Proceedings of 5th Asia-Pacific Business Research Conference
17 - 18 February, 2014, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-44-3
The Influence of Large Shareholder’s Identity on Dividend
Policy of Malaysian Companies
Nathasa Mazna Ramli1
This study investigates the influence of large shareholder’s identity on
dividend policy of Malaysian companies over the period from 2002 to
2006. This study focuses on two types of decisions related to dividend
policy, namely whether or not companies pay dividends and how much
of corporate funds are distributed in the form of dividends. Based on
regression analysis, the results reveal that the identity of large
shareholder has no association with dividend policy. However, the
greater the largest shareholding, independent of identity, the more likely
companies is to pay dividends. Companies with higher largest
shareholding are also observed to have a higher dividend payout. This
study enriches the dividend policy literature by providing evidence from
an Asian country.
JEL Codes: G32, G35 and M00
1. Introduction
Many publicly listed companies in countries besides the United States (U.S.) and the
United Kingdom (U.K.) are found to have high ownership concentration. Furthermore, a
single large shareholder or shareholder group are in control of these companies
(Claessens, Djankov, Fan, & Lang, 2002; Faccio & Lang, 2002; La Porta, Lopez-DeSilanes, & Shleifer, 1999). Although most companies in Europe are controlled by large
shareholders, their identities and typical characteristics differ markedly from those of
large shareholders in Asian economies. For example, companies in Germany, France
and Italy are said to be bank dominated (Rajan & Zingales, 1995), but in contrast, the
majority of companies in Asian countries such as Malaysia and Thailand are dominated
by family groups who are in effect the controlling shareholders (Claessens et al., 2000).
Prior studies have found that one type of company decision that commonly affected by
ownership structure is dividend policy (e.g. Kouki & Guizana, 2009; Mancinelli & Ozkan,
2006; Short, Zhang, & Keasey, 2002). The objective of this paper, therefore, is to
investigate the influence of the identity of large shareholder on the dividend policy of
Malaysian companies. Malaysian companies’ ownership structure adds to the appealing
aspect of the examination of this issue. Firstly, corporate ownership structure is
concentrated and large shareholders are in control of a large proportion of listed
companies (Tam & Tan, 2007; Truong & Heaney, 2007). Secondly, the large
1
Dr. Nathasa Mazna Ramli, is a senior lecturer at the Faculty of Economics and Muamalat, Universiti Sains
Islam Malaysia (USIM), Bandar Baru Nilai, 71800 Nilai, Negeri Sembilan, Malaysia,
Email: nathasa@usim.edu.my
Proceedings of 5th Asia-Pacific Business Research Conference
17 - 18 February, 2014, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-44-3
shareholder of listed companies in Malaysia can be grouped into three main types: a
family, the Government or an institutional shareholder. Hence, the conclusions reached
by the European studies may not be applicable to the Asian context, and thus, may not
serve as a prototype of the blockholder-based system.
2. Review of Literature and Hypotheses Development
Prior literature has indicated that large shareholders have a dual influence on
companies. Large shareholders are noted to have strong motivation and could act as
monitor in ensuring that the company’s value is maximized. While based on agency
perspectives, large shareholders may enjoy private benefits of control and thus, embroil
in expropriation of the corporate wealth (Bolton & von Thadden, 1998; Shleifer & Vishny,
1986, 1997). One mechanism to alleviate these problems, known as agency conflicts is
dividends (Easterbrook, 1984; Jensen, 1986; Rozeff, 1982). Based on agency theory,
ineffective companies’ governance system might influence managers to expropriate
corporate funds. Distribution of a company’s earnings equally to all shareholders in the
form of dividends could reduce corporate funds from managers’ hands, and therefore,
dividend policy could become a corporate governance device to mitigate agency
conflicts.
