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The association between dividend payout and outside directorships

Al-Najjar, Basil and Hussainey, K. (2009) The association between dividend payout and outside directorships. Journal of Applied Accounting Research 10 (1), pp. 4-19. ISSN 0967-5426.

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Official URL: http://dx.doi.org/10.1108/09675420910963360

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.

Item Type: Article
School or Research Centre: Birkbeck Schools and Research Centres > School of Business, Economics & Informatics > Management
Depositing User: Dr Basil Al-Najjar
Date Deposited: 25 Oct 2012 09:17
Last Modified: 17 Apr 2013 12:25
URI: http://eprints.bbk.ac.uk/id/eprint/5380

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