The association between dividend payout and outside directorships

Basil Al-Najjar, Khaled Hussainey

Research output: Contribution to journalArticle

26 Citations (Scopus)

Abstract

Purpose
– The purpose of this paper is to examine whether the number of outside directors on the board of directors and dividend payout are substitutes or complements mechanisms applied by UK firms to control agency conflicts of interest within the firm.

Design/methodology/approach
– The authors use tobit and logit regression models to examine the extent to which firms with a majority of outside directors on their boards experience significantly lower or higher dividend payout after controlling for insider ownership, profitability, liquidity, asset structure, business risk, firm size, firms' growth rate and borrowing ratio.

Findings
– Based on a sample of 400 non‐financial firms listed at London Stock Exchange for the period from 1991 to 2002, it was found that dividend payout is negatively associated with the number of outside directors on the board of directors.

Originality/value
– The results suggest that firms pay lower dividends when higher number of outside directors is employed on the board. This evidence is consistent with the substitution hypothesis, which indicated that firms with weak corporate governance need to establish a reputation by paying dividends. In other words, dividends substitute for independent directors on the board. This finding offers novel insights to policy makers interested in agency conflicts of interest within the firm. It also provides evidence on the use of different substitute mechanisms for reducing agency costs.
LanguageEnglish
Pages4-19
Number of pages16
JournalJournal of Applied Accounting Research
Volume10
Issue number1
DOIs
Publication statusPublished - 2009
Externally publishedYes

Fingerprint

Dividend payout
Outside directors
Dividends
Substitute
Board of directors
Agency conflict
Conflict of interest
Borrowing
Design methodology
Profitability
Assets
Low pay
Corporate governance
Politicians
London Stock Exchange
Tobit regression
Insider ownership
Liquidity
Agency costs
Business risk

Cite this

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The association between dividend payout and outside directorships. / Al-Najjar, Basil; Hussainey , Khaled.

In: Journal of Applied Accounting Research, Vol. 10, No. 1, 2009, p. 4-19.

Research output: Contribution to journalArticle

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AU - Hussainey , Khaled

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AB - Purpose– The purpose of this paper is to examine whether the number of outside directors on the board of directors and dividend payout are substitutes or complements mechanisms applied by UK firms to control agency conflicts of interest within the firm.Design/methodology/approach– The authors use tobit and logit regression models to examine the extent to which firms with a majority of outside directors on their boards experience significantly lower or higher dividend payout after controlling for insider ownership, profitability, liquidity, asset structure, business risk, firm size, firms' growth rate and borrowing ratio.Findings– Based on a sample of 400 non‐financial firms listed at London Stock Exchange for the period from 1991 to 2002, it was found that dividend payout is negatively associated with the number of outside directors on the board of directors.Originality/value– The results suggest that firms pay lower dividends when higher number of outside directors is employed on the board. This evidence is consistent with the substitution hypothesis, which indicated that firms with weak corporate governance need to establish a reputation by paying dividends. In other words, dividends substitute for independent directors on the board. This finding offers novel insights to policy makers interested in agency conflicts of interest within the firm. It also provides evidence on the use of different substitute mechanisms for reducing agency costs.

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