Types of large shareholder, such as a family group, an institutional shareholder and the
Government have been discussed in the literature in which could influence the dividend
decisions (Gugler and Yurtoglu, 2003). The shareholder’s impact on the dividend policy
may depend on the nature of agency conflicts associated with certain types of large
shareholder or the efficient monitoring function of the shareholder. Several studies have
empirically examined the relationship between family ownership and dividend policy.
Gugler (2003) states that the conflicts of interest and information asymmetry in familyowned companies are low due to there being no separation between large family
shareholders and managers. The management of family-owned companies is mostly
comprised of the family members. Therefore, large family shareholders have more
motivation to monitor the company directly, and this limits the monitoring function of
dividend payments. This is consistent with a negative relationship between familyowned companies and dividends. Truong and Heaney (2007) also find that dividend
payout ratios are lower when the largest shareholder is an insider, which includes
employees, individuals and families. They explain that insiders may enforce low
dividend policy on the company to increase the company’s cash flow.
Evidence shows that the posts of the Chief Executive Officer (CEO), Board Chairman or
Vice-Chairman of 85 percent of Malaysian companies are held by a member of a
controlling family (Claessens, Djankov, Fan, & Lang, 1999). Renneboog and
Trojanowski (2007) also find a significant negative relationship between dividend payout
and the voting power of executive directors. High retention of companies’ earnings may
give executive directors the private benefit of enjoying free cash flow (Jensen, 1986).
Overall, smaller payout can be expected in family-owned companies as this type of
company is associated with lower agency conflicts (Gugler, 2003). In addition, as most
managers are part of the family group, payout are not needed as a monitoring tool
Proceedings of 5th Asia-Pacific Business Research Conference
17 - 18 February, 2014, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-44-3
because greater insider ownership helps mitigate agency problems.
study proposes the following hypothesis:
Therefore, the
H1: Dividend policy is negatively related to the existence of a family group as the large
shareholder.
The efficient monitoring hypothesis proposed by Pound (1988) views institutional
shareholders as having a greater incentive to monitor the management of companies.
Institutional shareholders can also indirectly monitor companies by using their size to
influence or place constraints on managerial decisions (Jennings, 2005). Based on the
role of large institutional investors as a monitoring device, high dividend payments are
therefore not needed to mitigate agency problems. Zeckhauser and Pound (1990) have
suggested that institutional shareholders and dividend payments work as substitutes for
monitoring of a company. Considering that an institutional shareholder is an efficient
monitor and a substitute monitoring instrument to payouts, lower payout can be
expected in institution-owned companies. However, it is possible that an institutional
shareholder may also influence companies towards higher dividend payout. One
explanation is that, as large shareholders with strong monitoring skills, institutional
investors would encourage companies to pay higher payout to avoid being expropriated
(Renneboog & Szilagyi, 2006). Alternatively, the institutional shareholder may prefer that
companies be subjected to the scrutiny of capital market monitoring as suggested by
Easterbrook (1984). Institutional shareholders may think that their role in monitoring a
company is not sufficient or it is too costly, and consequently prefers the company to be
monitored by external capital markets (Farinha, 2003). Furthermore, institutional
shareholders may need consistent cash flow on an ongoing basis, thus the expectancy
arises that companies will pay higher payouts. Institutional shareholders need income
return on investments to fund activities or liabilities, as institutional shareholders may not
depend solely on capital gains (Short et al., 2002).
Empirical evidence on the influence of an institutional shareholder on dividend policy
has, however, yielded mixed results. Moh’d et al. (1995) contend that there is a positive
relationship between institutional ownership and dividend payouts in US companies.
The high payouts attract large shareholders, which are perceived to have strong
monitoring skills (Moh'd et al., 1995). Short et al. (2002) also provide evidence of a
positive relationship between dividend policy and institutional shareholdings. Renneboog
and Szilagyi (2006) evaluate companies as trying to please institutional investors’
preferences, because dividends increase when they are present. Other studies find no
association between institutional ownership and dividend payments. In contrast,
Renneboog and Trojanowski (2007) find that dividend payments are negatively
associated with the existence of institutional investors. Although institutional investors
have tax advantages on dividends, Renneboog and Trojanowski (2007) suggest that
they recognize the costs associated with high dividend payments, thus, they are willing
to receive lower dividend payouts. Based on the efficient monitoring hypothesis (Pound,
1988), the following hypothesis, is tested:
Proceedings of 5th Asia-Pacific Business Research Conference
17 - 18 February, 2014, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-44-3
H2: Dividend policy is negatively related to the existence of an institutional shareholder
as the large shareholder.
