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The impact of board composition and ownership structure on dividend payout policy: evidence from Saudi Arabia
Article in International Journal of Emerging Markets · October 2021
DOI: 10.1108/IJOEM-05-2021-0791
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The impact of board composition and ownership structure on
dividend payout policy:
evidence from Saudi Arabia
Helmi A. Boshnak
King Abdulaziz University, Jeddah, Saudi Arabia
Abstract
Purpose–This study examines the impact of board composition and ownership structure variables on dividend payout policy in Saudi Arabian firms. In particular, it aims to determine the effect of board size, independence and meeting frequency, in addition to chief executive officer (CEO) duality, and state, institutional, managerial, family, and foreign ownership on both the propensity to pay dividends and dividend per share for Saudi-listed firms over the period 2016–2019.
Design/methodology/approach–The paper captures dividend policy with two measures, propensity to pay dividends and dividend per share, and employs a range of regression methods (logistic, probit, ordinary least squares (OLS) and random effects regressions) along with a two-stage least squares (2SLS) model for robustness to account for heteroscedasticity, serial correlation and endogeneity issues. The data set is a large panel of 280 Saudi-listed firms over the period 2016 to 2019.
Findings–The results underline the importance of board composition and the ownership structure in explaining variations in dividend policy across Saudi firms. More specifically, there is a positive relationship between the propensity to pay dividends and board-meeting frequency, institutional ownership, firm profitability and firm age, while the degree of board independence, firm size and leverage exhibit a negative relation. Further, dividend per share is positively related to board meeting frequency, institutional ownership, foreign ownership, firm profitability and age, while it is negatively related to CEO duality, managerial ownership, and firm leverage. There is no evidence that family ownership exerts an impact on dividend payout policy in Saudi firms. The findings of this study support agency, signalling, substitute and outcome theories of dividend policy.
Research limitations/implications–This study offers an important insight into the board characteristic and ownership structure drivers of dividend policy in the context of an emerging market. Moreover, the study has important implications for firms, managers, investors, policymakers, and regulators in Saudi Arabia.
Originality/value–This paper contributes to the existing literature by providing evidence on four board and five ownership characteristic drivers of dividend policy in Saudi Arabia as an emerging stock market, thereby improving on less comprehensive previous studies. The study recommends that investors consider board composition and ownership structure characteristics of firms as key drivers of dividend policy when making stock investment decisions to inform them about the propensity of investee firms to pay dividends and maintain a given dividend policy.
KeywordsBoard composition, Ownership structure, Dividend policy, Saudi stock exchange Paper typeResearch paper
1. Introduction
Board composition and the ownership structure are fundamental drivers of managers’ incentives and thus firm efficiency (Jensen and Meckling, 1976). Dividend policy, a key strand of corporate strategy, remains one of the most intensively researched and contentious fields of corporate finance. A dividend is the unit of income paid to shareholders as compensation for their risk investment. As a key component of remuneration along with potential capital gains, shareholders maximize their wealth by maximizing total returns. However, there is a key trade-off for firms wanting to both distribute earnings as dividends and retain funds to support long-term growth. Therefore, dividend policy is a contentious balancing act for management to pursue shareholders’ best interests to retain their trust while ensuring investment income and firm growth.
Board composition
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1746-8809.htm
Received 28 May 2021 Revised 8 August 2021 Accepted 17 September 2021
International Journal of Emerging Markets
© Emerald Publishing Limited 1746-8809 DOI10.1108/IJOEM-05-2021-0791
While there are many dividend policy studies for emerging market countries (Abdelsalam et al., 2008;Al-Najjar and Belghitar, 2014;Benjamin and Zain, 2015;Yarram and Dollery, 2015;
Benjamin and Zain, 2015;Elmagrhiet al., 2017;Mehdiet al., 2017;Bataineh, 2020;Suwaidan and Khalaf, 2020;Hasanet al., 2021), there has been less emphasis on the influence of good governance on dividend policy to address potential agency issues. There is a paucity of research in particular on the effect on dividend policy of board composition and ownership.
Further, dividend policy in Saudi Arabian firms may well differ from that observed in developed countries.
Corporate dividend policies exert a critical impact on corporate share prices and thus market value (Bernstein, 1998; Baker and Powell, 1999; Sarwar, 2013). There is a well-developed international literature on dividend policy drivers (Glenet al., 1995;La Porta et al., 2000;Thanatawee, 2013;Berezinetset al., 2017;Adjaoud and Hermassi, 2017;Bataineh, 2020; Suwaidan and Khalaf, 2020; Hasan et al., 2021). However, most studies focus on developed countries characterised by well-regulated financial markets and widely dispersed ownership, while the literature for emerging countries is still developing. The emerging market literature lacks depth, and some key differences in dividend policy drivers exist across countries (Laceet al., 2013;Al-Najjar and Kilincarslan, 2019;Bataineh, 2020;Hasanet al., 2021).
The corporate board exists to approve the corporation’s strategic goals, plans, and policies, and to direct its corporate affairs. The board is typically composed of internal directors at its core, while additional external directors are executives from other firms (Gitman and Zutter, 2015). The composition introduces an element of both independence and diversity. The board determines both whether to pay dividends and the level where dividends are paid. This decision is influenced by the firm’s ownership structure, as a governance control mechanism, which determines how ownership is divided between institutional and retail investors, managers, governments, and family, and thus how ownership may be either concentrated or dispersed.
