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

Abstract

A concentrated ownership structure is likely to cause an 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 between ownership concentration and dividend payouts based on agency theory. The study used data from 56 non-financial firms listed on the Pakistan Stock Exchange (PSX) for nine years, from FY2011 to FY2019. The dependent variable is the dividend payout ratio, while ownership concentration, as measured 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 a Driscoll-Kraay standard error. The findings confirm a positive association between ownership concentration and dividend payouts. Institutional and foreign shareholders also have 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 favours the assumption that large shareholders can influence management, and the impact could be vice versa.