Large Shareholders, Agency Theory and Dividend Decision in Emerging Markets

Abstract

This paper examines the impact of large shareholders and agency theory on a dividend payout decision. Using firms listed on the Kuwait Stock Exchange as an emerging market, a panel dataset of 37 non-financial firms between 1999 and 2003 is used in the analysis. Random effects probit models are used to examine the impact of large shareholders, firm size, free cash flows, investment opportunity, business risk, and firm profitability on dividend amounts firms paid. Large shareholders are disaggregated into three types to determine if they influence the dividend paid: institutions, governments, and large individual shareholders. Results suggest government ownership is the only large shareholder type affecting dividend decisions. Furthermore, results show government ownership and firm profitability increase the probability of paying dividends, while the leverage ratio decreases the probability. Overall, findings indicate companies listed on the Kuwait Stock Exchange pay dividends to reduce agency conflict and avoid exploiting minority shareholders.