DOES CORPORATE GOVERNANCE AFFECT THE CRITICAL CORPORATE POLICIES SUCH AS DIVIDEND POLICY?

Dan Lin,Lu Lin

doi:10.32479/ijefi.10546

Abstract

This study examines the influence of corporate governance on dividend policy based on a sample of Canadian firms listed on the S&P/TSX composite index during 2009-2012. The results show that firms with better governance quality, measured by the governance index provided by The Globe and Mail, have larger payouts and have a higher propensity to pay dividends. In terms of four dimensions of corporate governance index, the shareholding and compensation index is the most important determinant of dividend payouts. Our results support the complementary role of corporate governance and dividend policy of the firms. The implication from this study is that managers and board of directors should make dividend payout decisions in a big picture of corporate governance.

Highlights

IntroductionIt is about the decision to divide a company’s net earnings into dividends, which are to be distributed to shareholders, or retained earnings that may be used for investments in the future
Dividend policy is one of the most important financing decisions in the company
GOV is the main variable of interest and is measured by the governance index provided by The Globe and Mail

Summary

Introduction

It is about the decision to divide a company’s net earnings into dividends, which are to be distributed to shareholders, or retained earnings that may be used for investments in the future. The general framework of the agency theory suggests a link between governance quality and dividend payouts. As good corporate governance can mitigate the conflicts of interest between shareholders and managers, corporate governance must play a critical role in the dividend distribution decision (Adjaoud and Ben-Amar, 2010). Dividend payout is one way of returning cash directly to shareholders and act as a way of removing company’s cash from its coffers, where the cash may not be used in the best interest of shareholders. It is important to understand how corporate governance influence one of the most important corporate decisions; that is, the dividend policy

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