Why do Family Firms Pay Cash Dividends in Emerging Markets? Corporate Control and Family Succession in Korea
DOI:
https://doi.org/10.6000/1929-7092.2019.08.24Keywords:
Corporate Payout, Dividend, Corporate Control, Family Firm, Ownership Structure, Succession.Abstract
Following the economic crisis in 1997, the Korean government introduced the enhanced corporate governance and reform policy, which drove family-controlled firms to search strategic reaction for control succession and wealth transfer. This paper explores alternative explanations for why Korean firms choose to pay cash dividends around this corporate reform period. What lead firms to pay cash dividends remains largely unexplained by the reducing agency cost, signaling, or life-cycle theories. This study focuses on relations between the ownership structure and cash dividends payout, seeking effects deriving from (i) controlling shareholder (CS) and (ii) their family members. The logit analysis result shows that firms with large control rights, especially higher ownership of other family members of CS are more likely to pay cash dividends. After adjusting for the characteristics that affect the degree of cash dividends, ownership variables are positively related to payout ratios and dividend yields. CS family members' ownership has a statistically stronger effect on payout ratios than CS's. These results provide the evidence of incentive for corporate control succession within the family with least costs carried by the family members of controlling shareholders who positively influence payout decisions and dividend ratios.
References
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https://doi.org/10.1111/1540-6261.00510
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https://doi.org/10.1111/j.1540-6261.2006.01062.x
Baker, M., Wurgler, J. (2004). “Appearing and Disappearing Dividends: The Link to Catering Incentives,” Journal of Financial Economics, 73, 271-288.
https://doi.org/10.1016/j.jfineco.2003.08.001
Bebchuck, L., Kraakman, R. G. and G. Triantis (2000). Stock Pyramids, Cross-Ownership and Dual Class Equity: “The mechanisms and agency costs of separating control from cash-flow rights,” in R. Morck (Ed.), Concentrated Corporate Ownership, Chicago, University of Chicago Press
Bennedsen, M., Nielse, K., Perez-Gonzales, F. and D. Wolfenzon (2007). “Inside the family firm: The role of families in succession decisions and performance,” The Quarterly Journal of Economics 122, 647–691.
https://doi.org/10.1162/qjec.122.2.647
Bhattacharya, S. (1979). “Imperfect information, dividend policy, and the ‘bird in the hand’ Fallacy. Bell Journal of Economics, 10, 259–270.
https://doi.org/10.2307/3003330
Brav, A., J. R. Graham, C. R. Harvey, and R. Michaely (2005), “Payout policy in the 21st century” Journal of Financial Economics, 77, 483–528.
https://doi.org/10.1016/j.jfineco.2004.07.004
Brealey, R.A., Myers, S.C. and F. Allen (2006). Corporate Finance, 8th ed., McGraw-Hill.
Brennan, M. and A. Thakor (1990). “Shareholder preferences and dividend policy,” Journal of Finance, 45, 993–1018.
https://doi.org/10.1111/j.1540-6261.1990.tb02424.x
Burkart, M., Panunzi, F. and A. Shleifer (2003). “Family firms,” Journal of Finance, 58, 2167–2202.
https://doi.org/10.1111/1540-6261.00601
Claessens, S., Djankov, S. and L. Lang (2000). “The separation of ownership and control in East Asian corporations,” Journal of Financial Economics, 58, 81–112.
https://doi.org/10.1016/S0304-405X(00)00067-2
Demsetz, H. and K. Lehn (1985). “The structure of corporate ownership: Causes and consequences.” Journal of Political Economy, 93, 1155–1177.
https://doi.org/10.1086/261354
Dyck, A., and L. Zingales (2004). “Private benefits of control: an international comparison,” Journal of Finance 59, 537-600.
https://doi.org/10.1111/j.1540-6261.2004.00642.x
Easterbrook, F. (1984). “Two agency-cost explanations of dividends,” American Economic Review, 74, 650–659.