The extant literature lacks consensus on the precise effect of board composition and the ownership structure on firms’dividend policies. Investors require a return that is consistent with the investment risk taken, and dividend policy aims to maximize their wealth by balancing the stream of distributed and retained earnings. Given the relatively underdeveloped literature on emerging market dividend policy, this study aims to examine the effect of both board composition and ownership structure variables on corporate dividend payout policy in Saudi-listed firms over the period 2017–2019, thereby making the following contributions: First, it presents evidence on the impact on dividend payout policy of board composition and the ownership structure in an emerging market setting where corporate governance and firm regulation are relatively weak when compared to developed markets.
Second, firms in Saudi Arabia provide an interesting example of a key emerging market, as they are associated with business groups and managed by founding family members, thus giving significant decision-making power to controlling shareholders. Third, the study results afford insights for investors and others to facilitate better-informed investment decisions. The research questions tackled in the paper are
(1) What is the relationship between the firm’s propensity to pay dividends and dividend per share and the composition of the board of directors?
(2) What is the relationship between the firm’s propensity to pay dividends and dividend per share and its ownership structure?
The study is organized as follows:Section 2sets out the theoretical framework, andsection 3 examines the extant literature in the field.Section 4formulates the study hypotheses, and section 5outlines the research methodology. The study results are examined insection 6, whilesection 7gives the conclusions, implications, limitations and recommendations.
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2. Theoretical framework
There is an established theoretical literature seeking to explain dividend policy, focussing largely on developed rather than developing countries, and employing agency, signalling, outcome and substitute theories. At its core is the dividend puzzle whereby (higher) dividend- paying firms are rewarded with higher valuations even though investors should be indifferent between such firms and those paying no or lower dividends.
2.1 Agency theory
There is an agency conflict between managers and shareholders in the presence of information asymmetry (Jensen and Meckling, 1976), whereby the former may engage in actions that are harmful to the latter and therefore firm value. Dividends may thus be employed as a mechanism to minimize the free cash accessible to management to pursue their interests by making poor investment decisions (Rozeff, 1982;Easterbrook, 1984), and thereby dividends reduce the agency costs from management–shareholder interest misalignment (Zainudinet al., 2018).
2.2 Signalling theory
Signalling theory supports dividend relevance. Managers enjoy an informational advantage concerning the firm’s current and potential future state that is not available to shareholders, which may be used to pursue actions to the benefit of the former and detriment of the latter (Bataineh, 2020). The dividend announcement can function as a signalling mechanism to convey performance information, and thereby reduce the degree of information asymmetry:
increasing dividends send a positive signal, while decreasing dividends send a negative signal to investors concerning the firm’s future performance (Bhattacharya, 1979;John and Williams, 1985).
2.3 Outcome theory
Outcome theory sees the payment of dividends as an outcome of the corporate governance system, such that managers in poorly governed firms maximize their personal wealth by paying no or little dividends (La-Portaet al., 2000). Conversely, managers in firms that are governed well act according to shareholder best interests, by pursuing wealth-maximizing strategies and paying greater dividends (DeAngelo and DeAngelo, 1990). The quality of corporate governance will therefore be positively related to dividend payouts.
2.4 Substitute theory
The substitute hypothesis proposes that poor governance structure firms typically pay greater dividends to create a positive shareholder reputation (La-Portaet al., 2000), effectively acting as an alternative mechanism of governance to alleviate the potential conflict of interest (Sawicki, 2009). Thus, in contrast to outcome theory, the quality of governance will be negatively related to dividend payouts.
3. Literature review
A number of extant studies investigate how dividend policy is affected by board and ownership structures across a range of developed and emerging countries. Focussing on developed capital markets,Borokhovichet al.(2005)find a negative relationship between US firm board independence and dividend payouts, whileGill and Obradovich (2012)observe a positive association between US firm board size and chief executive officer (CEO) duality and dividends. Al-Najjar and Kilincarslan (2016) study Turkish firms and observe a lower
Board
composition
propensity to pay dividends in the presence of state and foreign ownership, while domestic financial institution ownership, family ownership and the existence of minority shareholders have no impact. However, dividend yields and payout ratios are negatively related to these ownership factors. Al-Najjar and Belghitar (2014) examine firm compliance with good governance practice and find that institutional ownership positively affects cash dividend payments, while director independence weakly affects cash dividends. However,Elmagrhi et al.(2017)observe that neither board independence nor CEO role duality impact the level of dividends in UK small and medium-sized enterprises (SMEs), whileYarram and Dollery (2015) find a positive relationship between dividend payout and the degree of board independence and firm size in Australian firms.
In relation to emerging capital markets,Abdelsalamet al. (2008)observe that greater institutional ownership leads to both a greater likelihood of paying dividends and an enhanced payout ratio in Egyptian firms, though they find no relation between dividends and board composition. Similarly,Tahiret al.(2020)find no relation between dividend payout and board diversity in Malaysian firms, a positive relationship with both board size and profitability, and a negative relation with firm leverage.Mehdiet al.(2017)find that firm dividends rise with the degree of institutional ownership in East Asian and Gulf Cooperation Council countries. In contrast,Juhmani (2020)observes dividends to be negatively associated with the degree of board independence, positively associated with board size, and unrelated to board meeting frequency, institutional and managerial ownership, and blockholder ownership in Bahraini firms.Suwaidan and Khalaf (2020) determine that dividends are positively associated with institutional ownership, duality, board size and earnings per share in Jordanian firms. Moreover,Ahmadet al.(2019)examine Pakistani firms and find that higher profitability firms pay greater dividends as a mechanism for signalling firm prospects to address agency issues.
Roy (2015)studies Indian firms and finds that board size, director independence, and the board share of non-executive directors positively impact dividend payout, while firm liquidity and growth have a positive impact.Nguyenet al.(2021)examine Vietnamese firms and show that role duality has a negative effect on dividends, while firm profitability, leverage, size, and investment opportunities positively affect dividends.Hasanet al.(2021) study Bangladeshi firms and show that both public and family ownership positively affect dividends, while institutional and government ownership have a negative effect. Further, profitability, leverage, the price-earnings ratio, firm age and the global financial crisis positively affected dividends.
