
39.38
26.92
-7.12
BR(β)
0.0113
0.2365
0.39
0.017
0.296
0.43
-0.0057
PROF
0.391
0.096
0.072
0.112
0.011
0.109
0.279
FL
2.392
3.399
0.192
0.525
0.548
0.225
1.867
LC
1.3846
1.3979
0.109
0.2264
0.041
1.388
1.1582
TAX
28.74
24.42
1.59
13.77
11.61
35.82
14.97
GO
13.68
12.981
0.315
3.21
20.1
1.15
10.47
GOV INSIDER
8.2.
The Pearson’s correlation matrix
The Pearson’s correlation matrix explains the degree of correlation between the explanatory (independent) variables. In case of low or moderate degree of correlation, the issue of multicollinearity seems to be off the record. If the degree of correlation among variables is above 0.80, it means the issue of multicollinearity prevails and the results seem to be inconclusive [14]. Moreover, the results of collinearity diagnostic statistics (e.g. tolerance (TOL) and variance inflated factor (VIF)) also support the Pearson’s correlation coefficients as shown in table 3. The VIF and tolerance factor are also shown in table 4. 8.3.
Regression Results
8.3.1.
TOBIT Model
The TOBIT model was used to investigate and explain the determinants of dividend policy in a Malaysian context. The TOBIT model allows us to include those firms which are not paying dividend in order to remove selection bias. The results are tabulated in table 5 below. As far as the market power measures are concerned, firms with a high level of market concentration (HHI) and Lerner index (LI) are significant with positive value indicating that both the indexes positively affect dividend policy. Similarly, there is a significant negative relationship between dividend policy and import penetration; high level of import penetration negatively affects dividend policy of the firms. These results clearly state that market power has a positive impact on a firm’s dividend policy – a firm with higher market power is both more probable to pay a dividend and to pay more. Secondly, the study also tested for any significant relationship between dividend policy and board composition. Board independence is positively significant at 1% level, showing a high significant
9
Do Market Power, Board Composition and Ownership Concentration Influence Dividend Policy? (An Empirical Study of Malaysian Industrial Sector) Hashim Khan, Norkhairul Hafiz Bajuri, Saif-Ur-Rehman, Lee Bee Yoke, Faisal Khan
relationship with dividend policy. Secondly, the bigger board size and dual board also positively impacts dividend policy as the results show in table 5. In case of ownership consideration, the government and institutional ownership also have positive impact on dividend policy in firms in the Malaysian industrial product sector. These results seem to be in line with findings of [24]. Insider ownership and individual holdings have no association with the firm’s dividend policy. Lastly, the firms characteristics results also explains that firm’s profitability and life cycle are positively significant at 1%, indicating the high profitability and maturity of the firm also play a positive role in influencing dividend policy [38 1]. The growth opportunity of the firms also contributes to dividend policy positively. In contrast, the negative association between business risk and dividend policy of the firms indicate that firms exposed to high levels of risk are less likely to distribute dividend. TABLE 3. CORRELATION MATRIX BS BI BD INS IZ N UA IDE IN IN B ST D R E D L R
DI V
H HI
LI
IP
T D I
1 0.3 2 0.0 9 0.1 6 0.0 55 0.0 57
1 0. 02 0. 08 0. 01 0. 03
1 0.0 62 0.0 35 0.0 62
1 0.0 32 0.0 35
1 0. 88
1