In analysing the association between dividend policy and Government ownership, Gul
(1999) suggests that Government ownership is a form of, or is similar to, institutional
ownership. The Government could operate as a domestic institutional investor in a
country’s capital market and monitor companies in which it invests. Against this
background, the Government can substitute for dividend payouts as a monitoring
device. Thus, lower payouts can be expected in Government-owned companies. Very
little empirical research, in fact, has been conducted on the impact of Government
ownership on dividend policy, although studies report that Governments own and control
a substantial percentage of publicly listed companies in many countries around the
world. An empirical study by Gugler (2003) shows that Government ownership is
positively associated with dividend policy. The author indicates this is due to double
principal-agent problems. This conclusion also supports the agency cost explanation
regarding dividends, where payouts are used to mitigate severe agency conflicts in
Government-owned companies. Gul (1999) states that there is a positive link between
Government ownership and dividend policy. However, instead of attributing this
scenario to agency conflict in Government-owned companies, Gul views that, in having
the Government as a shareholder, companies would experience fewer problems in
obtaining funds and, thus, are better able to provide larger payouts. Gugler and
Yurtoglu (2003) conclude that dividend payments are positively associated with the
voting rights of the Government’s shareholding. The study, therefore, explores whether
the findings by Gugler (2003) and Gugler and Yurtoglu (2003) are tenable for Malaysian
listed companies. Based on the double principal-agent problems, the next hypothesis is:
H3: Dividend policy is positively related to the existence of the Government as the large
shareholder.
3. Methodology
This study focuses on non-financial public listed companies (PLCs) of Bursa Malaysia
(Malaysian Stock Exchange) that consistently listed over the period of 2002 to 2006.
Due to the extent of data required in this study, particularly relating to ownership data, a
systematic random sampling of one for every two companies in the population is
applied. This study excludes financial, trusts and closed-end funds companies due to
the regulatory framework that specifically apply to them. The final sample contains 245
companies, which covers 1,225 firms-years observations. The ownership data of the
sample companies are collected from the respective annual reports. This study focusses
on the largest shareholding, as the largest shareholder of a company is a unique type of
shareholder. This due to their holding can be associated with benefits and costs, and
especially underinvestment costs (Claessens et al., 2002; Truong & Heaney, 2007). The
largest shareholder is defined as the largest shareholder who owns directly and
indirectly the equity of the company. The information relating to ownership is generally
provided in the analysis of shareholdings section in an annual report. This study
Proceedings of 5th Asia-Pacific Business Research Conference
17 - 18 February, 2014, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-44-3
carefully collects the relevant information of each company in annual reports, especially
in identifying the indirect holdings of the largest shareholder.
The largest shareholder is then categorized into four mutually exclusive groups: (1)
individual/family, (2) Government, (3) institutional investors and (4) foreigner.
Consistent with prior studies, this study does not differentiate between family members.
The family group is considered as a unit of analysis, assuming that they vote as a
coalition. People with the same surname and people that have the same father’s name
are assumed to belong in the same family. In Malaysia, the Muslims’ name will include
their father’s name after the word ‘Bin’ which mean ‘the son of’ or ‘Binti’ which can be
translated into ‘the daughter of’. The largest shareholder is categorized as the
Government if it can be grouped into one of the three bodies, namely the Federal
Government, the State agencies, and the Federal Government-Linked
agencies/Government-Linked Investment Companies (GLICs). However, GovernmentLinked institutional shareholders are classified as an institutional investor, due to its
principal activities and characteristics. Besides that, insurance companies, pension
funds, professional fund managers and licensed banking institutions are also
categorized as institutional shareholder. A company with the largest shareholder is a
foreign company or foreign individual, is classified as foreigners. There are companies
which the largest shareholder is a private company. The ultimate owner of the private
company is scrutinized until the shareholder is able to be grouped into one of the above
category. The main source for financial data is OSIRIS database.
