Dividend Policy and Ownership Concentration: An Empirical Analysis of the Non-Financial Sector of Pakistan

Abstract

A concentrated ownership structure is likely to raise the agency problem between large and minority shareholders. This situation allows dividends to work as a tool to fix agency problems. The underlying objective of this study is to check the relationship of ownership concentration with dividend payouts based on the agency theory. The study used data from 56 non-financial firms listed at the Pakistan Stock Exchange (PSX) for nine years from FY2011 to FY2019. The dependent variable is the dividend payout ratio, while ownership concentration as proxied by institutional shareholders and foreign shareholders is the independent variable. Profitability ratio, liquidity ratio, and firm size are the control variables. The Hausman test suggested using the fixed-effect model with Driscoll-Kraay standard error. The findings confirm a positive association between ownership concentration and dividend payout. Institutional and foreign shareholders also posit a strong positive association with the dividend payout ratio.  Ownership concentration was found to be significantly affecting Pakistan's non-financial sector regardless of the identity of the concentrated owner. This means that concentration contributes positively to dividend policy to mitigate agency problems. Despite this positive association, it also favors the assumption that large shareholders can influence management, and the impact could be vice versa. It is recommended that businesses with concentrated ownership structures should leverage dividends strategically to address agency problems.