Decisions on corporate dividends are the main strategic decisions of firms. In such decisions, firm characteristics are considered highly influential. These characteristics include family ownership, size, profitability, growth, leverage, tangibility, and turnover. This section explains the theoretical and empirical relationship between dividend policy and its determinants (including family ownership).
Family ownership
According to the agency cost theory, agency conflicts can exist between firm managers and shareholders (Jensen and Meckling, 1976). Under family ownership, the interests of shareholders and managers might align. Such mutual interests reduce agency conflicts (La Porta et al., 2000), especially given that family owners would likely monitor their managers more strictly (Anderson and Reeb, 2003). When firms distribute dividends, family owners serve as efficient monitoring mechanisms to ensure that managers do not waste free cash flow on unprofitable projects. Hence, distribution of dividends reduces agency conflicts of free cash flow between controlling and minority shareholders (Jensen, 1986). Through this strategy, firms can establish better corporate governance systems. Thus, based on the outcome model of dividends, higher dividends should be associated with better corporate governance practices.
The dividends can reduce the conflict between family and nonfamily owners. However, DeAngelo and DeAngelo (2000) argue that income and wealth preservation might reflect the preferences of family-owned firms in lieu of wealth maximization for outside shareholders through a dividend payout. Faccio et al. (2001) argue that a controlling family might expropriate the wealth of minority shareholders when its cash flow rights dwarf over minority shareholders. Gugler and Yurtoglu (2003) argue that free cash flow reduces if family firms pay higher dividends. High dividends might then decrease the tendency of family firms to expropriate wealth from minority shareholders. Moreover, De Cesari (2012) claims that family firms pay fewer dividends to preserve their cash flow for expropriation. Thus, lesser dividends indicate the possibility of wealth expropriation by family owners. Ultimately, it leads to the high agency costs (La Porta et al., 2000).
Family firms have a lower dividend payout ratio compared with state-controlled firms (Gugler et al., 2003; Duygun et al., 2018) and often use funds for own benefits. Evidently, families expropriate shareholder wealth by paying lower dividends, and minority shareholders resultingly face a loss. Villalongs and Amit (2006) maintain that conflicts arise between a large controlling shareholder and minority shareholders when the former uses firm resources for own benefits and, thus, pays fewer dividends to minority shareholders (i.e., agency problem). Li et al. (2006) find that family firms do not pay dividends smoothly and also pay fewer dividends compared with nonfamily firms (Gugler and Yuroglu, 2003); their dividends are, in fact, more volatile. Further, Jensen et al. (1992) find a negative association between insider ownership and dividend payout.
According to Baron and Kenny (1986) and Dawson (2014), testing for moderation is crucial when a contradictory relationship between the independent and dependent variable exists. That is, a relationship between two variables may be affected by a third variable. Novi and Pontoh (2018) state that a family firm with higher profitability moderates the relationship between the ownership structure and dividend. However, their results are insignificant. Similarly, they also tested for the moderating role of other firm-specific variables such as return on equity and earning per share. Saerang and Pontoh (2016) study the sample of Indonesian firms. They empirically prove that the larger the size of the family firm, the higher the dividends for shareholders.
Size
Chang and Rhee (1990) point out that larger firms have more convenient access to capital markets at lower costs when a financing need arises. Thus, such firms can afford a higher dividend payout than smaller firms. Gaver et al. (1993), Holders et al. (1998), Fama et al. (2001), and Jones et al. (2001) similarly find an empirically positive relationship between size and dividend payout. On the other hand, Ahmed and Attiya (2009) find a negative relationship for the emerging economy of Pakistan.
Profitability
A firm pays dividends from its profits. Thus, profits indicate a firm’s capacity to pay dividends. Baker et al. (1985) report that anticipated future earnings constitute the “impact determinant” of the dividend payout. Pruitt and Gitman (1991) find that past and current returns are important factors in influencing the dividend payout. The pecking order hypothesis explains this relationship between profitability and dividends. Less profitable firms would not find it optimal to pay dividends, because they consider the cost of issuing equity and debt financing. Contrariwise, highly profitable firms are better able to pay dividends. It concludes that profitability directly affects the dividend payout (Fama and French (2002).
Growth
Firms with high growth require more capital than those with lower growth because the former logically have higher investment expenditures. Such firms are expected to implement a policy of low dividend payout because they retain their profits to finance investments; they also seek to avoid the high costs of external finance (Rozeff, 1982). According to the agency theory, low-growth firms should pay higher dividends to reduce agency costs between shareholders and managers because they have lower investments expenditures and, thus, higher retained earnings. Otherwise, managers may use their firm’s retained earnings or cash flow to invest in unprofitable projects if the firm is characterized by low growth opportunities. In this scenario, the best option is to distribute dividends among shareholders to reduce agency costs in lieu of wasting funds (Jensen, 1986). Hence, the agency theory predicts a negative relationship between growth and dividend payout. In the literature, both Lang et al. (1989) and Denis et al. (1994) also confirm this negative relationship.
Leverage
Based on the agency theory, Jensen (1986) argues that debt is an alternative for dividends in reducing agency conflicts. Debt repayment on higher debts reduces the cash flow available to a firm. Inevitably, the likelihood of managers investing free cash flow in unprofitable projects decreases, whereas monitoring by the capital market also increases. The agency theory also explains the negative relationship between debt and dividend payout. Kalay (1982) argues that debt covenants can force firms to limit the dividend payout. Jensen et al. (1992) and Faccio et al. (2001) empirically determine a negative relationship between leverage and dividend payout. Finding the same result, Gugler et al. (2003) argue that highly leveraged firms pay fewer dividends to shareholders because the high amount of interest and principal payments reduce firms’ capacity to pay dividends to shareholders. Thus, highly leveraged firms pay fewer dividends to maintain their liquidity position and, thus, fulfill their current and future debt obligation. Such firms become bankrupt if a failure of debt repayment occurs (Chao et al., 2019; Chao et al., 2019) or liquidation arises. Leuz et al. (1998), Thornton (1992), and Niskanen and Niskanen (2004) suggest that debt covenants restrict dividend policy, indicating a negative relationship between leverage and dividend payout.
Tangibility
The tangibility of assets may affect the dividend policy because firms can use tangible assets as collateral against debt (Booth et al., 2001). Bradley et al. (1984) argue that firms with a higher proportion of tangible assets can fulfill their financing needs more easily and with cheaper cost through debt because they can use more tangible assets as backup or collateral against large debts. In such scenarios, there is decreased pressure on internal funds to fulfill financing needs, and firms can easily declare dividends from internal funds. Hence, these tangible assets, when taken as collateral, positively affect the dividend policy.