0.0 25 0.0 58 0.0 82 0.1 47 0.0 36
0. 06 0. 04
0.0 22 0.0 54
0.0 88 0.0 55
0. 74 0. 08
0.4 8 0.0 8
1 0.0 7
0. 03 0. 03 0. 08
0.0 7 0.0 4 0.0 4
0.0 5 0.0 8 0.0 7
0. 00
0.0 57 0.0 25 0.0 58 0.0 82
0. 06 0. 05 0. 06
0.0 88
0.0 34 0.0 65 0.0 87 0.0 66
0. 01
0.0 6
0.0 56
0. 03
LF TA X
0.0 36 0.0 88 0.0 56
GO
0.0 2
0. 07
0.0 54 0.0 65 0.0 54 0.0 99 0.0 44
0.1 47
0.0 45 0.0 2 0.0 4
0. 09 0. 06 0. 09 0. 07
0.0 45
DIV HHI LI IP BSI ZE BIN DP BD UA L GO V INS IDE R INS T IND
BR PR OFI T
FL
PR OFI T
T A X
FL
LF
1 0.05 9 0.28 6 0.46 2
1 0.0 18 0.0 08
1 0.1 42
1
0.06 2
0.0 03
0.0 41
0.0 08
G O
1
0.43
1
0.46
0.36
0.48
0.0 0
0.1 5
0.2 1
0. 01 0. 06 0. 09
0.1 4 0.0 5 0.0 1
0.0 4 0.0 3 0.0 4
0. 01
0.0 4
0.0 2
0.28
1 0.3 5
1
0.18
0.04
0.0 5
0.0 08
0.23
0.08
0.0 2
0.0 98
0.06
0.03
0.05
0.01
0.06
0.02
0.0 9 0.0 9 0.0 4
0.0 13 0.0 02 0.0 04
0.13
0.01
0.0 2
0.0 06
1 0. 26 0. 19 0. 10 0. 06 0. 02
1
10
Do Market Power, Board Composition and Ownership Concentration Influence Dividend Policy? (An Empirical Study of Malaysian Industrial Sector) Hashim Khan, Norkhairul Hafiz Bajuri, Saif-Ur-Rehman, Lee Bee Yoke, Faisal Khan
VI F 1/ VI F
DI H V HI 2. 1. 9 8 2 2 0. 0. 3 5 4 5
Table 4. Multicollinearity Diagnostic (Variance Inflation Factor) TD TD TDI G INS PR T T I(B I(D (SH O IDE IN IN B OFI A G LI IP DI ) FL LF X O ST D R T ) ) V R 1. 2. 1. 1. 1. 1. 1. 1. 2. 3 8 2.5 2.6 2.1 2. 2.5 2. 6 9 3.0 4 5 6 9 8 6 8 8 98 6 56 8 4 8 6 8 5 6 7 8 0. 0. 0. 0. 0. 0. 0. 0. 0. 3 7 3 0.3 0.3 0.4 0. 0.3 0. 6 5 0.3 6 6 6 5 9 7 6 34 9 39 2 6 5 5 0 1 9 4 0 1
Table 5. TOBIT Model
Intercept HHI LI IP
MODEL 1
MODEL 2
MODEL3
MODEL 4
MODEL 5
MODEL 6
MODEL 7
-0.0385 2.0673***( 0.0031) 1.3247***( 0.0000) 0.1432*(0. 06715)
-0.0924 2.1873***( 0.0001) 1.482***(0 .0001) 0.09562*(0 .05719) 1.0162**(0 .0349) 0.9304***( 0.0046) 0.2326**(0 .0312)
-0.1641 2.3673*** (0.0004) 1.3247*** (0.0000) 0.08842*( 0.05116)
0.0599 2.2337*** (0.0000) 1.7644*** (0.0024) 0.0432*(0. 06715) 1.0321**( 0.0398) 0.0542**( 0.0342) 0.0424*(0. 0696) 1.4640*** (0.0047) 0.0046(0.1 876) 1.9548**( 0.0328) 0.0962(0.4 068)
0.1784 2.162***( 0.0001) 1.9601*** (0.0000) 0.0932*(0. 05826)
0.1730 2.5698*** (0.0021) 1.3247*** (0.0004) 0.0432*(0. 06715)
0.0584**( 0.0189) 24.084*** (0.002) 0.0981(0.1 040) 0.0974*** (0.000) 0.0474(0.6 450) 0.9025*(0. 0142)
1.9282*** (0.0042) 0.00946(0. 2472) 2.0632**( 0.0442) 0.0014(0.9 442) 0.0094**( 0.0248) 27.2402** *(0.000) 0.0814(0.5 210) 0.4624*** (0.0490) 0.0016(0.4 321) 0.0848*(0. 0216)
-0.0628 2.0932*** (0.0000) 1.2608*** (0.0024) 0.0226*(0. 08618) 2.0321**( 0.0414) 0.0542**( 0.0342) 0.0424*(0. 0696) 2.642***( 0.0016) 0.0174(0.2 142) 2.0422**( 0.0324) 0.0252(0.2 474) 0.0932**( 0.0146) 28.032*** (0.000) 0.2314(0.2 614) 0.0242*** (0.000) 0.0726(0.1 842) 1.0001*(0. 0346)
BSIZE BIND BDUAL
2.0827**( 0.0041) 0.0186(0.2 814) 0.8622**( 0.0131) 0.0316(0.1 364)
GOV INSIDER INST IND BR PROFIT FL LC TAX GO No of firms Left censrd obs
178
178
178
178
178
178
178
68
68
68
68
68
68
68
23.31
25.22
22.54
22.41 21.46 22.66 24.32 91.72**(0. 90.82**(0. 90.91**(0. …… …… …… 000) 000) 000) Wald chi2 Dependent variable is dividend payout ratio (DPR). The values reported in parentheses are significance level zstatistics. ***, **, * denote statistically significant at the 1%, 5% and 10% levels respectively. Pesudo R 2
11
Do Market Power, Board Composition and Ownership Concentration Influence Dividend Policy? (An Empirical Study of Malaysian Industrial Sector) Hashim Khan, Norkhairul Hafiz Bajuri, Saif-Ur-Rehman, Lee Bee Yoke, Faisal Khan
