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The association between dividend payout and outside directorships

Basil Al‐Najjar (Middlesex University Business School, Middlesex University, London, UK)
Khaled Hussainey (Accounting and Finance Division, Stirling Management School, University of Stirling, Stirling, UK)

Journal of Applied Accounting Research

ISSN: 0967-5426

Article publication date: 29 May 2009

2346

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.

Keywords

Citation

Al‐Najjar, B. and Hussainey, K. (2009), "The association between dividend payout and outside directorships", Journal of Applied Accounting Research, Vol. 10 No. 1, pp. 4-19. https://doi.org/10.1108/09675420910963360

Publisher

:

Emerald Group Publishing Limited

Copyright © 2009, Emerald Group Publishing Limited

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