Impact of Institutional Ownership on Dividend Policy - Kuwait - Essay Example

DISSERTATION PROPOSAL Research “The impact of al Ownership on dividend policy: The Case of Kuwait” Table of Contents Introduction 4 1.1 Introduction 4 1.2 Research Question 5 1.3 Aim and Objective of the Study 6 1.4 Rational and Justification for the Study 6 1.5 Research Methodology 7 1.6 Research Structure 8 1.7Research Plan 10 2. Literature Review 11 2.1 Kuwait Stock Exchange Market 11 2.2 Corporate Disclosure Practices and Institutional Investors 12 2.3 The Monitoring Role of Institutional Ownership 13 References 17 1. Introduction 1.1 Introduction Institutional investors differ from individual investors in several ways. Generally, the institutions invest huge sum of their funds in to each stock. They have huge incentives, motivation and devote a lot of their resources in monitoring them, because a huge amount of their investment is at stake (Grossman & Hart, 1980; Shleifer & Vishny, 1986). In contrast to individual investors, the institutional investors are more and better informed. The institutions are more devoted and put in more resources to get information and sometimes the information known to the institutions exceed the individual investor (Michaely & Shaw, 1994). The huge amount of investment held by many institutional investors are coupled with many benefits with respect to monitoring the investments, which the individual investors fail to do themselves (Zeckhauser & Pound, 1990). Firms are forced by the institutional investors to provide monitoring instead of providing monitoring themselves. This is done so that the firms are forced to increase their dividends and are hence forced to reach the external markets for further future funds. Eckbo & Verma (1994) opined that, in order to lessen the expenses like the agency costs, the institutional investors prefer that free cash flow to the companies are distributed in form of dividends. From this outlook, it might be stated that institutional investors possibly will oppose the inclination of managers to favor the disproportionate withholding of cash flow. Additionally, it is likely that the institutional ownership, by means of their voting control, compel managers to distribute dividends (Moh’d et al., 1994; Short et al., 2002). Jensen & Meckling (1976) stated that the dividend policy acts as a controlling mechanism, which helps in reducing the conflicts between the shareholders and the managers. By paying a large portion of corporate earning as dividends, a lot of agency costs of equity can be reduced (Rozeff, 1982). If there is a high percentage of the dividend payout ratio then there would be less discrimination of cash flow available to be wasted by the managers. With the issuance of a new stock or security, the corporation’s matters will be examined by some intermediary, which acts in the best interest of the shareholders and purchasers (Easterbrook, 1984). Miller & Modigliani, (1961) concluded that the cash dividend policy had no impact on price of stock or in no way price of stock and cost of capital gets interrupted. The theory of “Bird in hand” suggests in finding the variables impacting the relationship between cash dividend policy and the firms value, which the theory states can be explained by the investors as by stating their choice of preference for the cash dividend payment instead of the likely capital gains from stocks. The only reason for this choice of preference is because of the assurance of cash dividend, unlike the likely expected capital gains that are not assured and hence risky. Researchers have revealed that the risk depends on the riskiness of cash flows of the company and not on the cash payout dividend policy (Miller & Modigliani, 1961). In this context, it can be added that the effectiveness of corporate governance affects the quality of disclosures, thereby influencing the decisions taken by investors and other stakeholders (Larcker et al., 2007). Evidence suggests that with a change in corporate ownership, the corporate governance and performance get influenced (Davis & Thompson, 1994). An increase in institutional ownership has a strong influence on the corporate governance and performance of the organization (Baysinger & Hoskisson, 1990). This study would attempt to explore the relationship between rising institutional ownership in publicly traded firms Kuwait and their tendency to payout cash dividends, keeping in mind the influence the institutional investors have on the corporate governance of the firms. 1.2 Research Question Is there are a relationship between cash dividends and the level of institutional ownership? 1.3 Aim and Objective of the Study This study will examine the implications of corporate governance on dividend policy and focus specially on the cross sectional relationship of ownership structure and dividend payout policies of an organization. The basic aim of the research will be to examine the relationship of ownership structure and dividend payout. The study focuses on the Kuwaiti public companies that are listed on the Kuwait Stock Exchange. 