In relation to Saudi Arabia,Al-Qahtani and Ajina (2017)find that management ownership increases dividend payouts while family ownership and the extent of institutional ownership reduce payouts, the latter due to the more effective monitoring of the management. Moreover, Soliman (2013)finds that both the likelihood of paying dividends and the payout ratio are positively related to the degree of institutional ownership, board size and corporate performance in Saudi firms, though no relationship is found in relation to the degree of independence, role duality or the degree of managerial blockholder ownership.
This study aims to investigate the impact of both board characteristics and ownership structure variables on the dividend policy of Saudi-listed firms. It improves upon the study of Soliman (2013)in various ways. First, it augments the growing body of emerging market studies on corporate governance, the ownership structure and dividend policy with updated data spanning the period 2016–2019. Second, it investigates the impact on dividend policy of further firm-level governance variables such as board meeting frequency, new ownership structure variables (state, family and foreign ownership), and additional firm-specific characteristics to address the conflicting findings of the prior research. Finally, it provides new evidence and discussion on the importance and efficacy of corporate governance mechanisms and ownership structure that influence Saudi firm dividend policies.
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4. Hypotheses development
This section draws from the large body of the literature addressing the determinants of dividend policy, focussing in particular on corporate governance factors (board size and independence, CEO duality and board meeting frequency) and ownership structure factors (state, institutional, managerial and family ownership) to develop hypotheses in a Saudi Arabian setting.
4.1 Board composition
4.1.1 Board size. The function played by board size in reducing agency conflicts varies by theoretical standpoint. Agency theory suggests that larger boards allow free riding, low firm performance, ineffective decision-making and weak monitoring (Jensen and Meckling, 1976;
Fama, 1980), thus leading to a demand for higher dividends to compensate investors. In contrast, resource dependence theory sees larger boards as providing greater external resources and knowledge along with more vigorous skills to the organization (Daltonet al., 1998). Given the greater management specialization and enhanced monitoring of bigger boards (Klein, 2002), reduced dividends are required for monitoring purposes. Further, signalling theory suggests that bigger boards provide a positive market signal, and thus less demand for higher dividends to moderate agency costs. In reality, board size in emerging countries is usually relatively small, thereby reducing agency issues and the demand for high dividend payouts.
Most empirical studies support higher dividend payouts as board size increases (Xieet al., 2003;Abdelsalamet al., 2008;Soliman, 2013;Roy, 2015;Benjamin and Zain, 2015;Mehdiet al., 2017;Juhmani, 2020;Suwaidan and Khalaf, 2020), while a minority find a negative relation (Khan, 2006;Roy, 2015). Further studies find no such relation between dividend payout and board size (Cheng, 2008;Ajanthan, 2013). From an agency theory perspective, smaller boards may produce greater agency costs and thus require higher dividend payouts for investors.
Therefore, the following hypotheses are proposed:
H1a. There is a negative relationship between board size and the propensity to pay dividends.
H1b. There is a negative relationship between board size and dividend per share.
4.1.2 Board independence.Independent directors are key to successful in-house control and monitoring (Gregory, 2000), thereby safeguarding the reliability of financial statement disclosures. Where a firm’s management control systems are poor, investors rely on dividends for monitoring management (Rozeff, 1982), and external directors have greater capacity to safeguard shareholder wealth in terms of the payout (Hu and Kumar, 2004;
Al-Najjar and Hussainey, 2009;Ntim, 2011). However, external directors have less knowledge and expertise concerning the firm and may not make such good decisions as the internal (executive) directors, leading to a negative association between independence and performance, and in turn dividend payout.La Portaet al.(2000)argue that agency costs will fall in a well-governed firm, diminishing the need for dividends in firms with more independent boards, consistent with substitute theory.
Several studies find a positive association between dividend payout and board independence (Abdelsalam et al., 2008; Roy, 2015), others observe a negative relation (Al-Najjar and Hussainey, 2009; Roy, 2015; Shehu, 2015), and some studies find no relationship (Benjamin and Zain, 2015;Elmagrhiet al., 2017;Juhmani, 2020;Suwaidan and Khalaf, 2020). Drawing on substitute theory, a negative relationship is expected, and the following hypotheses are proposed:
H2a. There is a negative relationship between the degree of board independence and the propensity to pay dividends.
Board
composition
H2b. There is a negative relationship between the degree of board independence and dividend per share.
4.1.3 CEO duality.Fama (1980)argues that board viability may be augmented by including external directors and separating the board roles of the CEO and Chairman, while duality leads to board function impairment and severely weakened controls with the CEO enjoying excessive power and being prone to pursuing their own interests over the shareholders’ interests. In line with agency theory arguments, combining the roles is an ineffective tool for mitigating expropriation risk in emerging markets, with duality leading to a less effective board control mechanism (Baligaet al., 1996).Jensen (1993)proposes that when the CEO and Chairman are the same person, they will enjoy greater power to control the board, increasing the possibility for them to pursue their own interests over the shareholders’interests.Mehdi et al.(2017)argue that duality leads to reduced board performance and thus lower dividend payouts.
Several studies find a positive empirical relation here (Gill and Obradovich, 2012;Mehdi et al., 2017), while others find a negative relationship (Chenet al., 2005;Abor and Fiador, 2013;
Sumail, 2018; Nguyen et al., 2021), and some find no relation (Abdelsalam et al., 2008;
Benjamin and Zain, 2015;Elmagrhiet al., 2017;Ahmadet al., 2019;Suwaidan and Khalaf, 2020). In emerging markets, firms are generally characterised by role duality, leading to increased agency costs and lower dividend payouts. Based on the above arguments, the following hypotheses are proposed:
H3a. CEO role duality is associated with a lower propensity to pay dividends.
