Institutional Ownership and Corporate Value - Essay Example

This paper investigates whether a company’s dividend policy is affected by the level of institutional ownership. The paper focuses on Kuwaiti public companies that are listed on the Kuwait stock exchange (KSE).

This study examines the implications of corporate governance on dividend policy. It focuses on the cross-sectional relationship between organizational ownership structures and dividend payout policies. In this paper, a regression model is employed to explore the link between institutional ownership and cash dividends. The dependent variable, cash dividends, is measured by using two different proxies. The independent variable, institutional ownership, is measured as the natural logarithm of shares held by institutional investors, then scaled by the number of shares outstanding.

The control variables include returns on equity, firm size, leverage, firm age, financial loss, year effects, and industry effects. The relevant data is collected from the KSE website and the Institute of Banking Studies in Kuwait (ISB). The monitoring hypothesis suggests that institutional investors tend to function as a superior oversight mechanism, and therefore are more likely to limit corporate managers. The other perspective relates to the entrenchment effect hypothesis, which states that institutional investors may align their interests with management’s interests at the expense of minority wealth. Institutional investors are a significant financial market force. They are rapidly replacing individual investors in the capital market. Unlike individual investors, institutional investors invest large amounts of their company resources into various stocks and shares, thereby devoting many of their resources to monitoring their investment (Grossman and Hart, 1980; Shleifer and Vishny, 1986).  

In addition, institutional investors are generally more and better informed than individual investors due to their unique skills and abilities in gaining access to private information and interpreting financial numbers and market trends (Michaely and Shaw, 1994).