Foreign institutional investors and the contribution of cash and dividend to firm's value

Abstract

Purpose

The aim of this study is to investigate the effect of foreign institutional investors (FII) on the contribution of cash and dividend to firm's value in the context of Japan.

Design/methodology/approach

This study used a sample of 1,929 nonfinancial firms listed in Tokyo Stock Exchange in the period from 2002 to 2016. For data analysis, pooled OLS regression with firm and year fixed effect is applied. Further, the p-value of difference is used to test the null hypothesis of equal coefficients.

Findings

The findings depict that cash holdings contribute more to firm's value when ownership by FII is high. Contrarily, dividends contribute more to firm's value when ownership by FII is low. The results remain consistent after using excess cash holdings instead of cash holdings and after re-estimating the main regression model in the presence of top 30% and bottom 30% ownership level.

Research limitations/implications

This study is limited to Japanese nonfinancial sector. The results implied that firms where the probability of managerial agency cost and expropriation of cash is high, the presence of FII mitigates the agency cost and positively influences the contribution of cash to firm's value. Overall, this research highlighted the disciplinary and monitoring role of FII in Japan.

Originality/value

This study provides new insights on the monitoring and governance role of foreign institutions, showing that FII promote better cash management and utilization, which significantly affects the contribution of cash holdings to firm's value.

Citation

Karim, S. and Ilyas, M. (2021), "Foreign institutional investors and the contribution of cash and dividend to firm's value", Managerial Finance, Vol. 47 No. 3, pp. 310-325. https://doi.org/10.1108/MF-11-2019-0568