The Integration Effect of Ownership Structure and Board Governance on Dividends: Evidence from Malaysian Listed Firms

Abstract

abstract: This paper investigates the nature and significance of the interaction effect of a firm's board governance on the relationship between types of ownership structure and dividends. A cross-sectional analysis of firms listed on the main board of Bursa Malaysia for the years 2002 and 2005 is utilised. Results from the direct effects reveal that government, foreign and managerial ownership are significantly related to dividends for the year 2005. However, the results are not significant for year 2002. As expected, managerial ownership significantly positively related to dividends, implying that insider shareholdings provide greater incentives for the alignment of management and shareholders' interest resulting in higher dividends. Both government and foreign ownership show significantly negative effect on dividends. Further, ownership concentration has a significant positive effect; however, its impact is very minimum on dividends. Using moderated regression analyses, the interaction effect of ownership structure variables with board duality is insignificant in years 2002 and 2005. Interestingly, the interaction term of foreign ownership with size of independent non executive directors shows significantly positive effect for both years. The negative interaction term of board size in government-controlled firms is also consistent with what is predicted: firms with a smaller board are in a better position to cope with firm's dividend decision than firms with a larger board. This finding is consistent with recent reports on corporate governance that have stressed the importance of having smaller boards. Overall, findings from this paper reveal that good board governance, particularly board independence and board size, can enhance the monitoring role of government and foreign ownership in reducing agency costs through the payment of dividends.