Faccio, M., Lang, L. and L. Young (2001). “Dividends and expropriation,” American Economic Review 91, 54–78.
https://doi.org/10.1257/aer.91.1.54
Faccio, M. and L. Lang (2002). “The ultimate ownership of western European corporations,” Journal of Financial Economics, 65, 365–395.
https://doi.org/10.1016/S0304-405X(02)00146-0
Fama, E.F. and K. French (2001). “Disappearing dividends: changing firm characteristics or lower propensity to pay,” Journal of Financial Economics, 60, 3–43.
https://doi.org/10.1016/S0304-405X(01)00038-1
Grullon, G. and R. Michaely (2002). “Dividends, share repurchases, and the substitution hypothesis,” Journal of Finance, 57, 1649–1684.
https://doi.org/10.1111/1540-6261.00474
Guay, W. and J. Harford (2000). “The Cash-Flow Permanence and Information Content of Dividend Increases versus Repurchases,” Journal of Financial Economics, 57, 385–415.
https://doi.org/10.1016/S0304-405X(00)00062-3
Hellman, J., Jones, G. and D. Kaufmann (2000). “Seize the state, seize the day: state capture, corruption and influence in transition,” World Bank policy research working paper #2444.
Jagannathan, M., Stephens, C. and M. Weisbach (2000). “Financial flexibility and the choice between dividends and stock repurchases,” Journal of Financial Economics, 57, 355–384.
https://doi.org/10.1016/S0304-405X(00)00061-1
Jensen, M. (1986). “Agency cost of free cash flow, corporate finance and takeovers,” American Economic Review, 76, 323–329.
Jensen, M. and W. Meckling (1976). “Theory of the firm: Managerial behavior, agency costs, and ownership structure,” Journal of Financial Economics, 3, 305–360.
https://doi.org/10.1016/0304-405X(76)90026-X
Jensen, G., Solberg, D. and T. Zornn(1991). “Simultaneous determination of insider ownership, debt, and dividend policies,” Journal of Financial and Quantative Analysis, 27, 247–263.
https://doi.org/10.2307/2331370
Johnson, S., La Porta, R., Lopez-de-Silanes, F. and A. Shleifer (2000). “Tunneling,” American Economic Review, 90, 22–27.
https://doi.org/10.1257/aer.90.2.22
Joh, S.W. (2003). “Corporate governance and firm profitability: evidence from Korea before the economic crisis,” Journal of Financial Economics, 68, 287–322.
https://doi.org/10.1016/S0304-405X(03)00068-0
Joo, S. (1993). “Empirical analysis: the effect of insider ownership on payout policy,” The Korean Journal of Financial Management, 10, 125–140.
Kalay, A. and M. Lemmon (2008), ‘Payout policy’ in: B. E. Eckbo (ed.): Handbook of Corporate Finance: Empirical Corporate Finance, Volume 2. Amsterdam, Elsevier/Science
Kim, A. and M. Cho (2008) “Investors, Dividend and Investment Policy: An Empirical Study of Korean Firms,” Journal of Strategic Management, 11, 25-42.
https://doi.org/10.17786/jsm.2008.11.1.002
Kim, Y., Jung, S. and S. Chun (2009). “Foreign stock investment and firm’s dividend policy in Korea,” The Korean Journal of Financial Management, 26, 1–29.
Ko, Y. and S. Joh (2009). “The effect of ownership structure on payout policy,” Asian Review of Financial Research, 22, 35–72.
Kumar, P. and B.S. Lee (2001). “Discrete dividend policy with permanent earnings,” Financial Management, 30:3 (Autumn), 55–76.
https://doi.org/10.2307/3666376
La Porta, R., Lopez-de-Silanes, F. and A. Shleifer (1999). “Corporate ownership around the world,” Journal of Finance, 54, 471–517.
https://doi.org/10.1111/0022-1082.00115
_____ (2000). “Agency problems and dividend policies around the world,” Journal of Finance, 55, 1–33.
https://doi.org/10.1111/0022-1082.00199
_____ (1998). “Law and finance,” Journal of Political Economy, 106, 1113–1155.
https://doi.org/10.1086/250042
Lee, B. S. (1996). “Time-series implications of aggregate dividend behavior,” Review of Financial Studies, 9:2, 589-618.
