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The Impact of Institutional Ownership on Dividends - An Agency Theory Based Analysis

This study addresses the debate over the relation between institutional ownership and dividend payout through the lens of the agency theory. We hypothesize that only institutional investors with certain traits are likely to monitor and conditioning on firms’ financial performance, they will use dividend payout to mitigate the firms’ agency problems. We find the following supporting evidence: (1) there is a positive relation between lagged long-term and concentrated institutional ownership and dividend payout ratio; (2) the positive relation is more salient when the firm has high agency costs; and (3) the positive relation is more salient when external monitoring is weak. These findings support the monitoring role of institutional investors and dividend payout as an ad hoc monitoring device. We document the interactions of dividend payout with other monitoring mechanisms that are consistent with the predictions from both outcome and substitution models based on agency theory.