H3b. CEO role duality is associated with a lower dividend per share.
4.1.4 Board meetings. Greater board meeting frequency should bring increased board monitoring, with infrequent meetings leading to less monitoring and scrutiny of management plans, motivations and strategic issues such as dividend policy (Grinstein and Michaely, 2005). La Porta et al. (2000)draw on substitute theory, suggesting that board meeting frequency and dividends may be substituted for each other to address agency problems, so more frequent meetings lead to lower dividends.Sawicki (2009)counters with a signalling argument that higher dividend payouts compensate for the poor governance associated with frequent board meetings, while outcome theory suggests a positive relation as the dividend payment results from effective governance.
The limited empirical literature tends to find a negative relationship (Benjamin and Zain, 2015;Elmagrhiet al., 2017), whileMehdiet al.(2017)find a positive relation in East Asian and Gulf Cooperation Council countries. Based on the outcome theory that managers with effective governance employ dividends to signal the safeguarding of shareholders’interests, the following hypotheses are proposed:
H4a. There is a positive relationship between board meeting frequency and the propensity to pay dividends.
H4b. There is a positive relationship between board meeting frequency and dividend per share.
4.2 Ownership structure
4.2.1 State ownership.Government investment in corporations can improve a company’s prospects through increased monitoring and better access to funds (Lau and Tong, 2008), leading such firms to pay higher dividends (Weiet al., 2004;Al-Malkawi, 2007;Wanget al., 2011;Bradfordet al., 2013). Signalling theory suggests that investing governments will signal the benefit of their involvement by investee firms encouraged to pay enhanced dividends.
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Some empirical studies find that state-controlled firms suffering weak governance compensate by paying higher dividends to appeal to capital market investors (La Portaet al., 2000), while other studies observe a negative relation (Al-Najjar and Kilincarslan, 2016;
Musallam and Lin, 2019;Hasanet al., 2021). Based on both signalling and substitute theory arguments, the following hypotheses are proposed:
H5a. There is a positive relationship between the degree of state ownership and the propensity to pay dividends.
H5b. There is a positive relationship between the degree of state ownership and dividend per share.
4.2.2 Institutional ownership. In many countries, institutional investors play a critical governance role and actively participate in firm dividend policies (Mehdiet al., 2017), an involvement informed by agency theory.Benjaminet al.(2016)andFarinha (2003)argue that such investors may persuade firms to pay greater dividends if they believe that management control is costly or ineffectual, thoughShortet al.(2002)draw upon signalling theory to argue that such investors may moderate the use of dividends as a signal of good performance.
Several studies find a positive relation between institutional ownership and dividends (Eckbo and Verma, 1994;Chenet al., 2005;Roy, 2015;Elmagrhiet al., 2017;Bataineh, 2020), while other studies find a negative relation due to the countervailing effective management monitoring role of institutions (Abdelsalamet al., 2008;Soliman, 2013;Roy, 2015;Al-Najjar and Kilincarslan, 2016;Al-Qahtani and Ajina, 2017;Berezinetset al., 2017;Suwaidan and Khalaf, 2020;Hasanet al., 2021). Based on agency theory, the following hypotheses are thus proposed:
H6a. There is a positive relationship between the degree of institutional ownership and the propensity to pay dividends.
H6b. There is a positive relationship between the degree of institutional ownership and dividend per share.
4.2.3 Managerial ownership.Director shareholder ownership should lead to interests aligning with wider shareholders (Adaoglu, 2000), thus reducing conflicts, agency costs, and the need for higher dividends (Chen and Steiner, 2005). In addition, Jensen (1986)and Eckbo and Verma (1994) draw upon substitute theory and find that firms with greater managerial ownership pay smaller dividends due to their absolute voting power in dividend decisions, thoughZwiebel (1996)argues that managers may increase dividends to counterbalance such opportunistic behaviour.
Alabdullah (2018)finds that managerial ownership is positively associated with dividends in Jordan, whileChenet al.(2005),Al-Qahtani and Ajina (2017)andMehdiet al.(2017)find a negative relation for Hong Kong, Saudi Arabia, and in East Asian and Gulf Cooperation Council country firms, respectively. The hypotheses are informed by substitute theory as follows:
H7a. There is a negative relationship between the degree of managerial ownership and the propensity to pay dividends.
H7b. There is a negative relationship between the degree of managerial ownership and dividend per share.
4.2.4 Family ownership.Firms controlled by families and greater ownership concentration are commonplace in most emerging market economies (Villalonga and Amit, 2006;Rajverma et al., 2019). Family ownership produces agency problems where the principals’ (family shareholders’) interests are inconsistent with shareholder agents’ (managers) interests,
Board
composition
leading to monitoring of managers through family member board and key management appointments (Gonzalezet al., 2014;Setia-Atmaja, 2017). Further, controlling versus minority shareholder conflict can lead to the former gaining private benefits including generous compensation packages and key executive roles despite the lack of expertise, thereby increasing the latter’s costs.
Some empirical studies find a positive relation between family ownership and dividend payouts (Pindadoet al., 2012;Adjaoud and Hermassi, 2017;Subramaniam, 2018;Hasanet al., 2021) in order to counteract potential controlling family shareholder agency issues (Benjamin et al., 2016;Subramaniam, 2018) and to limit free cash flow availability (Jensen, 1986;La Porta et al., 2000). However, other studies find a negative relationship (Villalonga and Amit, 2006;
Weiet al., 2011;Al-Qahtani and Ajina, 2017;Reyna, 2017) where family firms pay smaller dividends to control funds and benefit to the detriment of the minority shareholders (Setiawanet al., 2016;Rajvermaet al., 2019;Rajput and Jhunjhunwala, 2019). Drawing on the resource control argument, the following hypotheses are proposed:
H8a. There is a negative relationship between the degree of family ownership and the propensity to pay dividends.