https://doi.org/10.1093/rfs/9.2.589
Lee, B.S. and O. Rui (2007). “Time-series behavior of share repurchases and dividends,” Journal of Financial and Quantitative Analysis, 42:5, 119–142.
https://doi.org/10.1017/S0022109000002210
Miller, M.H. and K. Rock (1985). “Dividend policy under asymmetric information,” Journal of Finance, 40, 1031–1051.
https://doi.org/10.1111/j.1540-6261.1985.tb02362.x
Miller, M.H. and F. Modigliani (1961). “Dividend policy, growth and the valuation of shares,” Journal of Business 34, 411–433.
https://doi.org/10.1086/294442
Mitton, T. (2004). “Corporate governance and dividend policy in emerging markets,” Emerging Markets Review, 5:4, 409-426.
https://doi.org/10.1016/j.ememar.2004.05.003
Morck, R., Stangeland, D., and B. Yeung (2000). “Inherited wealth, corporate control and economic growth,” in Morck, R. (ed.); Concentrated Corporate Ownership, NBER Conference Volume, University of Chicago Press, Chicago, IL.
Nenova, T. (2003). “The value of corporate voting rights and control: a cross-country analysis,” Journal of Financial Economics, 68, 325–351.
https://doi.org/10.1016/S0304-405X(03)00069-2
Park, H. (2004). “The effect of foreign investors on firms’ growth in Korea,” Samsung, Economic Research Issue Paper.
Park, K., Lee, E. and I. Lee (2003). “Determinants of dividend policy of Korean firms,” Korean Journal of Finance, 16, 195–229.
Rozeff, Michael S. (1982). “How companies set their dividend payout ratios,” in Joel Stern and Donald Chew (eds.); The Revolution in Corporate Finance, Blackwell.
Sul, W. and S. Kim (2006). “Impact of foreign investors on firm’s dividend policy,” Asia-Pacific Journal of Financial Studies, 35, 1–40
https://doi.org/10.1002/mde.4090150206
Allen, F., Bernardo, A. and I. Welch (2000). “A theory of dividends based on tax clientele,” Journal of Finance 55, 2499–3536.
https://doi.org/10.1111/0022-1082.00298
Allen, F and R. Michaely (2003) ‘Payout Policy’ in: G. Constantinides, M. Harris, R. Stulz (Eds.), Handbook of the Economics of Finance, 337–429, Elsevier Science, Amsterdam.
Almeida, H. and D. Wolfenzon (2006). “A Theory of pyramidal ownership and family business groups,” Journal of Finance 61, 2637–2680.
https://doi.org/10.1111/j.1540-6261.2006.01001.x
Bae, K.H., Kang, J. and J. Kim (2003). “Tunneling or value added? Evidence from mergers by Korean business groups,” Journal of Finance, 57, 2695–2740.
https://doi.org/10.1111/1540-6261.00510
Baek, J.S., Kang, J.K. and I. Lee (2006). “Business groups and tunneling: evidence from private securities offerings by Korean chaebols,” Journal of Finance, 61, 2415–2449.
https://doi.org/10.1111/j.1540-6261.2006.01062.x
Baker, M., Wurgler, J. (2004). “Appearing and Disappearing Dividends: The Link to Catering Incentives,” Journal of Financial Economics, 73, 271-288.
https://doi.org/10.1016/j.jfineco.2003.08.001
Bebchuck, L., Kraakman, R. G. and G. Triantis (2000). Stock Pyramids, Cross-Ownership and Dual Class Equity: “The mechanisms and agency costs of separating control from cash-flow rights,” in R. Morck (Ed.), Concentrated Corporate Ownership, Chicago, University of Chicago Press
Bennedsen, M., Nielse, K., Perez-Gonzales, F. and D. Wolfenzon (2007). “Inside the family firm: The role of families in succession decisions and performance,” The Quarterly Journal of Economics 122, 647–691.
https://doi.org/10.1162/qjec.122.2.647
Bhattacharya, S. (1979). “Imperfect information, dividend policy, and the ‘bird in the hand’ Fallacy. Bell Journal of Economics, 10, 259–270.
https://doi.org/10.2307/3003330
Brav, A., J. R. Graham, C. R. Harvey, and R. Michaely (2005), “Payout policy in the 21st century” Journal of Financial Economics, 77, 483–528.
https://doi.org/10.1016/j.jfineco.2004.07.004
Brealey, R.A., Myers, S.C. and F. Allen (2006). Corporate Finance, 8th ed., McGraw-Hill.
