THE IMPACT OF INSTITUTIONAL OWNERSHIP ON CASH DIVIDENDS: - Essay Example

In addition, because of their large investment stake, institutional investors possess strong voting power and hence affecting the overall investment and business decisions of a company. Eckbo and Verma (1994) argue that institutional shareholders prefer free cash flow to be distributed in the form of dividends in order to reduce the agency costs of any free cash flow. From this perspective, it may be argued that institutional shareholders may counter a tendency for managers to retain cash flow.

By virtue of their voting power, institutional shareholders may force managers to pay out dividends. Moh’d, Perr and Rimbey (1994) and Short, Zhang, and Keasey (2002) support this tendency. Jensen and Meckling (1976) point out that the dividend policy both acts and is viewed as a controlling mechanism. This helps to reduce conflict between shareholders and managers. By paying a large portion of corporate earnings as dividends, many equity agency costs can be reduced. If a company distributes a large portion of dividends there will be less cash flow available to be wasted by managers.

Rozeff (1982) posits that dividend payouts assist in reducing agency costs and are an inherent part of monitoring a company. Easterbrook (1984) argues that dividends can play a role in reducing agency costs. With the issuance of a new stock or security, corporate matters will be examined by an appropriate intermediary. This acts in the best interests of shareholders and purchasers. The paper focuses on Kuwaiti public companies that are listed on the KSE. This study will examine the implications of corporate governance on dividend policy.

It will focus on the cross-sectional relationship of the organisational ownership structures and dividend payout policies. Given the rigorousness of problems such as over-investment, the bond between dividend payouts and ownership structures can be restricted to growth