Ownership concentration and dividend policy in Japan

Purpose - The purpose of this paper is to test two agency-based hypotheses regarding the effect of ownership concentration on dividend policy using a large sample of Japanese firms. Design/methodology/approach - Level regressions associating payout rates to ownership concentration are run. Different measures of payout are used to ensure the robustness of our findings. Endogeneity of ownership is taken into account. The choice of instruments is carefuly motivated and their statistical power and exogeneity are checked. How ownership concentration affects the propensity to increase dividends following changes in variables correlated with free cash flows is also examined. Findings - The results are consistent with rent extraction by large shareholders. Ownership concentration is associated with significantly lower dividends in proportion to earnings as well as relative to book equity. An endogenous relation between ownership concentration and dividend payout is established, but the results are not statistically different. Firms with concentrated ownership are also less likely to increase dividends when earnings increase or when debt decreases. Practical implications - Large shareholders do not appear to use dividend policy to remove excess cash and impose greater financial discipline on managers. Instead, the results underline the conflicts of interest between majority and minority shareholders. Originality/value - The endogeneity of ownership is controlled for using firm age and the industry's average ownership concentration as instruments. The effect of ownership concentration on dividend changes following changes in proxies for free cash flows is also analyzed.