Corporate governance and dividends payout: are they substitutes or complementary?

Abstract

Purpose

This paper aims to furnish incremental insights on dividends and corporate governance (CG) by addressing the relationship between board meeting frequency and board independence with dividend payout. In particular, this study aims to investigate whether CG attributes are substitutes to control agency problem within the Malaysian context.

Design/methodology/approach

This paper examines panel data on a sample of 114 Malaysian firms (798 observations) for seven years from 2002 to 2008.

Findings

Based on 798 firm-year observations for the period from 2002 to 2008, the results show significant negative relationship between CG (board independence, board meeting frequency) and dividend payout. This suggests that CG and dividend payout are substitutes in reducing agency costs. Our study provides empirical evidence consistent with the “substitution argument”, indicating that firms with weak CG need to establish reputation by paying more dividends. Specifically, the findings indicate that firms with a higher proportion of independent directors and boards of director that meet more frequent pay lower dividends.

Originality/value

This paper provides evidence on previously untested governance characteristics in relation to how they act as substitute mechanisms with dividends for reducing agency costs. The results builds a strong case for the fresh strand of knowledge on dividends and CG which tests each CG variables to understand each of its unique relationship with dividends in line with the dividends outcome or substitute theory.

Citation

Benjamin, S.J. and Mat Zain, M. (2015), "Corporate governance and dividends payout: are they substitutes or complementary?", Journal of Asia Business Studies, Vol. 9 No. 2, pp. 177-194. https://doi.org/10.1108/JABS-08-2014-0062