Shareholder Protection, Ownership, and Dividends: Russian Evidence

ABSTRACT

This article investigates the relation between corporate governance mechanisms and dividend policy in Russian firms. Using a sample of Russian listed firms over the period 1998–2003, we estimate models for dividend pay probability and payout size. We find that there has been a significant increase in dividend payout levels which coincide with improvements in legal shareholder protection. State controlled firms are more frequent dividend payers as compared to other majority owned firms. We also find that dual share firms, in which corporate charters protect minority interests, have a higher dividend pay probability; while firms reporting according to US GAAP, which may be less likely to manipulate earnings, have a lower dividend payout.

KEY WORDS:

• dividend policy
• investor protection
• majority ownership
• oligarchs
• ownership concentration

Acknowledgments

We thank two anonymous referees for valuable comments.

Funding

Financial support from the Academy of Finland (the Russia in flux-program) is gratefully acknowledged.

Notes

1. See e.g., La Porta et al. (2000), Faccio, Lang, and Young (2001), Maury and Pajuste (2002), Gugler and Yurtoglu (2003), and Bena and Hanousek (2008).

2. Using an international sample, Denis and Osobov (2008) find support for the argument that firms optimally pay out excess funds to mitigate the possibility that free cash flows would be wasted.

3. See e.g., Muravyev (2009).

4. Oligarchs denote business persons who control sufficient resources to influence national politics (Guriev and Rachinsky 2005).

5. Goncharoc and van Triest (2011) state that “To the best of our knowledge, there is no systematic evidence on dividend policies in Russia.” They provide descriptives on such policies, as well as test for a Lintner (1956) type of model for dividends in Russia, including variables for fair value adjustments. We in turn test for corporate governance related determinants including ownership variables for dividends in Russia.

6. The evidence is more mixed concerning the question of whether the second largest owner can mitigate the control problem. Maury and Pajuste (2002) found that also increased ownership by the second largest owner negatively influenced dividends, whereas Gugler and Yurtoglu (2003) and Bena and Hanousek (2008) found a positive effect from the existence of a significant minority shareholder.

7. The privatization process with its voucher privatization gave ownership rights to managers, employees, outsiders, while some part was retained by the state (Boycko, Shleifer, and Vishny 1995). Subsequent privatizations of state holdings enabled increased private ownership concentration and also led to the emergence of so-called oligarchs with a large influence on the Russian economy (Guriev and Rachinsky 2005; Shleifer and Treisman 2005).

8. Despite fears that this could lead to earnings management in order to totally avoid dividend payment, Russian firms have rather paid for than avoided some dividend on the preferred stock, see e.g., Goetzmann, Ukhov, and Spiegel (2002).

9. In March 2004, the Duma passed the last reading of a law, clearly stating a formula that closed the last gap for manipulating dividends.

10. For example, instead of common and preferred shares voting together, now a majority of 75 percent of the preferred votes is required on issues affecting the rights of the holders of preferred stock. Also, the actual payment of dividends is regulated, having to take place within sixty days from the Annual General Meeting.

11. For a detailed survey of the Corporate Governance Code, see e.g., Brunswick UBS Warburg (2002).

12. Alternatively, firms may strengthen national laws with firm-level corporate governance improvements, which could make it easier to force dividend payments.

13. For evidence on international listings as a corporate governance mechanism, preventing managers from taking excessive private benefits, see e.g., Coffee (1999) and Stulz (1999). Through a foreign listing, the firm may become subject to more stringent regulatory rules, the investors may acquire the ability to exercise more effective legal actions such as class actions, and the exchange itself may commit the firm to more extensive and transparent reporting (Coffee 1999). Doidge, Karolyi, and Stulz (2004) and Mitton (2002), for example, provide evidence supporting the hypothesis of such bonding / legal bonding through ADRs.

14. Large shareholders may also improve firm value by reducing conflicts of interest between managers and shareholders. However, if legal shareholder protection is weak, the private benefits extracted by controlling shareholders may exceed the benefits of the reduction in the shareholder-manager agency problem.

15. We do not study share buybacks nor have any data on them. Share buybacks are permitted in Russia but are subject to legal restrictions (see e.g., Zharskiy et al. 2014). According to point 3 of Article 72 of the federal law “On Joint-Stock Companies,” treasury shares (own shares acquired by a company) must be sold off within one year of the date of their acquisition or redeemed (with the corresponding reduction in share capital). Some expropriation cases reported for Russian firms relate to share repurchases (e.g., Surgutneftegaz) (see, Demidova 2007). The share buyback activity in Russian firms has not been consistently documented. However, it appears that dividends typically dominate over buybacks at least during our time period (an observation based on a casual observation of changes in the number of shares, business description in equity guides, and key word searches on the Internet) in our sample firms.

