Abstract
This study examines the link between foreign ownership and firm value in the context of dividend payouts and long-term firm growth. Consistent with prior studies, we find that foreign ownership is positively related to firm value. Next, we find that changes in foreign ownership are negatively related to changes in agency costs, which is linked to the improvement of future firm profitability. We also find a positive relationship between foreign ownership and dividend payouts. We further find that dividend payouts are negatively related to 3-year-ahead and 5-year-ahead sales (or earnings) growth as a proxy for long-term firm growth. However, for firms with high foreign ownership, we find a positive relationship between dividend payouts and long-term firm growth. These findings indicate that foreign ownership has a moderating effect on dividend payouts and long-term firm growth. Overall, our results suggest that foreign investors are expected to provide managers with an incentive to pursue long-term value for the sake of shareholders by monitoring and disciplining managers. Our study contributes to a better understanding of the value-increasing effects of foreign ownership on firm value by demonstrating that the reduction in agency costs due to the foreign ownership effect is associated with higher growth rates and thus higher firm value. Our study also contributes to the literature on the foreign ownership–firm value nexus by showing that foreign investors play a crucial role in ensuring sustainable firm growth.
Highlights
The issue of whether foreign ownership affects firm value has attracted significant research interest from both academics and practitioners over the past few decades [1,2,3,4]
We find that the coefficient on ∆Foreign_Own is positive and significant across all three columns, indicating that changes in foreign ownership are positively related to changes in firm value
We find that foreign ownership is positively related to firm value, consistent with prior studies
Summary
The issue of whether foreign ownership affects firm value has attracted significant research interest from both academics and practitioners over the past few decades [1,2,3,4]. Our results suggest that the improved profitability due to the decrease in agency costs resulting from the monitoring effect of foreign investors is associated with higher dividend payouts. For firms with high foreign ownership, we find a positive relationship between dividend payouts and long-term firm growth. We show that the reduction in agency costs due to the foreign ownership effect is associated with higher growth rates and higher firm value. Our study sheds light on the important role of foreign investors in the relationship between dividend payouts and long-term firm growth. Our study extends the existing literature by providing new evidence that the negative relationship between dividend payouts and long-term growth rates is weaker for firms with high foreign ownership. The remainder of this paper is organized as follows: Section 2 reviews prior literature and develops our hypotheses; Section 3 describes the sample selection and variable definitions; Section 4 presents the results; and Section 5 concludes the paper
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