Institutional Investment Horizon and Dividend Policy

An Empirical Study of UK Firms

Erhan Kilincarslan, Ozgur Ozdemir

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

This paper investigates the effect of the institutional investment horizon on dividend policy. Using a panel dataset of non-financial UK firms over the period 2000‒2010, we measure institutional investors’ investment horizons by the churn rate of their overall stock positions in a firm. We find that there is a significantly negative relationship between the churn rate and dividend payments, and this negative relation is robust to the usage of different dividend policy proxies, substitute methodologies and alternative churn rate measures. Thus, our findings suggest that institutions with shorter term investment horizons (with higher churn rates) have a negative impact on dividends, whereas longer term institutional investors (with lower churn rates) have a positive one. Overall, our evidence is consistent with the notion that long-horizon institutions are more concerned with monitoring, compared to short-horizon institutions, and prefer higher dividends to increase dividend-induced capital market monitoring in order to lower the agency costs of managerial discretion. In addition, this positive influence may also reflect the preferences of tax-neutral long-horizon institutions for dividend income due to their liquidity needs, as well as the common institutional charter and prudent-man rule restrictions.
Original languageEnglish
Pages (from-to)291-300
Number of pages10
JournalFinance Research Letters
Volume24
Early online date27 Sep 2017
DOIs
Publication statusPublished - 1 Mar 2018
Externally publishedYes

Fingerprint

Empirical study
Dividends
Investment horizon
Institutional investment
Dividend policy
Monitoring
Institutional investors
Capital markets
Managerial discretion
Charter
Tax
Methodology
Substitute
Payment
Income
Liquidity
Agency costs

Cite this

@article{41bf83e3f04a464c924deb346dc813d9,
title = "Institutional Investment Horizon and Dividend Policy: An Empirical Study of UK Firms",
abstract = "This paper investigates the effect of the institutional investment horizon on dividend policy. Using a panel dataset of non-financial UK firms over the period 2000‒2010, we measure institutional investors’ investment horizons by the churn rate of their overall stock positions in a firm. We find that there is a significantly negative relationship between the churn rate and dividend payments, and this negative relation is robust to the usage of different dividend policy proxies, substitute methodologies and alternative churn rate measures. Thus, our findings suggest that institutions with shorter term investment horizons (with higher churn rates) have a negative impact on dividends, whereas longer term institutional investors (with lower churn rates) have a positive one. Overall, our evidence is consistent with the notion that long-horizon institutions are more concerned with monitoring, compared to short-horizon institutions, and prefer higher dividends to increase dividend-induced capital market monitoring in order to lower the agency costs of managerial discretion. In addition, this positive influence may also reflect the preferences of tax-neutral long-horizon institutions for dividend income due to their liquidity needs, as well as the common institutional charter and prudent-man rule restrictions.",
keywords = "Dividend policy, Institutional investors, Investment horizon, UK, The UK",
author = "Erhan Kilincarslan and Ozgur Ozdemir",
year = "2018",
month = "3",
day = "1",
doi = "10.1016/j.frl.2017.09.016",
language = "English",
volume = "24",
pages = "291--300",
journal = "Finance Research Letters",
issn = "1544-6123",
publisher = "Elsevier BV",

}

Institutional Investment Horizon and Dividend Policy : An Empirical Study of UK Firms. / Kilincarslan, Erhan; Ozdemir, Ozgur .

In: Finance Research Letters, Vol. 24, 01.03.2018, p. 291-300.

Research output: Contribution to journalArticle

TY - JOUR

T1 - Institutional Investment Horizon and Dividend Policy

T2 - An Empirical Study of UK Firms

AU - Kilincarslan, Erhan

AU - Ozdemir, Ozgur

PY - 2018/3/1

Y1 - 2018/3/1

N2 - This paper investigates the effect of the institutional investment horizon on dividend policy. Using a panel dataset of non-financial UK firms over the period 2000‒2010, we measure institutional investors’ investment horizons by the churn rate of their overall stock positions in a firm. We find that there is a significantly negative relationship between the churn rate and dividend payments, and this negative relation is robust to the usage of different dividend policy proxies, substitute methodologies and alternative churn rate measures. Thus, our findings suggest that institutions with shorter term investment horizons (with higher churn rates) have a negative impact on dividends, whereas longer term institutional investors (with lower churn rates) have a positive one. Overall, our evidence is consistent with the notion that long-horizon institutions are more concerned with monitoring, compared to short-horizon institutions, and prefer higher dividends to increase dividend-induced capital market monitoring in order to lower the agency costs of managerial discretion. In addition, this positive influence may also reflect the preferences of tax-neutral long-horizon institutions for dividend income due to their liquidity needs, as well as the common institutional charter and prudent-man rule restrictions.

AB - This paper investigates the effect of the institutional investment horizon on dividend policy. Using a panel dataset of non-financial UK firms over the period 2000‒2010, we measure institutional investors’ investment horizons by the churn rate of their overall stock positions in a firm. We find that there is a significantly negative relationship between the churn rate and dividend payments, and this negative relation is robust to the usage of different dividend policy proxies, substitute methodologies and alternative churn rate measures. Thus, our findings suggest that institutions with shorter term investment horizons (with higher churn rates) have a negative impact on dividends, whereas longer term institutional investors (with lower churn rates) have a positive one. Overall, our evidence is consistent with the notion that long-horizon institutions are more concerned with monitoring, compared to short-horizon institutions, and prefer higher dividends to increase dividend-induced capital market monitoring in order to lower the agency costs of managerial discretion. In addition, this positive influence may also reflect the preferences of tax-neutral long-horizon institutions for dividend income due to their liquidity needs, as well as the common institutional charter and prudent-man rule restrictions.

KW - Dividend policy

KW - Institutional investors

KW - Investment horizon

KW - UK

KW - The UK

UR - http://www.scopus.com/inward/record.url?scp=85033444775&partnerID=8YFLogxK

U2 - 10.1016/j.frl.2017.09.016

DO - 10.1016/j.frl.2017.09.016

M3 - Article

VL - 24

SP - 291

EP - 300

JO - Finance Research Letters

JF - Finance Research Letters

SN - 1544-6123

ER -