16. Goncharov and van Triest (2011) found a negative relationship between posititive fair value adjustments (mandated by Russian accounting standards) and dividend payout. They suggest that the relationship may either be due to managers using the potentially transitory nature of such gains opportunistically as a justification for lower dividends, or that the fair value adjustments may positively correlate with growth. In the latter case, there might be a need for lower dividends, e.g., due to investment needs. However, these reasons would suggest a negative sign for our RSA variable only if the RSA firms would in general have more of such fair value adjustments as compared to those also reporting according to US GAAP.

17. Although international listing and international reporting standards largely go hand in hand, there are also firms which do not have an international listing but are using international reporting standards.

18. The largest shareholder is traced using the 20 percent voting rule used in La Porta, Lopez-de-Silanes, and Shleifer (1999). For example, if the sample company has two shareholders with more than 20 percent of votes, we assign control to the one with the largest ultimate controlling shareholder. If shareholder A (holding 40 percent in the sample firm) is another listed company with a 30 percent private owner, we say that this controlling shareholder has thirty percent of votes. Shareholder B in the sample firm has 35 percent of votes but is also a direct private owner, e.g., an oligarch, then shareholder B is the ultimate controlling shareholder of the sample firm with 35 percent of control.

19. Hence, our PRIVATE and FOREIGN ownership groups may include a few offshore companies with unknown ultimate controllers. We do not believe these will bias our results.

20. When looking only at the explanatory variables, and excluding alternative specifications of the same variable such as ADRs and OTC_Exchange (a correlation of 0.80, but these two variable specifications are never used simultaneously), the highest correlation is between Ln_sales and RSA (−0.5282), meaning that the largest firms are less likely to only use the Russian accounting standards. Next highest are those between Majority and State_majority (0.42), indicating that the Russian state quite often is the majority owner, and between STATE and Dual_shares (0.39), meaning that dual shares are relatively more common in companies where the Russian state is a large owner. Correlations above 0.3 are also encountered between USGAAP and OTC_Exchange, and between OLIG and Asset_liquidity (0.30) and STATE and Asset_liquidity (−0.32), the latter ones indicating that oligarch controlled firms have relatively more, and state controlled relatively less, liquid assets. When dependent variables are also considered, the highest correlations are between ROA and DIV/EARN (0.51) and State and Divdummy (0.40), the latter being also one of our results in this study.

21. The number of firms that have been exluded due to zero or negative earnings differs between Table 3 and the final sample since some of the firms with zero or negative earnings fell out in the sample selection process because of prior criteria i.e., lacking ownership or growth data.

22. Altough we are not aware of laws mandating dividend policy in state-owned firms during our study period 1998–2003, there has been plans more recently to force a 25 percent payout ratio in state-controlled firms (see, e.g., Financial Times, Nov. 16, 2012), which could help attract foreign capital, improve the perception of corporate governance, and increase government income.

23. Foreign controlling owners which have been associated with better corporate governance in Russia (e.g., Guriev and Rachinsky 2005) can in our study be viewed as supporting the substitute model of dividends.

24. To analyze the impact of legal changes on dividend policy, we performed a difference-in-difference analysis, using Finnish-listed companies as a control group. The use of Finnish firms as a control sample was motivated by the close relation between Russia and Finland in an economic and a geographic sense. Finland experienced no significant changes in legal shareholder protection during 1998–2003. Data for the Finnish sample covered 99 firms and 426 firm years. Dividend data came from Balance Consulting and financials from Thomson financial. The results showed that an interaction variable (Russia*period 2001–2003) was positive but not statistically significant in a probit model for dividend payments, and also positive but not statistically significant in tobit models using dividends/earnings and dividends/sales. These results do not support hypotheses 1a or 1b, but instead indicate that the reason for the positive time trend may lie in changes in the related general economic (business) conditions in the two countries over time.

25. Our data set is, however, even now not a full panel, since observations with negative earnings and hence a negative DIV/EARN have to be cencored for. Due to the already limited sample, we did not estimate the full panel model for all the more extended sets of explanatory variables used in the further columns of Table 6.

Additional information

Funding

Financial support from the Academy of Finland (the Russia in flux-program) is gratefully acknowledged.