Correlation between distribution of cash dividends from capital reserves, ultimate controlling shareholders and corporate governance

Abstract

PurposeThis study aims to discuss whether a new accounting policy can help enterprises withstand operating risks and whether corporate governance can play a supervisory role. Taiwan took the lead worldwide in allowing companies to distribute cash dividends from capital reserves. Compared with traditional cash dividends distributed from retained earnings, this move was aimed at maintaining the stability of cash dividends and helping listed companies address the risks of temporary downturns. However, the distribution of cash dividends from capital reserves may violate the principle of capital maintenance and damage creditors’ equity. The authors sought to examine whether corporate governance could play a supervisory role.Design/methodology/approachThe present study targeted Taiwanese listed companies and cited data from the Taiwan Economic Journal. The study period was from 2011–2019. The authors tested the hypotheses using the least square method.FindingsThe results showed that ultimate controlling shareholders of listed companies can maximize their own interests through ownership arrangements, whereas corporate governance cannot play a supervisory role nor protect creditors’ equity. The findings provide insight on whether, in the development process of corporate governance, appropriate measures are taken to protect creditors’ equity in addition to shareholders’ equity, or achieve a good coordination of interests among all stakeholders.Originality/valueThe ultimate controlling shareholders or directors of a listed company would seek to maximize their own interests, and transfer the operating risks to creditors through the arrangement of dividend policy, thus harming creditors’ equity. However, independent directors cannot play a supervisory role. The authors inferred that corporate governance standards previously focused on the shareholder level or alleviation of the agency problem between controlling shareholders and non-controlling shareholders but ignored creditors’ equity.