H8b. There is a negative relationship between the degree of family ownership and dividend per share.
4.2.5 Foreign ownership. The impact of foreign ownership on dividend payments is contentious. Several studies propose a positive relation (Chai, 2010;Jeonet al., 2011;Aydin and Cavdar, 2015; Mossadak et al., 2016; Musallam and Lin, 2019) given the general preference of foreign shareholders for higher dividend over higher capital gain firms (Lace et al., 2013;Kowerski and Wypych, 2016) arising from investee market changes along with poor corporate governance and information visibility (Le and Le, 2017). In contrast, other studies support a negative relation for emerging markets (Lin and Shiu, 2003;Sulong and Nor, 2008;Lamet al., 2012;Al-Najjar and Kilincarslan, 2016) as experienced large foreign investors constitute a mechanism for preventing opportunistic managerial behaviour and reducing agency costs (Al-Najjar and Kilincarslan, 2016). Moreover,Glenet al.(1995)argue that most foreign institutions select emerging market stocks for their longer-term growth prospects rather than shorter-term dividends. Drawing on these arguments and the results of the majority of studies which support a positive relationship, the following hypotheses are proposed:
H9a. There is a positive relationship between the degree of foreign ownership and the propensity to pay dividends.
H9b. There is a positive relationship between the degree of foreign ownership and dividend per share.
4.3 Control variables
In addition to the hypothesized variables, the empirical models include firm characteristic control variables to account for the variations in firm size, leverage, profitability and age, consistent with the approach employed byAl-Najjar and Kilincarslan (2016)andSuwaidan and Khalaf (2020). They argue that larger firms enjoy greater free cash flows and may thus pay higher dividends than smaller firms, and more highly leveraged firms are expected to pay smaller dividends given the competing imperative to pay greater interest. Further, more profitable firms have greater capacity to pay higher dividends than less profitable firms, and older, more established firms should enjoy more stable earnings than younger firms and thus tend to pay higher dividends.
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5. Research methodology
This paper examines the effect of board composition and the ownership structure on the dividend policy of Saudi-listed firms using both descriptive and multivariate regression analyses, consistent with the extant literature (Juhmani, 2020;Suwaidan and Khalaf, 2020).
5.1 Data sample
The study sample comprises the top 70 Saudi-listed firms by market weight index from 2016 to 2019 and across sectors, giving 280 firm-year observations for each variable. Banks and insurance sector firms, along with real estate investment trusts (REITs) are excluded given their adherence to regulations and qualities which differ from other sectors. The sample, gathered from corporate websites and firm annual reports, constitutes 54% of Tadawul non-financial firms, as detailed inTable 1.
5.2 Model variable measurement
The dividend policy dependent variables examined are the propensity to pay dividends and dividend per share. The former dichotomous variable is coded 1 for firms which have declared and paid dividends, and 0 for those that have not. The latter is calculated as the level of cash dividends divided by the number of shares outstanding, assuming a zero value where the firm pays no dividends (Al-Najjar and Kilincarslan, 2016; Suwaidan and Khalaf, 2020).
The independent variables are corporate board and ownership structure characteristics:
board size, independence, and meeting frequency, CEO duality, and the degree of state, institutional, managerial, foreign, and family ownership. Summary statistics are given in Table 2, consistent with previous studies (Gonzalezet al., 2014;Setia-Atmaja, 2017;Mehdi et al., 2017;Subramaniam, 2018;Juhmani, 2020;Suwaidan and Khalaf, 2020). There are four firm characteristic control variables: firm size, leverage, profitability and age (Mehdiet al., 2017;Juhmani, 2020;Suwaidan and Khalaf, 2020).
5.3 The study models
In this study, models are estimated for each of the two dependent variables, the propensity to pay dividends and the dividend per share. Dividend per share can take a positive value if the firm pays dividends, and zero otherwise. Logistic and probit regression approaches are employed for modelling the dichotomous propensity to pay dividends in Model 1, consistent with the literature (Franc-Da˛browskaet al., 2020;Bataineh, 2020), while OLS and random effect regression approaches are employed to model 2 the continuous dividend per share dependent consistent with Al-Najjar and Kilincarslan (2016) and Suwaidan and Khalaf (2020), as follows:
2016 2017 2018 2019 Total
Initial sample 176 188 200 204 768
Less:financial firms (12) (12) (12) (12) (48)
Less:insurance firms (33) (33) (33) (33) (132)
Less:real estate investment firms (17) (17) (17) (17) (68)
Final sample 114 126 138 142 520
Selected firms 70 70 70 70 280
Percentage of selected firms 61% 55% 51% 49% 54%
Table 1.
The sample selection process
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Model 1:
PPD¼β0þβ1 BSþβ2 BIþβ3 CEODUALþβ4 BMþβ5 SOWNþβ6 INSOWN þβ7 MANOWNþβ8 FAMOWNþβ9 FOROWNþβ10 SIZEþβ11 LEV þβ12 ROAþβ13 AGEþε
Model 2:
DPS¼β0þβ1 BSþβ2 BIþβ3 CEODUALþβ4 BMþβ5 SOWNþβ6 INSOWN þβ7 MANOWNþβ8 FAMOWNþβ9 FOROWNþβ10 SIZEþβ11 LEV þβ12 ROAþβ13 AGEþε
WherePPD5propensity to pay dividends dichotomous variable;DPS5dividend per share continuous variable;BS5board size;BI 5board independence;CEODUAL5dummy variable for the presence of CEO duality;BM5board meeting frequency;SOWN5degree of state ownership;INSOWN5degree of institutional ownership; MANOWN5degree of managerial ownership;FAMOWN5degree of family ownership;FOROWN5degree of foreign ownership; SIZE 5 firm size; LEV 5 firm leverage; ROA 5 return on assets;
AGE5firm age;ε5error term.