Brennan, M. and A. Thakor (1990). “Shareholder preferences and dividend policy,” Journal of Finance, 45, 993–1018.
https://doi.org/10.1111/j.1540-6261.1990.tb02424.x
Burkart, M., Panunzi, F. and A. Shleifer (2003). “Family firms,” Journal of Finance, 58, 2167–2202.
https://doi.org/10.1111/1540-6261.00601
Claessens, S., Djankov, S. and L. Lang (2000). “The separation of ownership and control in East Asian corporations,” Journal of Financial Economics, 58, 81–112.
https://doi.org/10.1016/S0304-405X(00)00067-2
Demsetz, H. and K. Lehn (1985). “The structure of corporate ownership: Causes and consequences.” Journal of Political Economy, 93, 1155–1177.
https://doi.org/10.1086/261354
Dyck, A., and L. Zingales (2004). “Private benefits of control: an international comparison,” Journal of Finance 59, 537-600.
https://doi.org/10.1111/j.1540-6261.2004.00642.x
Easterbrook, F. (1984). “Two agency-cost explanations of dividends,” American Economic Review, 74, 650–659.
Faccio, M., Lang, L. and L. Young (2001). “Dividends and expropriation,” American Economic Review 91, 54–78.
https://doi.org/10.1257/aer.91.1.54
Faccio, M. and L. Lang (2002). “The ultimate ownership of western European corporations,” Journal of Financial Economics, 65, 365–395.
https://doi.org/10.1016/S0304-405X(02)00146-0
Fama, E.F. and K. French (2001). “Disappearing dividends: changing firm characteristics or lower propensity to pay,” Journal of Financial Economics, 60, 3–43.
https://doi.org/10.1016/S0304-405X(01)00038-1
Grullon, G. and R. Michaely (2002). “Dividends, share repurchases, and the substitution hypothesis,” Journal of Finance, 57, 1649–1684.
https://doi.org/10.1111/1540-6261.00474
Guay, W. and J. Harford (2000). “The Cash-Flow Permanence and Information Content of Dividend Increases versus Repurchases,” Journal of Financial Economics, 57, 385–415.
https://doi.org/10.1016/S0304-405X(00)00062-3
Hellman, J., Jones, G. and D. Kaufmann (2000). “Seize the state, seize the day: state capture, corruption and influence in transition,” World Bank policy research working paper #2444.
Jagannathan, M., Stephens, C. and M. Weisbach (2000). “Financial flexibility and the choice between dividends and stock repurchases,” Journal of Financial Economics, 57, 355–384.
https://doi.org/10.1016/S0304-405X(00)00061-1
Jensen, M. (1986). “Agency cost of free cash flow, corporate finance and takeovers,” American Economic Review, 76, 323–329.
Jensen, M. and W. Meckling (1976). “Theory of the firm: Managerial behavior, agency costs, and ownership structure,” Journal of Financial Economics, 3, 305–360.
https://doi.org/10.1016/0304-405X(76)90026-X
Jensen, G., Solberg, D. and T. Zornn(1991). “Simultaneous determination of insider ownership, debt, and dividend policies,” Journal of Financial and Quantative Analysis, 27, 247–263.
https://doi.org/10.2307/2331370
Johnson, S., La Porta, R., Lopez-de-Silanes, F. and A. Shleifer (2000). “Tunneling,” American Economic Review, 90, 22–27.
https://doi.org/10.1257/aer.90.2.22
Joh, S.W. (2003). “Corporate governance and firm profitability: evidence from Korea before the economic crisis,” Journal of Financial Economics, 68, 287–322.
https://doi.org/10.1016/S0304-405X(03)00068-0
Joo, S. (1993). “Empirical analysis: the effect of insider ownership on payout policy,” The Korean Journal of Financial Management, 10, 125–140.
