Ownership Structure and Payout Policy in the UK

Abstract

This paper examines payout policies of British firms listed on the London Stock Exchange during the 1990s. It complements the existing literature by analyzing the trends in both dividends and total payouts (including share repurchases). In a dynamic panel data regression setting, we relate target payout ratios to a wide group of ownership structure variables that characterize the sample firms. The major finding is that the payout policy in the UK is significantly related to ownership of the companies. The presence of strong block holders or block holder coalitions (in particular, executive directors, financial institutions, and other industrial firms) weakens the relationship between the corporate earnings and the payout dynamics. The results challenge some of the implications of the agency theories of payout, and favor a pecking-order explanation for the observed payout patterns. Finally, the paper improves upon the methodological flaws of the recent empirical studies of payout policy.

Keywords: Payout policy, dividends, share repurchases, partial adjustment, ownership structure, voting power, corporate governance, free cashflow, pecking order

JEL Classification: G35, G32, G30