The study focuses on the influence of large shareholder’s identity on two types of
decisions related to dividend policy: (i) whether or not companies pay dividends, and (ii)
how much of corporate funds are distributed in the form of dividends. The following
random-effects Logit regression equation is used to examine the first type of decision
i.e. the likelihood that a company distributes earnings in the form of dividends.
[
3
5
k 1
l1
Pr (PAYER it  1)  LOGIT α  a1LARGEST it   a k TYPE kit   a l CONTROL lit
4
  amTIME
m 1
8
mit
  a nINDUSTRYnit  μit
n 1
]
(Equation 1)
Where:
it
PAYERit
LARGEST
TYPEkit
CONTROLmit
: the unobserved error component
: dummy variable equal to 1 if the ompany pays cash
dividends and 0 if otherwise
largest shareholder equity holding
: set of variables either FAMILY, GOVERNMENT or
INSTITUTIONAL for k=1,2 or 3 respectively
: set of control variables: profitability (ROA), firm size
Proceedings of 5th Asia-Pacific Business Research Conference
17 - 18 February, 2014, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-44-3
(SIZE), investment opportunities (INV), debt level (DEBT)
and risk level (RISK)
: set of year dummies that, respectively, take a value of 1
for 2003, 2004, 2005 and 2006, or 0 if otherwise
: Set of industry dummies that, respectively, take a value of
1 for companies categorized in construction, consumer
products, industrial products, infrastructure project
companies, hotels, plantations, properties and technology,
or 0 if otherwise
TIMEnit
INDUSTRYpit
The second part of the regression analysis relates to the influence of large shareholder’s
identity on the magnitude of dividend payout ratio. The study use random-effects Tobit
regressions, where the model to be estimated can be expressed as:
3
5
4
k 1
l 1
m 1
Yit    b1LARGEST it   bk TYPE kit     bl CONTROL lit   bm TIME mit
8
  bnINDUSTRYnit   it
n 1
(Equation 2)
The observable left-censored dependent variable Yit can be stated as:
Yit 
{
*
*
Yit if Yit  0
0 if Yit*  0
(Equation 3)
Where Y*it is the dependent variable, which is dividends by earnings ratio (DIVE). Details
of independent and control variables are explained in Table 1.
Table 1: Variable Measurements
Notation
Independent Variables
FAMILY
:
GOVERNMENT
:
INSTITUTIONAL
:
Control Variables
ROA
SIZE
INV
DEBT
RISK
:
:
:
:
:
Explanation
Dummy variable equal to 1 if the largest shareholder is a family group, 0 if
otherwise
Dummy variable equal to 1 if the largest shareholder is the Government, 0
if otherwise
Dummy variable equal to 1 if the largest shareholder is an institutional
shareholder, 0 if otherwise
is the ratio of earnings before interest and taxes to total assets
is the natural log of total assets
is the ratio of market capitalization to total assets
is the ratio of the book value of total debt to total assets
is the standard deviation of monthly share returns
Proceedings of 5th Asia-Pacific Business Research Conference
17 - 18 February, 2014, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-44-3
4. Findings and Discussion
Table 2 highlights the largest shareholder ownership based on identity of ownership.
From the table, it can be observed that 73.71 percent of the Malaysian companies are
categorized into a family-owned company. Companies with the largest shareholder are
the institutional shareholder and foreigner is relatively smaller in the sample. The results
show that 4.90 percent and 7.51 percent are owned by an institutional shareholder and
a foreigner, respectively. On average the holding of the largest shareholder which is
categorized as a FAMILY is 37.68 percent.
