Nonfinancial Firms as Large Shareholder Use Dividend Policy for Management Monitoring in Brazil

Abstract

The paper analyzes whether nonfinancial firms as large blockholders of the Brazilian firm shape dividend policy. Under the Agency Theoretical framework, a set of good corporate governance practices is suggested as able to control management activity and prevent managers from incurring in moral hazard problems and the emergence of excessive management power as predicted by the Managerial Power Hypothesis. In this context, the Management Monitoring Hypothesis proposes that dividend policy may be used as a management control mechanism given that dividend distribution affects the free cash flow available for managers. Dividend models were estimated by the Generalized Method of Moments (GMM) for an unbalanced panel data, composed of 1.890 firm-year observations of 234 companies listed on the BM&FBovespa, in the period 1996-2012. The results indicate that nonfinancial firms as large shareholders increase dividend payout which leads to the reduction of free cash flow. This result is in accordance with the monitoring hypothesis which predicts the reduction of free cash flow available for managers through dividend policy.