This article deals with
the relationship between institutional ownership and dividend payout. Under two
different scenarios, the article tries to analyze opposing hypotheses about
whether an increased level of institutional ownership leads to lower or higher
dividend payout. The first hypothesis states that institutional ownership
lowers dividend payout. It is supported by the fact that there are agency costs
between management and shareholders. However, a high level of institutional
ownership can decrease agency costs because an institutional owner is more able
to monitor the management of a firm. As such, the concern for agency costs is
diminished, leading to a smaller dividend payout.
The second hypothesis is
supported by the fact that the level of institutional ownership impacts the tax
policy of the firm. Since capital gains are exposed to higher taxation rules
than dividend payments, institutional owners would prefer higher dividend
payments instead of capital gains. The disposable income of the firm is
therefore spent on dividends rather than on new investments.
This could be displayed
in real life in the following situation: a company has a significant amount of
retained earnings after a certain period and is considering either paying out
dividends or reinvesting it. If hypothesis 1 is correct and the company’s
agency costs are high, investments might be preferred over dividend payouts.
Also, if hypothesis 2 is correct and there are considerable tax
advantages, dividends might be considered over investments
The sample that the
article uses is formed by companies listed on COMPUSTAT or CRSP and that have a
standard industry classification code between 2000 and 3999.
To avoid having a
falsified conclusion, the authors control for extraneous variables that could
also impact on the dividend payment policies but are not linked to the
institutional ownership. Those effects could falsify the findings. One such
effect is that companies experiencing an increasing level of revenue and
growth, tend to give smaller dividends, as they prefer to reinvest their funds.
To test the hypothesis,
the dividend yield is assessed by a regression analysis on the level of
institutional ownership, making sure the controlled variables are kept
A Tobit analysis is used
over the least squares estimators as the results of the former are unbiased,
due to the control over extraneous variables.
conclusions the authors make are consistent with both hypotheses. They conclude
that dividend payouts are indeed negatively correlated with institutional
ownership when there are agency-costs and positively correlated in case of tax
advantages. Therefore, it is difficult to infer only one correlation between
institutional ownership and dividend policy as it heavily depends on context.
However, there is an overall trend that institutional ownership and dividend
policy are positively correlated. This is shown by the positive effect size.
The Tobit analysis shows a value of 0.3612 at the 5% significance level, for
the target dividend yield over all investigated years. We interpret this as
evidence that the tax-advantage hypothesis is more supported than the
agency-problem hypothesis in real life. It implies that institutional
shareholders prioritize dividend payments over a gain in capital. This
interpretation does not significantly differ from the one stated in the