1.4 Rational and Justification for the Study Institutional investors play a vital part in the corporate governance of organizations. Evidence indicates that institutional investors have more direct and significant effect on corporate governance in areas involving board composition, leadership diversity, ownership concentration, and CEO duality (Li et al., 2006). These institutional investors possess huge investments and their possessions such as ownerships have excelled in the recent years (Pinkowitz, 2002). This may suggest that institutional investors have greater incentives than any other interested group to desire more credible and accurate accounting/financial disclosures. There have been a lot of researches on the dividend policies, but most of them have been confined to the developed markets. We will be having a look at the developing and emerging markets, which did not, receive much attention in the past. There are many aspects that justify exploring the association between cash dividends and the ownership of institution in the KSE-listed firms. This research will try to determine the dividend policy behavior in Kuwait. It is a general perception about the emerging markets that corporate performance is leaning and probably dependent on few of the resourceful stakeholders, which ignore the aspects of corporate governance. The resourceful stakeholders include the big giants like financial institutes, insurance companies that possess a major holding in many organizations and they can affect the dividend payouts. Thus the main reason for studying this topic is to explore and examine the linkages between the different ownership structures and cash dividend payout. 1.5 Research Methodology Research Methodology is the method of collecting relevant data for analyzing a research topic and accomplishing the research objectives. It basically consists of models, dependent and independent variables. Methodology states about the introduction of variables, which are most suitable and fulfill our requirements for the research. This paper introduces a logistic model to have an idea about the relationship and likelihood of dividend distribution, which is a dependent variable with institutional ownership, which is an independent variable. The dependent variable here is “dividend” which is a categorical variable and is equal to 1 if the firm I distributed cash dividends and 0 otherwise. To measure the independent variable two proxies are used. First proxy defined as the number of share (proportion) held by the institutional players (investors) by the end of year. Second proxy used to measure the number of institutional players who possess the shares in each company by the end of each year. The model also avails other variables called the control variables, which may affect in some way the possibility of restating before the disclosure as recognized in previous studies. The treatment samples, which are the restating firms, and the control sample, which are non-restating firms, are matched based on total assets and market sector. The samples cover all the KSE listed firms in the period from the year 2005 to 2008. The announcements of dividend are collected from the website of Aljoman Centre for Economic consultancy (AEC). Rest of the financial data such as the institutional ownership, total asset possessions, return on assets, and return on equity (two proxies for firm profitability) is gathered from the KSE, Institute of Banking Studies (IBS) and Gulf invest International (K.S.C.C) Directory for the Company Listed on the KSE. 1.6 Research Structure Research Structure is an overview of how the research will be carried out and the layout the research will follow. This research will be following the flowing layout. Chapter One: Introduction This chapter will include the basic introduction of the topic under discussion, followed by the reason and motivation for studying the particular issue. Research the main problem and the methods by which the research will be carried on. Finally stating how the research will be organized. 1.1 Introduction / overview. 1.2 Motivational factors. 1.3 Research problem 1.4 Research methodology 1.5 Organization of the dissertation Chapter Two: Literature Review The second chapter will discuss about the previous studies carried out by other researchers in the relevant field in context of the Kuwait Stock Exchange (KSE), corporate disclosure practices and institutional investors and the corporate governance roles of institutional investors. 2.1 Kuwait Stock Exchange Market 2.2 Corporate Disclosure Practices and Institutional Investors 2.3 The Monitoring Role of Institutional Ownership Chapter Three: Hypothesis. This chapter will focus on the development of hypothesis according to variables we have considered in the research. Chapter Four: Research Methodology This chapter would consist of a discussion on the selection of the appropriate sample and the sources used to collect it. It would also include an analysis of the findings and the methods. 4.1 Sample Selection 4.2 Explanatory Analysis 4.3 Research methodology Chapter Five: Results This chapter will state the results from the testing’s and findings after the experimentation about the research. 5.1 Realistic Results 5.2 Conclusion Chapter Six: Conclusion and Implication of the Research Finally, this chapter would state the implications of the research for further development and further research. This would be done by stating the objectives and the summary of the research and summarizing the results by comparing with existing researches. Additionally, it would also include a discussion. 