4.6.3 LOGIT Binary Choice Model for the Dividend Decision. As mentioned earlier, 68 of the 178 firms in the sample do not pay dividends. This forces us to check the probable independent variable that may influence dividend policy of the firms-rather than level of dividend payout- applying a binary choice model known as LOGIT. The results are presented in table 6 below. In LOGIT estimation, we use the same variables as applied in TOBIT in order to find out the probable factors that may influence dividend policy of the firms. In table 6, the results of Wald chi-square test are significant for all the models predicting the results in similar direction as tabulated in TOBIT model. Moreover, the percentage of correct prediction varies between 68% and 79%. The results of market powers are similar as predicted in TOBIT models. Ownership concentration and board structure are also predicted in a similar direction as in table 5. As far as the firm’s characteristics are concerned, the results seem to be in line with the prediction of TOBIT model. As a result, we can say that the probability of the factors influencing the dividend policy of the firms is the same as the predicted variables as determinants of dividend policy.
5. Conclusions The paper aims to investigate the market power measure, ownership structure of the firms, board size and firm characteristics of dividend policy in Malaysian industrial product sector. The study has some unique characteristics due to use of different measures in a semi-emerged economy. The results of market power measures indicate that market power plays a vital role in deciding the firm’s dividend policy. The firms with high market power are likely to distribute more dividends than its counterparts. Secondly, the study explores the agency conflicts through board composition and ownership consideration and the results seems to be in line in that high ownership concentration eliminates the agency conflicts by forcing management to distribute more dividend. Government ownership and institutional holdings have a positive role in mitigating agency conflicts. The firms with high profitability, mature corporate life and high growth opportunity are more likely to distribute dividends in the Malaysian industrial product sector. In contrast, firms with highest level of market risk seem to be poor candidates to distribute dividends. Overall, the analysis carried out confirms that protection of minority shareholders is a relevant matter in Malaysia. Though legal protection and remedies are available to protect minority shareholders in Malaysia, it is rarely used because of length and cost of judicial procedure. So the role of ownership has immense importance because it mitigates the agency conflicts in Malaysia. The study suggests that there is a need to extend the research work into different sectors to present a clearer picture of the economy. Secondly, the time span needs to be extended to test the validity of results over different periods of time. Thirdly, the potential venue for future porch of the present study is to inspect the relations between dividend policy and ownership structure and other financial decisions. In fact, there is a strong interrelation between ownership structure and financial policies of firms. Financial policies and ownership structure are in fact highly interrelated, which would motivate for example, an investigation of dividend decisions, capital structure debt policies and ownership structure in the context of an appropriate system of equations.
