Abstract
Following the economic crisis in 1997, the Korean government introduced the enhanced corporate governance and reform policy, which drove family-controlled firms to search strategic reaction for control succession and wealth transfer. This paper explores alternative explanations for why Korean firms choose to pay cash dividends around this corporate reform period. What lead firms to pay cash dividends remains largely unexplained by the reducing agency cost, signaling, or life-cycle theories. This study focuses on relations between the ownership structure and cash dividends payout, seeking effects deriving from (i) controlling shareholder (CS) and (ii) their family members. The logit analysis result shows that firms with large control rights, especially higher ownership of other family members of CS are more likely to pay cash dividends. After adjusting for the characteristics that affect the degree of cash dividends, ownership variables are positively related to payout ratios and dividend yields. CS family members' ownership has a statistically stronger effect on payout ratios than CS's. These results provide the evidence of incentive for corporate control succession within the family with least costs carried by the family members of controlling shareholders who positively influence payout decisions and dividend ratios.
Highlights
Since Miller and Modigliani’s study in 1961, a central investigative question is ‘why do firms make cash payouts’
Repurchase dummy is a dummy variable, one (1) when a firm buys back shares, or zero (0) if otherwise; ROA is return on assets; OP_STD is 5-years standard deviation of operating profit to net sales; capital expenditure (Capex) is the change in fixed assets scaled against total assets; Age is the number of years since the firm’s inception; Controlling shareholder is the ownership of the controlling shareholder; ‘other’ CS family members is ownership by all other CS family members excepting CS; Family ownership is ownership by controlling family; Control Rights is ownership by controlling shareholders and subsidiaries; Foreign ownership is the sum of all foreign shareholder ownership; ROA and MTB are winsorized at 1% and 99%
Why firms pay cash dividends has been commonly explained by the reducing agency problem or by signaling or by life-cycle theory in the literature
Summary
Since Miller and Modigliani’s study in 1961, a central investigative question is ‘why do firms make cash payouts’. According to the agency theory, these mixed results explain the motivation for dividend payments They directly indicate a controlling family’s incentive to increase member-family wealth by paying more cash dividends in firms in which they hold greater ownership. This implies that cash dividends might be paid for private benefit in firms belonging to a business group. Based on the CS’s incentive for avoiding inheritance tax, I suggest an alternative explanation that cash dividends may be used as a tool of wealth succession within a CS family To verify this hypothesis, I segregated the ownership of controlling shareholders and ‘other’ CS family members’ ownership, and examined their effect on payout decision and magnitude of cash dividends, separately.
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