Institutional ownership stability and dividend payout policy

Abstract

Purpose

The purpose of this paper is to empirically examine the link between institutional ownership stability and dividend payout ratio.

Design/methodology/approach

First, the authors estimate the propensity of a firm to pay dividend. Next, the authors perform panel fixed-effect regressions of dividend payouts on institutional ownership stability variables. The authors also compare institutional ownership between dividend paying and non-dividend paying investee firms. The authors analyze the dividend preferences of different types of institutional owners. Finally, the authors examine the cross-sectional variation in the volatility of dividend payouts.

Findings

The authors find that stable and large institutional owners favor dividend paying companies. There also exists a positive association between ownership persistence and dividend payout. Conversely, firms that change their dividend payout frequently are associated with larger deviations in institutional ownership. Additionally, the presence of pressure-sensitive institutional investors (i.e. investors that also hold business ties with the investee firm) is significantly linked to dividend payout policy. Conversely, pressure-insensitive investors use alternative forms of monitoring instead of requiring investee firms to pay dividends, which serve to reduce agency conflicts.

Originality/value

This paper considers the preferences of long-term stable institutional investors in their selection of dividend paying firms.

Citation

Jory, S.R., Ngo, T. and Sakaki, H. (2017), "Institutional ownership stability and dividend payout policy", Managerial Finance, Vol. 43 No. 10, pp. 1170-1188. https://doi.org/10.1108/MF-09-2016-0272