Table 2: The largest shareholder’s identity of sample companies
N
FAMILY
GOVERNMENT
INSTITUTIONAL
FOREIGN
903
170
60
92
Percentage Holding
Standard
Mean
Median
Deviation
37.68%
37.62%
0.158
46.82%
45.88%
0.154
49.33%
52.89%
0.177
46.89%
40.41%
0.148
Table 3 shows the dividends to earnings ratio of sample companies over the period from
of the study. The results indicate that Malaysian listed companies paid around 29
percent of their earnings as dividends. This figure is lower than the average dividend
payout ratio report by La Porta et al. (2000), who found that Malaysian companies paid
out 38 percent of their earnings as dividends. A possible reason for the higher dividend
payout ratio in their study is that the companies in their sample mainly focus on the
largest companies listed on the stock exchange. In contrast, this study randomly
selected companies on Bursa Malaysia, which might include wider coverage of company
sizes.
Table 3: Dividend to earnings ratio of sample companies
N
Average 2002-2006
2002
2003
2004
2005
2006
1225
245
245
245
245
245
Mean
29.14%
12.56%
32.75%
19.30%
34.29%
46.64%
Median
13.43%
9.16%
12.53%
13.76%
15.31%
16.46%
SD
154.41%
130.71%
130.92%
139.44%
122.92%
224.01%
Table 4 presents the results of random-effects Logit model estimations which focus on
the association between the identity of the largest shareholder in sample companies and
the decision of whether or not to pay dividends. The analysis observes that the
coefficient signs and significance levels of the control variables are statistically
Proceedings of 5th Asia-Pacific Business Research Conference
17 - 18 February, 2014, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-44-3
significant. The results in Table 4 show that the dividend decision of Malaysian
companies is not related to the identity of the largest shareholder. The coefficient for the
FAMILY variable in model specification 1 is negative, implying that companies are less
likely to pay dividends when the largest shareholder is categorized as a family, although
the coefficient are statistically significant. The results also show that there is no
statistically significant evidence that Government or institutional shareholders have an
influence on the likelihood of companies in paying dividends, hence, reject the
hypothesis of this study. Furthermore, the analysis finds that the interaction between the
largest shareholding variable and the FAMILY, GOVERNMENT and INSTITUTIONAL
variables, respectively, are not statistically significantly related with the DIVPAYER
variable. Our results, thus, provide no evidence that the identity of the largest
shareholder influences the propensity of Malaysian companies to pay dividends, and do
not support the findings by Renneboog and Szilagyi (2006) and Truong and Heaney
(2007). However, the study also finds that the coefficient for the LARGEST variable is
positive and statistically significant at the 10 percent level in model 1 and at the 5
percent level in model 2. This indicates that the greater the largest shareholding,
independent of identity, the more likely companies is to pay dividends.
Table 4: The influence of the largest shareholder’s identity on the likelihood of
dividend payments
Dependent Variable
INTERCEPT
DEBT
INV
ROA
SIZE
RISK
LARGEST
DIVPAYER
1
-9.730
-6.209
0.425
2.301
1.107
-11.532
2.350
FAMILY
-1.598
GOVERNMENT
-0.800
INSTITUTIONAL
-1.868
**
***
*
*
***
***
*
2
-11.303
-6.208
0.423
2.314
1.109
-11.518
5.381
FAMILY*LARGEST
-3.252
GOVERNMENT*LARGEST
-1.939
***
***
*
*
***
***
**
INSTITUTIONAL*LARGEST
-3.212
Year dummies
Yes
Yes
Industry dummies
Yes
Yes
No. of observations
1225
1225
Wald test
77.56 ***
61.49 ***
Log-likelihood
-429.636
-430.178
Sigma u
3.199
0.095
Rho
0.757
0.751
LR test of rho=0
245.54 ***
257.98 ***
Note:*, ** and *** denote 10%, 5% and 1% statistical significance level, respectively
Proceedings of 5th Asia-Pacific Business Research Conference
17 - 18 February, 2014, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-44-3
This study also investigates the determinant of dividend payout with particular emphasis
on types of the largest shareholder. Model specifications 3 and 4 in Table 5 present the
results of the analysis. In these models, the LARGEST variable is also observed to be
positive and is statistically significant at 5 percent level. The analysis does not,
however, provide any evidence that the identity of the largest shareholder has any
influence on dividend payout. The coefficients of the dummy variables of interest, which
represent the types of the largest shareholder, are negative, but not statistically
significant. The results do not provide support for the argument that the dividend payout
ratio is linked to the types of the controlling shareholder as suggested by Gugler (2003),
Correia da Silva et al. (2004) and Truong and Heaney (2007). Reasons for the
contradictory results of the study with previous research might due to the difference in
the institutional background of the countries, the sample of the studies and the definition
used for particular shareholder types.
