Dividend policy determinants: an investigation of the influences of stakeholder theory

Financial Management (Financial Management Association), Autumn, 1998 by Mark E. Holder, Frederick W. Langrehr, J. Lawrence Hexter

B. Size Effects

The coefficient of firm size is significant and in the hypothesized direction. This indicates that larger firms tend to have higher payout ratios. Compared to smaller [TABULAR DATA FOR TABLE 1 OMITTED] firms, larger firms have easier access to the capital markets and are therefore less dependent on internal funds. Therefore, they can afford to pay higher dividends.

Table 2. Means and Standard Deviations for Variables in the Study

This table provides descriptive statistics for the variables used
in the study over the period 1983-1990. DP is the smoothed
dividend-payout ratio for the firm. The variables are defined as:
FS is a measure of the focus of the firm, LSALES is the natural log
of sales, INS is the residual of the percentage of common shares
held by corporate insiders after regressing on the natural log of
sales (to remove size effects), LCSHAR is the residual of the
natural log of the number of shareholders regressed on the natural
log of sales, FCF measures free cash flow, GROW is the growth rates
in sales, and STD is the standard deviation of firm returns.

                               Standard
Variable           Mean        Deviation

DP (percent)      29.5993       21.2116
FS                 0.7278        0.2372
LSALES             7.0412        1.6169
INS                6.0456       10.7391
LCSHR              9.3009        1.0314
FCF                0.0481        0.0872
GROW               0.0530        0.1172
STD (percent)      0.0990        0.0301

C. Agency Costs

Results from the regression indicate that insider ownership negatively and significantly affects dividend-payout ratios, and the number of shareholders positively affects payouts. Both results are consistent with the theoretical model and previous empirical work.(12)

These results indicate that firms with a higher percentage of stock held by insiders will have lower agency costs and lower dividend-payout ratios. The natural log of the number of shareholders also positively and significantly affects dividend-payout ratios, again supporting extant theoretical and empirical work (Rozeff, 1982). Firms with a larger dispersion of ownership of common stock will have higher agency costs and higher dividend-payout ratios to control agency costs.

We also use free cash flow, which has not been used in previous studies of dividend-payout determinants, to measure agency costs. Our empirical results show that free cash flow positively and significantly affects dividend-payout ratios. This result supports the hypotheses (Jensen, 1986a) that firms with higher levels of free cash flow will have higher agency costs and need higher dividend-payout ratios to reduce those agency Costs.(13)

D. Transaction Costs

The coefficient of the standard deviation of monthly returns for a firm is negative and statistically significant. Dividend-payout ratios are lower for higher-risk firms. This supports the theoretical model that postulates that higher-risk firms face larger transaction costs.

Where previous studies used other variables, such [TABULAR DATA FOR TABLE 3 OMITTED] as beta, as a transaction costs variable (Lloyd, Jahera, and Page, 1985), our use of the standard deviation provides additional benefits because it measures total risk differences among firms in the sample.(14)