Kalay, A. and M. Lemmon (2008), ‘Payout policy’ in: B. E. Eckbo (ed.): Handbook of Corporate Finance: Empirical Corporate Finance, Volume 2. Amsterdam, Elsevier/Science
Kim, A. and M. Cho (2008) “Investors, Dividend and Investment Policy: An Empirical Study of Korean Firms,” Journal of Strategic Management, 11, 25-42.
https://doi.org/10.17786/jsm.2008.11.1.002
Kim, Y., Jung, S. and S. Chun (2009). “Foreign stock investment and firm’s dividend policy in Korea,” The Korean Journal of Financial Management, 26, 1–29.
Ko, Y. and S. Joh (2009). “The effect of ownership structure on payout policy,” Asian Review of Financial Research, 22, 35–72.
Kumar, P. and B.S. Lee (2001). “Discrete dividend policy with permanent earnings,” Financial Management, 30:3 (Autumn), 55–76.
https://doi.org/10.2307/3666376
La Porta, R., Lopez-de-Silanes, F. and A. Shleifer (1999). “Corporate ownership around the world,” Journal of Finance, 54, 471–517.
https://doi.org/10.1111/0022-1082.00115
_____ (2000). “Agency problems and dividend policies around the world,” Journal of Finance, 55, 1–33.
https://doi.org/10.1111/0022-1082.00199
_____ (1998). “Law and finance,” Journal of Political Economy, 106, 1113–1155.
https://doi.org/10.1086/250042
Lee, B. S. (1996). “Time-series implications of aggregate dividend behavior,” Review of Financial Studies, 9:2, 589-618.
https://doi.org/10.1093/rfs/9.2.589
Lee, B.S. and O. Rui (2007). “Time-series behavior of share repurchases and dividends,” Journal of Financial and Quantitative Analysis, 42:5, 119–142.
https://doi.org/10.1017/S0022109000002210
Miller, M.H. and K. Rock (1985). “Dividend policy under asymmetric information,” Journal of Finance, 40, 1031–1051.
https://doi.org/10.1111/j.1540-6261.1985.tb02362.x
Miller, M.H. and F. Modigliani (1961). “Dividend policy, growth and the valuation of shares,” Journal of Business 34, 411–433.
https://doi.org/10.1086/294442
Mitton, T. (2004). “Corporate governance and dividend policy in emerging markets,” Emerging Markets Review, 5:4, 409-426.
https://doi.org/10.1016/j.ememar.2004.05.003
Morck, R., Stangeland, D., and B. Yeung (2000). “Inherited wealth, corporate control and economic growth,” in Morck, R. (ed.); Concentrated Corporate Ownership, NBER Conference Volume, University of Chicago Press, Chicago, IL.
Nenova, T. (2003). “The value of corporate voting rights and control: a cross-country analysis,” Journal of Financial Economics, 68, 325–351.
https://doi.org/10.1016/S0304-405X(03)00069-2
Park, H. (2004). “The effect of foreign investors on firms’ growth in Korea,” Samsung, Economic Research Issue Paper.
Park, K., Lee, E. and I. Lee (2003). “Determinants of dividend policy of Korean firms,” Korean Journal of Finance, 16, 195–229.
Rozeff, Michael S. (1982). “How companies set their dividend payout ratios,” in Joel Stern and Donald Chew (eds.); The Revolution in Corporate Finance, Blackwell.
Sul, W. and S. Kim (2006). “Impact of foreign investors on firm’s dividend policy,” Asia-Pacific Journal of Financial Studies, 35, 1–40
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Published
2019-12-12
How to Cite
Ko, Y. K. (2019). Why do Family Firms Pay Cash Dividends in Emerging Markets? Corporate Control and Family Succession in Korea. Journal of Reviews on Global Economics, 8, 275–290. https://doi.org/10.6000/1929-7092.2019.08.24
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