6. Results and discussion 6.1 Descriptive statistics
Table 3presents the variable descriptive statistics. The propensity to pay dividends (PPD) dichotomous variable shows that 68% of sample firms pay dividends, while mean dividend
Variable Symbol Measurement
Dependent variables Propensity to pay dividends
PPD Dummy variable coded as 1 for firms which declared and paid dividends and 0 for those that did not
Dividend per share DPS Cash dividends divided by number of shares outstanding Independent variables
Board size BS Total number of board members
Board independence BI Proportion of board non-executive directors
CEO duality CEODUAL Dummy variable coded as 1 where the Chairperson also assumes the CEO role, and 0 otherwise
Board meetings MB Number of board meetings held during the year State ownership SOWN Proportion of shares held by government shareholders Institutional
ownership
INSOWN Proportion of shares held by institutions’shareholders
Managerial ownership MANOWN Proportion of shares held by managers (i.e. the CEO and/or inside directors)
Family ownership FAMOWN Proportion of shares held by family members Foreign ownership FOROWN Proportion of shares held by foreign shareholders Control variables
Firm size SIZE Natural logarithm of total assets Firm leverage LEV Total debt to total assets Firm profitability ROA Net income to total assets
Firm age AGE Number of years since incorporation
Table 2.
Model variable definitions and measurement
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per share (DPS) is 1.4 Riyals and ranges from 0 to 8.15 Riyals. Boards have an average board size (BS) of around nine directors, with a range of five to 15 directors. 47% of directors are independent (BI), though this varies widely from 18% to 90%. 34% of firms have CEO role duality (CEODUAL). Firms conduct around five board meetings (BM) per year on average, though this varies considerably from one to 15 meetings. In terms of firm ownership, institutional investors own 26% of outstanding shares, government agencies own 12.4%, foreign investors own 7%, families and management both own around 4%. Average (log) firm size is 6.874, and ranges from 6.097 to 9.174. Mean firm leverage is 43%, ranging from 3% to 88%, and mean profitability (ROA) is 5% and ranges from13% to 31%. Mean firm age is 28.19 years and ranges from 6 to 64 years.
6.2 Correlation analysis
Table 4provides a Pearson correlation matrix for the model variables. The propensity to pay dividends (PPD) is significantly positively correlated with dividend per share (DPS) (0.564), as expected, and is significantly positively correlated with both firm profitability (ROA) (0.413) and firm age (AGE) (0.287), and significantly negatively correlated with firm leverage (LEV) (0.428) and firm size (SIZE) (0.247). Dividend per share (DPS) is significantly positively correlated with firm profitability (ROA) (0.692) and foreign ownership (FOROWN) (0.209), and significantly negatively correlated with firm leverage (LEV) (0.429) and CEO duality (CEODUAL) (0.202).
6.3 Regression results
6.3.1 Propensity to pay dividends (PPD) models.Table 5summarizes the regression results for the logistic and probit PPD models. The logistic regression model has a pseudoR2of 0.368 and the probit model has a pseudoR2of 0.363.
PPD is significantly positively related to board meeting frequency (BM) at the 1% level in both models. This finding supportsHypothesis 4and outcome theory and accords with the contrasting arguments ofMehdiet al.(2017)who argue that payouts increase with greater meeting frequency and thus show more effective manager governance and withSawicki (2009)who argues that managers may pay dividends to signal that shareholder interests are safeguarded in order to compensate for more frequent board meetings associated with poor governance.
Variable Symbol Mean Minimum Maximum Std. Deviation
Propensity to pay dividends PPD 0.680 0.000 1.000 0.469
Dividend per share DPS 1.416 0.000 8.15 1.746
Board size BS 8.975 5.000 15.000 1.420
Board independence BI 0.474 0.182 0.900 0.137
CEO duality CEODUAL 0.342 0.000 1.000 0.475
Board meetings MB 5.375 1.000 15.000 2.166
State ownership SOWN 0.124 0.000 0.980 0.222
Institutional ownership INSOWN 0.257 0.000 0.750 0.244
Managerial ownership MANOWN 0.0365 0.000 0.525 0.089
Family ownership FAMOWN 0.041 0.000 0.400 0.081
Foreign ownership FOROWN 0.066 0.000 0.155 0.038
Firm sizeLn SIZE 6.874 6.097 9.174 0.640
Firm leverage LEV 0.425 0.026 0.875 0.209
Firm profitability ROA 0.053 0.128 0.309 0.071
Firm age AGE 28.186 6.000 64.000 14.501
Firm ageLn AGE 1.384 0.778 1.806 0.250
Table 3.
