A survey on the relationship between ownership structure, debt policy and dividend policy in Tunisian stock exchange : Three stage least square simultaneous model approach

Abstract

This research tests the efficiency of the debt policy, dividend policy and ownership structure as mechanism of resolution of agency conflicts between shareholders and managers due to the problem of overinvestment, in the limitation of the problem of the free cash flow. By estimating three stage least square simultaneous model and on the basis of a sample of 35 non-financial Tunisian listed companies selected for the period 2000–2009, our results are in favor of the theory of free cash flows of Jensen (1986) that stipulates that the debt policy represents the principal governance mechanism that can limit the risk of free cash flow. However, our empirical results do not confirm our hypothesis implies that the solution to reduce the level of free cash flow in the Tunisian firms with low growth opportunities is the use of policy dividends. It therefore appears that in the case of our sample, managers must settle their debts to creditors. They should thus allocate free cash flow to profitable projects. Thus, the debt reduces agency costs of free cash flow and present as a control mechanism which substitute dividend policy. Also, it is found that managerial ownership lowers the level of agency costs of free cash flow. However, the ownership concentration increases the risk of the free cash flow. Finally, regarding the impact of ownership structure on the payout ratio, our results support the idea that more risk aversion of the majority shareholders and their intention to expropriate minority shareholders through the extraction private benefits are the cause of a low dividend.