6.1 Summary of Research 6.2 Discussion and Conclusion References Giving appropriate references for the data used throughout the research. 1.7 Research Plan The deadline for the submission of the research project is 30th September 2012. The time allocated for the research is 4 months. I have devised a plan, which I tend to follow and it is as follows: Working on the Literature Review and proposal End March Data collection and Analysis. Mid of June Preparing the First Draft and showing to supervisor. 30th July Rectifying the Draft In August Finally Submit the final draft. 30th of September 2. Literature Review Literature review is the brief review of studies already carried out by others concerning the topic we are interested in. In this section, we will briefly review the KSE market, prior studies on relationship between cash dividends and the level of institutional ownership. 2.1 Kuwait Stock Exchange Market The operation of the Kuwait Stock Exchange (KSE) formally commenced in the year 1984. Many governing bodies regulate the KSE, which include Ministries of Finance, Commerce, Industry and Central Bank of Kuwait. KSE is one of the largest emerging stock market in the Middle East in terms of market capitalization. KSE market has been shaped by many vital reforms such as the large volume of listed governmental shares selling in the KSE, the beginning of Mutual funds, the prominent role of institutional players who play a vital role , the permissions for trading shares in KSE listed firms to foreign individuals and companies. The implementation of International Accounting Standards (IAS) was a major breakthrough in the market. Nevertheless, the KSE market has certain shortcomings, for instance deficiency of market makers, exclusion of short selling activities and derivative trading (Alyousef & Almutairi, 2010). Many measures have been taken to enhance the transparency in the market, one example of such measures being disclosure of ownership by the investors who own 5 percent or more of the company shares. KSE regularly updates the market participants if there are any changes in the block holders by means of announcements, bulletins and print media among others. Proper updated information regarding the CEO’s, board of directors is provided to the investors so they can act accordingly. Misleading companies, who indulge in activities like forging or concealing information from the shareholders or the participants of the market, have to bear heavy fines, legal charges, suspension from trading etc. Major shareholders hesitate to disclose their ownership by partnerships with other investors, portfolios or agents. 2.2 Corporate Disclosure Practices and Institutional Investors Over the years, there has been a continuous reduction in the information content of corporate disclosure in context of cash dividend declarations. A major cause for the decrease in the level of information content regarding dividends is the increase in the percentage of share holdings by the institutional investors. This is owing to the fact that the institutional investors are more refined and informed regarding this matter. The rises in the institutional ownership amongst the publicly traded firms have thus resulted in the decline of corporate disclosure on the subject of dividends. The managers of the publicly traded companies are more focused to the requirements of these institutional investors, as they hold a very large proportion of the companies’ share. Taking advantage of their advanced information, the institutional investors purchase stocks prior to the dividend payout and sell later (Alangar & Bathala, 1999). A number of researchers have stated that institutional investors try to manipulate the financial results of a company by forcing and influencing its managers. These institutional investors generally have short-term investment horizon, and since they hold majority of the shares of a company, selling off their holdings causes the performance of the company to decrease. This dramatic situation is alarming for the company owing to the threat of takeover or merger. Hence the managers tend to exaggerate and inflate the results and performance of the company by artificial growths in accordance with the objectives of the institutional owners (Barth et al., 1999; Bushee 1998; Burgsthaler & Dichev, 1997). Another remarkable observation made by researchers was that dividends were less likely to go up in companies that had elevated percentage of institutional holdings (Amihud & Li, 2003, pp 31-32). 2.3 The Monitoring Role of Institutional Ownership Amihud & Li (2003) stated that the fading of dividends is partially owing to the diminution in the information substance of dividend declarations. The common investors are not able to receive much information from dividend declarations, because the institutional investors on the basis of their enhanced knowledge and position draw the accessible information before hand. Consequently, by the point in time, the declaration are formally made, the information is by included in the share price. The rise in the proportion of share holdings of the institutional investors is therefore deteriorating the function of dividends as a way to communicate information regarding the market value of an organization. Since dividends are expensive for the organizations and moreover, they do not