Descriptive statistics for the model variables
Board
composition
PPDDPSBSBICEODUALBMSOWNINSOWNMANOWNFAMOWNFOROWNSIZELEVROAAGE PPD1 DPS0.564**1 BS0.125*0.129*1 BI0.0680.0200.0641 CEODUAL0.166**0.202**0.0470.168**1 BM0.0130.142*0.0240.163**0.205**1 SOWN0.0090.0230.1120.220**0.348**0.0611 INSOWN0.0760.0410.129*0.0780.188**0.287**0.444**1 MANOWN0.0600.138*0.0920.1090.155**0.0160.224**0.0221 FAMOWN0.131*0.0160.246**0.1090.0990.0650.223**0.0480.0221 FOROWN0.0440.209**0.0770.1000.0870.120-*0.1140.0520.292**0.0491 SIZE0.247**0.123*0.267**0.337**0.203**0.149-*0.633**0.1150.229**0.154**0.0341 LEV0.428**0.429**0.0540.238**0.0530.0610.0250.180**0.0200.0860.0830.273**1 ROA0.413**0.692**0.124*0.0600.0530.185**0.0250.0350.0800.276**0.1030.124*0.400**1 AGE0.287**0.200**0.0550.0690.142*0.136*0.135*0.488**0.238**0.0220.0630.198**0.138*0.1061 Note(s):**Correlationissignificantatthe0.01level(two-tailed) *Correlationissignificantatthe0.05level(two-tailed) Table 4.
Pearson correlation matrix for the model variables
IJOEM
VariablelabelsVariableHypExp.sign
Propensitytopaydividends(PPD) FixedeffectslogisticregressionmodelPropensitytopaydividends(PPD) RandomeffectsGLSprobitregressionmodel Coefzp>zCoefzp>z ConstantModelconstantþ1.6990.450.6501.3380.630.527 Boardcompositioncharacteristics(BCC) BSBoardsizeH10.1651.200.2310.1081.380.167 BIBoardindependenceH22.0631.490.1371.2221.530.126 CEODUALCEOdualityH30.3310.820.4120.1500.640.525 BMBoardmeetingsH4þ0.3703.380.001***0.2153.520.000*** Ownershipstructurecharacteristics(OSC) SOWNStateownershipH5þ0.4260.350.7280.1290.180.854 INSOWNInstitutionalownershipH6þ2.6372.430.015**1.3542.230.026** MANOWNManagerialownershipH70.1970.110.9120.1350.130.900 FAMOWNFamilyownershipH80.5200.230.8160.1880.140.889 FOROWNForeignownershipH9þ6.2951.180.2373.3821.150.248 Controlvariables(CV) SIZEFirmsizeþ0.6911.550.1210.4101.640.101 LEVFirmleverage4.5294.100.000***2.6234.240.000*** ROAFirmprofitabilityþ13.8013.680.000***6.8053.630.000*** AGEFirmageþ3.5303.670.000***2.003.740.000*** YEARYeardummyIncludedIncluded INDUSTRYIndustrydummyIncludedIncluded Loglikelihood111.48112.415 LRχ2130.16128.29 Prob>χ2 0.0000.000 PseudoR20.3680.363 No.ofobservations280280 Note(s):***significantatthe1%level,**significantatthe5%level,*significantatthe10%level
Table 5.
The results of the propensity to pay dividends for logistic and probit regression models
Board
composition
A good ownership structure can impact corporate dividend payout policy by minimizing agency costs. PPD is significantly positively related to the degree of institutional ownership (INOWN) at the 5% level in both models, supportingHypothesis 6 and agency theory.
Institutional shareholders can mitigate agency costs between management and shareholders where direct monitoring is not possible by demanding dividends and reducing available cash flow and thus opportunistic behaviour. The finding aligns withEckbo and Verma (1994)who observe that firms with large institutional shareholders exhibit a higher dividend yield and Benjaminet al. (2016)andFarinha (2003)who argue that institutional investors demand bigger dividends where investee firm oversight is ineffective or costly. The other hypothesized variables are all insignificant.
For the control variables, PPD is significantly negatively associated with leverage (LEV), and significantly positively associated with both firm profitability (ROA) and age (AGE) in both models.
6.3.2 Dividend per share (DPS) models.The pooled OLS and random effects models for DPS are presented inTable 6. The pooled OLS estimator takes no account of the data’s panel structure, and thus its weakness is that it may provide biased estimates (Cameron and Trivedi, 2005). The Hausman test shows the preference for a random over a fixed effect model estimator (χ250.56, Prob >χ251.000), and thus a random effects model is also estimated.
The pooled model has an adjustedR2of 0.554, and a significantF-test (F527.70,p< 0.000), while the random effects model has an adjustedR2of 0.575, and a significant Waldχ2(Wald χ25360,p< 0.000).
DPS is significantly negatively associated with the presence of CEO duality (CEODUAL) at the 5% level in both models, providing support forHypothesis 3and agency theory, and thus as CEO duality role increases, firms pay smaller dividends. This result provides support for the argument ofJensen (1993)that duality leads to weaker internal control and greater CEO opportunity to pursue their interests to the detriment of the shareholders and aligns with the results ofChenet al.(2005),Abor and Fiador (2013),Sumail (2018), andNguyenet al.
(2021). DPS is significantly positively related to board meeting frequency (BM) at the 10%
level in both models, providing support for Hypothesis 4 and outcome theory, and is consistent withMehdiet al.(2017)who connect effective manager governance with meeting frequency.
The ownership structure can address agency issues and exert a significant impact on DPS. DPS has a significant positive relationship with the degree of institutional ownership (INOWN) at the 1% level in both models, supportingHypothesis 6and agency theory arguments that institutions demand higher dividends where managerial oversight is either ineffective or costly. The finding is consistent with a number of extant studies (Chen et al., 2005;Roy, 2015;Benjaminet al., 2016;Elmagrhiet al., 2017;Bataineh, 2020). DPS is also significantly negatively associated with the degree of managerial ownership (MANOWN) at the 1% level in both models, thus supporting Hypothesis 7 and substitute theory. The result is consistent withEckbo and Verma (1994)who observe that greater managerial ownership leads to lower dividends due to managers’absolute voting power, and with extant studies (Chenet al., 2005;Al-Qahtani and Ajina, 2017;Mehdiet al., 2017). Finally, DPS is significantly positively associated with the degree of foreign ownership (FOROWN) at the 5% level in both models, thus supportingHypothesis 9and the argument of Le and Le (2017) who report that firms with foreign investors pay enhanced dividends compared to those with solely local investors, and that foreign investors prefer firms to pay higher dividends where corporate governance is poor and performance information disclosure is insufficient. The result is consistent with extant empirical studies (Jeon et al., 2011; Aydin and Cavdar, 2015; Mossadak et al., 2016;
Musallam and Lin, 2019).