Table 6. LOGIT Model
Intercept HHI LI IP
MODEL 1
MODEL 2
MODEL3
MODEL 4
MODEL 5
MODEL 6
MODEL 7
-2.106** 0.8673***( 0.0016) 0.0946**(0 .0184) 0.0092*(0. 05041)
-3.089** 1.1842***( 0.0040) 0.4832**(0 .0244) 0.0536*(0. 0746)
-8.1082** 2.0051*(0. 0142) 1.3247**(0 .031) 0.0432*(0. 0842)
-4.1846** 2.651*(0.0 32) 1.4782***( 0.0001) 1.0432*(0. 06224)
-3.4134** 2.986*(0.0 318) 0.9947***( 0.000) 0.8639*(0. 06406)
-5.486** 5.209*(0.0 198) 1.8432***( 0.0002) 1.5490*(0. 08260)
-6.1148** 0.2337***( 0.0000) 0.7632***( 0.0024) 1.0442*(0. 07922)
12
Do Market Power, Board Composition and Ownership Concentration Influence Dividend Policy? (An Empirical Study of Malaysian Industrial Sector) Hashim Khan, Norkhairul Hafiz Bajuri, Saif-Ur-Rehman, Lee Bee Yoke, Faisal Khan
0.0466**(0 .0442) 1.0744**(0 .0124) 1.3541*(0. 0765)
BSIZE BIND BDUAL
2.4042***( 0.0002) 0.0092(0.3 840) 2.5421**(0 .0201) 0.0036(0.4 362)
GOV INSIDER INST IND
2.6542**(0 .0391) 2.0092*(0. 0648) 2.04621*(0 .0936) 5.0448***( 0.0034) 0.0088(0.3 982) 3.5485**(0 .0471) 0.0034(0.8 720)
BR PROFIT FL LC TAX GO No of firms Left censored Obs Pesudo R 2 Nagelkerk e R2 Wald chi2
2.976**(0. 0220) 26.013***( 0.0032) 0.1116(0.6 201) 5.893***(0 .0036) 1.0534(0.3 921) 1.976**(0. 0222)
2.8401***( 0.0032) 0.0045(0.7 239) 2.0947**(0 .0188) 0.00978(0. 6530) 3.076**(0. 0190) 28.003***( 0.0012) 0.3329(0.4 351) 7.732***(0 .004) 0.0261(0.7 213) 1.743*(0.0 643)
2.0321**(0 .0414) 0.0542**(0 .0342) 0.0424*(0. 0696) 2.1042***( 0.0016) 0.0127(0.2 251) 1.5421**(0 .01482) 0.0432(0.7 822) 1.8734***( 0.0041) 27.833***( 0.0011) 0.0534(0.3 501) 1.209**(0. 0124) 0.117(0.13 56) 1.076**(0. 0320)
178
178
178
178
178
178
178
68
68
68
68
68
68
68
52.31
51.22
52.54
……
……
……
63.20%
63.20%
63.20%
27.31a
……
……
63.20% 91.72**(0. 000)
63.20% 90.82**(0. 000)
63.20% 90.91**(0. 000)
63.20%
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Do Market Power, Board Composition and Ownership Concentration Influence Dividend Policy? (An Empirical Study of Malaysian Industrial Sector) Hashim Khan, Norkhairul Hafiz Bajuri, Saif-Ur-Rehman, Lee Bee Yoke, Faisal Khan
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Do Market Power, Board Composition and Ownership Concentration Influence Dividend Policy? (An Empirical Study of Malaysian Industrial Sector) Hashim Khan, Norkhairul Hafiz Bajuri, Saif-Ur-Rehman, Lee Bee Yoke, Faisal Khan
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