Do corporate governance mechanisms affect cash dividends? An empirical investigation of UK firms

Abstract

The study examines whether corporate governance mechanisms and the compliance with good governance practice are related to cash dividends. In particular, the study assesses the effect of institutional ownership and board structure on the decision to pay cash dividends. A study on UK firms is interesting because firms are expected to voluntarily structure governance mechanisms based on their own needs. We find that institutional owners positively affect cash dividend payments, suggesting that UK institutions are effective in forcing firms to disgorge cash. There is limited evidence that independent directors affect the cash dividends. The results also show that firm specifics affect the cash dividends, namely, business risk, firm size, and leverage ratio. The results are consistent across several robustness checks.

Keywords:

• audit committee
• audit meetings
• independent auditors
• non-executive directors
• institutional ownership
• cash dividends

• JEL Classifications:
• G32
• G35

Notes

1. According to the Office of National Statistics.

2. We are grateful for an anonymous referee for this point.

3. Strategic ownership is defined to include the portion of a company's share capital that is effectively excluded from normal dealing. The institutions formally bound by ‘prudent man’ rules are investment banks

and pension or endowment funds.

4. La Porta et al. (2000) examine the relationship between the composition of board of directors and dividend. Chen et al. (2005) assess the effect of the presence of an audit committee on dividends; while Aivazian, Booth, and Cleary (2003) investigate the relationship between institutional ownership and the decision of paying dividend.

5. The insignificant result of profitability might be explained by the findings of Brav et al. (2005) that firm managers are willing to sell assets, lay off employees, raise external funds, or forgo positive-NPV projects in order to pay dividends. In addition, Lysandrou and Stoyanova (2007) argue that UK institutional owners are able to disgorge cash through their collective portfolio selection and rebalancing decisions.