Board Governance, Dividend Payout and Executive Compensation in Malaysian Firms

Abstract

Research Question: This study seeks to present and test how board governance mechanisms affect the relationship between a company's dividend payout and CEO compensation. Motivation: In the face of the significant payouts to directors and abundant literature on executive pay, there is scant evidence on board governance the relationship between executive compensation and the dividend payout policy of listed firms in emerging capital markets. The independent variable used in this study is the dividend payout ratio, which is the dividend per share divided by primary earnings per share before extraordinary items. A direct measure of the dependent variable is the total executive compensation, inclusive of fixed salaries and variable bonuses. The research is built based on these three key papers, Bhattacharyya et al. (2011); Smith and Watts (1992); Gaver and Gaver (1993). Idea: Building on Bhattacharyya et al. (2011), this study examines how the board governance relationship between a company's dividend payout and executive compensation in the context of a developing country. Data: Using a sample of 300 largest Malaysian public listed companies (PLCs) on Bursa Malaysia from 2008 until 2014. The data is from the Kuala Lumpur Stock Exchange, OSIRIS, DATASTREAM, BANKSCOPE databases, and the Malaysian Stock Performance Guide. Method/Tools: We test using the panel data. Findings: Our empirical results reveal three findings. First, our results suggest a direct relationship between dividend payout and executive compensation across all models. Our sub-sample analyses show that this phenomenon is limited to the non-government linked firms and non-family firms. Secondly, board governance shows that the Bumiputera, CEO-education, and non-executive directors are positively related to dividend payout. Lastly, the interaction between executive board compensation and the presence of Bumiputera has a negative relationship with the dividend payout. Contributions: The results of this study contribute to the growing scholarly work that examines board governance and the impact on dividend payout in an emerging market context.