endow the investors with much information regarding the value of the company, hence companies abstain from distributing them. According to Balsam et al (2000), the institutional investors are able to influence the management as they have access to private and very secret internal information of the company. Institutional investors as compared to the individual investor are superior as they have a lot of information which individual investors do not have access to. This means the motivation level of the institutional investors exceed others and play a very crucial role in analyzing the firm’s investment opportunities and in monitoring the performance of the managers (Gillan & Starks, 2000). Gompers & Metrick (2001) had affirmed that the institutional ownership had doubled over time from 1980 to 1996. This was a reflection of institutional investors who accounted for half of the US stock market. Shleifer & Vishny (1986) suggested that the institutional investors are very efficient at monitoring the corporate performance, manager’s behaviors owing to the fact that they have rich expertise and lower marginal costs. Therefore a positive relationship is deemed between institutional ownership and market value of the company. In general researchers have accentuated on organizations with superior discrete ownership configuration or a single controlling shareholder (Berle & Means, 1932; Jensen & Meckling 1976; Grossman & Hart, 1980; Shleifer & Vishny 1986; Burkurt et al., 1997). It has been observed that literature on the ownership structure shows co existence of multiple block holders in many organizations. For example listed companies in countries like Germany and majority in the US contain two or more large share holders (Gomes & Novaes, 2001). Bennedsen & Wolfenzon (2000), illustrated that the managing group does not includes large share holders but instead it is an outcome of a coalition of different large shareholders who combine together to form a coalition and strive to seize the firms control. Corporate policies are formed as a result of interaction among several huge shareholders. Nevertheless, not much is known about how large shareholders cooperate and share powers among themselves. Recently some theoretical papers have started to study the composition of the controlling group and its effect on the expropriation of the minority shareholders (Bennedsen & Wolfenson, 2000). Aivazian et al. (2003) established in their research study that the companies originating from the emerging markets exhibit similar behavior as the US companies in the context of dividend. This observation was made about the dividend policy of various companies in terms of logical explanation of profitability, debt etc. However, asset mixes tend to affect the emerging markets, due to the fact they rely heavily on debt from banks. Da Silva et al. (2004:129) studied the dividends paid out by the firms that are family controlled as against those that are company controlled or otherwise. The payout ratio of such firms was found to be 25 percent compared to 18.5 percent company controlled, 16.5 percent bank controlled, 19 percent controlled widely. The authors’ analysis revealed that the family controlled organizations had no impact on the dividend policies. Gugler (2003) countered this through evidence from Austria, where family managed organizations pay out were 25 percent and while that of bank controlled organizations were 34 percent. On the other hand, Gugler & Yurtoglu (2003) were not able to find any relationship between family managed organizations and other organizations in Germany in terms of dividend payout. A large number of empirical researches have concluded that rise in the institutional ownership of a company resulted in a positive reaction of the stock market as well as an increase in the stock returns (Han & Suk, 1989; Barclay & Holderness, 1990; Holderness & Sheehan ,1988). Navissi & Naiker (2006) had observed an increase in firms’ value, when institutional investors holding exceeded 30 percent. Brickley et al. (1988) opined that institutional investors are more active than any other investors in such areas as anti-takeover amendments. Deng & Wang (2006) described and stated a negative relation between ownership concentration and risk. They also suggested that major shareholders hold back the company’s financial suffering. Furthermore studies also displayed that the institutional investors can cut down expenses like R&D and hence are expected to boost expected earnings (Bushee, 1998). In short all these studies indicate the institutional investors’ efficiency in monitoring the performance of the organization and overseeing the managers’ practices. The institutional investors can definitely enhance the value of the firm and check the management from distorting the corporate disclosures. The institutional investors can hence increase efficiency in disclosing accurate information and will be beneficial for other investors as well. The point to note is that these institutional investors not always exercise and implement the monitoring of management and may benefit at the expense of small investors interest. References Alyousef , H. Y., & Almutairi, A. R., 2010. An Empirical Investigation of Accounting Restatements by Public Companies: Evidence from Kuwait. 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