The analysis further tests the notion that the types of the largest shareholder have
influences on the magnitude of dividend payout by replacing the dummy variables that
represent the types of the largest shareholder with the interaction between the
LARGEST variable and FAMILY, GOVERNMENT and INSTITUTIONAL, respectively.
This analysis specifically evaluates the effect of the shareholding magnitude of the
ownership types on the dividend payout ratio. The results in model 4 demonstrate that
the interaction variables are not statistically significant. Overall, the study does not find
any relation between dividends and ownership influences exerted by different largest
shareholder categories. The results do not support all hypothesis of the study and are
not consistent with prior literature, where types of shareholders are found to influence
the nature of dividend payout (see Correia da Silva et al., 2004; Gugler, 2003; Truong &
Heaney, 2007).
Proceedings of 5th Asia-Pacific Business Research Conference
17 - 18 February, 2014, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-44-3
Table 5: The influence of the largest shareholder’s identity on the dividends to
earnings ratio
Dependent Variable
DIVE
INTERCEPT
DEBT
INV
ROA
SIZE
RISK
LARGEST
3
-1.794
-1.060
-0.032
2.014
0.134
-3.443
1.057
FAMILY
-0.150
GOVERNMENT
-0.123
INSTITUTIONAL
-0.260
*
**
***
*
***
**
4
-2.529
-1.167
-0.346
1.989
0.124
-3.239
1.785
FAMILY*LARGEST
-0.149
GOVERNMENT*LARGEST
-0.481
***
***
***
*
***
**
INSTITUTIONAL*LARGEST
-0.695
Year dummies
Yes
Yes
Industry dummies
Yes
Yes
No. of observations
1225
1225
Left-censored observations
387
387
Wald test
64.89 ***
79.66 ***
Log-likelihood
-1727.807
-1719.664
Sigma e
1.335
1.323
Rho
0.388
0.396
Note:*, ** and *** denote 10%, 5% and 1% statistical significance level, respectively
5. Conclusion
This study investigates the influence of large shareholder’s identity on dividend policy of
Malaysian listed companies. It is observes that the higher the largest shareholding, the
higher the likelihood of paying dividends. The magnitude of dividend payout of
Malaysian companies is also found to be higher in companies with higher largest
shareholding. However, the study does not find significant evidence on the influence of
the largest shareholder’s identity on companies’ dividend payout level and propensity to
pay dividends. Overall, the study finds that large shareholder, independent of the
identity, have an effect on the dividend policy of Malaysian companies.
Nevertheless, there is much more to be investigated and further research is required to
tackle various issues that were not considered in this study. Future work can tests
whether the concentration level, i.e. whether the majority or block holding of the largest
shareholder have an impact on dividend policy. Another issues warrant further
investigation is, instead of focusing on large shareholder ownership, an examination of
Proceedings of 5th Asia-Pacific Business Research Conference
17 - 18 February, 2014, Hotel Istana, Kuala Lumpur, Malaysia, ISBN: 978-1-922069-44-3
other agencies proxies such as board of director structure on dividend policy would
provide deeper insight on the usage of dividends as a governance mechanism.
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