IJOEM
VariableslabelsVariableHypExp.sign
Dividendpershare(DPS) PooledOLSregressionmodelDividendpershare(DPS) Randomeffectsregressionmodel Coefzp>zCoefzp>z ConstantModelconstantþ2.9451.5430.057*2.9451.910.056* Boardcompositioncharacteristics(BCC) BSBoardsizeH10.0460.850.3960.0460.850.396 BIBoardindependenceH20.8191.350.1790.8191.350.178 CEODUALCEOdualityH30.3361.980.049**0.3361.980.048** BMBoardmeetingsH4þ0.0611.700.090*0.0611.700.089* Ownershipstructurecharacteristics(OSC) SOWNStateownershipH5þ0.0880.170.8670.0880.170.867 INSOWNInstitutionalownershipH6þ1.3203.060.002***1.3203.060.002*** MANOWNManagerialownershipH72.3482.690.008***2.3482.690.007*** FAMOWNFamilyownershipH80.0730.070.9430.0730.070.942 FOROWNForeignownershipH9þ5.3202.340.020**5.3202.340.019** Controlvariables(CV) SIZEFirmsize-þ0.2321.330.1850.2321.330.185 LEVFirmleverage2.1485.110.000***2.1485.110.000*** ROAFirmprofitabilityþ12.2149.810.000***12.2149.810.000*** AGEFirmageþ1.6064.460.000***1.6064.460.000*** YEARYeardummyIncludedIncluded INDUSTRYIndustrydummyIncludedIncluded AdjustedR2 0.5540.575 F-statistic27.70– Waldχ2–360 VIF<2<2 Prob.(F)0.0000.000 No.ofobservations280280 Note(s):***significantatthe1%level,**significantatthe5%level,*significantatthe10%level
Table 6.
The results of the dividend per share for OLS and random effect regression models
Board
composition
Finally, higher DPS firms tend to have lower leverage (LEV), are more profitable (ROA), and are more established firms (AGE) across the two models.
6.3.3 Robustness tests.Panel regression results may be affected by endogeneity issues, thereby giving rise to regression estimates that are inconsistent and biased, and therefore cannot be used to infer causality. As a robustness test, a single equation two-stage least squares (2SLS) regression is thus employed consistent withElmagrhiet al.(2017)andMehdi et al.(2017), while noting that this approach may not produce better estimates given that identifying theoretically and empirically appropriate instruments is difficult. Lagged values of each endogenous variable are employed. The results reported inTable 7are consistent with the earlier logit and probit PPD models, except board independence (BI) and firm size (SIZE). PPD is negatively related to the board independence at the 5% level, providing support forHypothesis 2and substitute theory whereby a well-governed firm enjoys lower agency costs and less need for dividends (La Portaet al., 2000), and consistent with the results ofAl-Najjar and Hussainey (2009),Roy (2015)andShehu (2015). PPD is also significantly negatively associated with firm size (SIZE). The 2SLS estimates for DPS are entirely consistent with the pooled OLS and random effects model results.
7. Conclusion
This study examines the effect of board composition and ownership structure on the dividend policy of Saudi-listed firms over the period 2016 to 2019 and finds evidence of the important role played by both on the propensity to pay dividends (PPD) and the level where paid (DPS).
The degree of board independence (BI) exerts a negative impact on PPD, consistent with substitute theory such that well-governed Saudi firms reduce agency costs and the need for dividends (La Portaet al., 2000). Board meeting frequency exhibits a positive impact on PPD, consistent with outcome theory whereby more frequent board meetings improve governance and therefore dividends (Mehdiet al., 2017) or with the competing signalling argument that more frequent meetings are required to compensate for poor governance thereby requiring higher dividends (Sawicki, 2009). The degree of institutional ownership is also a positive driver of PPD, consistent with agency theory, such that institutional shareholders push for dividend payments to limit managerial opportunistic behaviour given their inability to closely monitor management decisions. Further, larger, and higher leveraged Saudi firms are less prone to paying dividends, while more profitable and older firms have a greater tendency to pay dividends.
The models show that CEO duality exerts a negative impact on DPS, consistent with agency theory given the concomitant higher agency costs associated with higher CEO power and discretionary funds retention. Both institutional and foreign ownership evidence a positive effect on DPS, according with agency theory whereby such investors demand higher dividends where managerial oversight is difficult. However, consistent with substitute theory, managerial ownership exerts a negative impact due to managerial exercise of absolute voting power. Thus, outsiders (institutional and foreign) tend to press for higher dividends than insiders (managerial owners) given the reduced ability of the former to monitor, and the increased power of the latter. Finally, more established firms with better profitability tend to pay better dividends, while those with higher leverage pay more moderate dividends.
Three recommendations arise from this study. First, investors should carefully examine potential investee firm board composition and the ownership structure as a precursor to committing their investment funds. Those with a preference for dividend income should target firms with more frequent board meetings, lower board independence, the absence of CEO duality, a higher degree of institutional and foreign shareholders, and a lower degree of managerial ownership, and also firms that are smaller, more profitable, lower leveraged and more established. Second, profiling board composition and the ownership structure should
