Effect of institutional ownership on dividends: An agency-theory-based analysis

This study examines the effect of institutional ownership on dividend payouts through the lens of agency theory. We hypothesize that only institutions with certain traits are likely to monitor. Monitoring institutions will use dividend payouts as a tool to mitigate firms' agency problems, conditional on those firms' financial performance. We find that (1) there is a positive relation between lagged long-term institutional ownership with a large stake and the dividend payout ratio, (2) the positive relation is more salient in firms with high agency costs, and (3) the positive relation is more salient when external monitoring is weak These findings support that (1) concentrated and long-term institutional investors play a monitoring role and (2) monitoring institutions use dividend payouts as a monitoring device. Our findings are robust to endogeneity tests, level and change models, alternative income based dividend payout measures, alternative measures of long-term institutions, and sub-period analyses. (C) 2015 Elsevier Inc. All rights reserved.