Investors’ Power and the Dividend Cost Minimization Model: Which One Better Explains the Dividend Policy in Pakistan?

African Journal of Business Management, Vol. 5, No. 24, pp. 10747-10759, October 2011

13 Pages Posted: 12 Nov 2011

See all articles by Fahad Abdullah

Fahad Abdullah

Institute of Management Sciences, Peshawar

Attaullah Shah

Institute of Management Sciences

Abdullah Muhammad Iqbal

Independent

Raheel Gohar

NUST Business School

Date Written: November 11, 2011

Abstract

This paper posits that the relevance and indeed the assumptions of the dividends cost minimization model are restricted to those countries where shareholders rights are well protected. Alternatively, we propose an “investor power” hypothesis, which is closely akin to the La Porta et al. (2000) “outcome hypothesis”. Our hypothesis states that the determining factor of dividends payout in a weak legal system is not the minimization of agency costs, instead it is the presence of certain powerful outside investors who can force firms to pay dividends. Using two variants of the dividends cost minimization model and a modified version of the dividends partial adjustment model on a data set for 183 Pakistani listed firms, our results partially support the investor power hypothesis. Results of the mean-comparison tests as well as the regression models show that dividend-payout ratio decreases with the ownership percentage of individual shareholders and the incumbent managers. Our empirical results indicate that there is only weak evidence that institutional investors can force managers to pay dividends. Among the other variables, dividend payout ratio increases with the size of a firm and ownership percentage of associated companies, and decreases with financial leverage, coefficient of variation of net income, and growth opportunities.

Keywords: Ownership structure, dividend policy, investors’ power, cost minimization model of dividend, managerial ownership, institutional ownership, Karachi Stock Exchange

JEL Classification: G32

Suggested Citation

Abdullah, Fahad and Shah, Attaullah and Iqbal, Abdullah Muhammad and Gohar, Raheel, Investors’ Power and the Dividend Cost Minimization Model: Which One Better Explains the Dividend Policy in Pakistan? (November 11, 2011). African Journal of Business Management, Vol. 5, No. 24, pp. 10747-10759, October 2011 , Available at SSRN: https://ssrn.com/abstract=1958426

Fahad Abdullah

Institute of Management Sciences, Peshawar ( email )

Phase-VII, Hayatabad
Hayatabad, Peshawar
Peshawar, NWFP 25000
Pakistan

Attaullah Shah (Contact Author)

Institute of Management Sciences ( email )

1-A, Sector E / 5, Phase – VII, Hayatabad, Peshawa
Peshawar, NWFP 25000
Pakistan
+923459146115 (Phone)

HOME PAGE: http://www.opendoors.pk

Abdullah Muhammad Iqbal

Independent ( email )

Raheel Gohar

NUST Business School ( email )

H-12 Sector
islamabad
Pakistan

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