Dividend Pay-Outs and Leverage in Japanese Firms

Abstract

Through an analysis of the use of leverage and dividend policy by Japanese companies, we came to the conclusion that the strategy that directed them regarding the agency theory cost levels incurred was not neutral. The theoretical implications of the agency theory allowed us to express several hypotheses that we tested on a wide sample of Japanese firms listed on the Tokyo Stock Exchange. Owing to considerable restructuring in Japan at that time, the difference between keiretsu and non-keiretsu firms was also investigated. In the empirical part of this paper, we show some clear differences between firms located within the influence area of the horizontal groups (keiretsu) and those outside it. Indeed, the outside companies showed a leverage rate significantly lower than the others, and a slightly lower pay-out ratio. As for firms belonging to keiretsu, no difference regarding leverage levels was noted, but there was a slight tendency for firms belonging to former zaibatsu heirs to pay lower dividends than companies belonging to other horizontal groups. Moreover, leverage and dividend policy appeared to be ways of reducing agency costs. Evidence showed that these means were more substitutive than complementary, since our results showed a negative relationship between leverage and pay-out ratio.