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Journal cover: Journal of Applied Accounting Research

Journal of Applied Accounting Research

ISSN: 0967-5426

Online from: 1999

Subject Area: Accounting and Finance

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The association between dividend payout and outside directorships


Document Information:
Title:The association between dividend payout and outside directorships
Author(s):Basil Al-Najjar, (Middlesex University Business School, Middlesex University, London, UK), Khaled Hussainey, (Accounting and Finance Division, Stirling Management School, University of Stirling, Stirling, UK)
Citation:Basil Al-Najjar, Khaled Hussainey, (2009) "The association between dividend payout and outside directorships", Journal of Applied Accounting Research, Vol. 10 Iss: 1, pp.4 - 19
Keywords:Directors, Dividends, United Kingdom
Article type:Research paper
DOI:10.1108/09675420910963360 (Permanent URL)
Publisher:Emerald Group Publishing Limited
Abstract:

Purpose – The purpose of this paper is to examine whether the number of outside directors on the board of directors and dividend payout are substitutes or complements mechanisms applied by UK firms to control agency conflicts of interest within the firm.

Design/methodology/approach – The authors use tobit and logit regression models to examine the extent to which firms with a majority of outside directors on their boards experience significantly lower or higher dividend payout after controlling for insider ownership, profitability, liquidity, asset structure, business risk, firm size, firms' growth rate and borrowing ratio.

Findings – Based on a sample of 400 non-financial firms listed at London Stock Exchange for the period from 1991 to 2002, it was found that dividend payout is negatively associated with the number of outside directors on the board of directors.

Originality/value – The results suggest that firms pay lower dividends when higher number of outside directors is employed on the board. This evidence is consistent with the substitution hypothesis, which indicated that firms with weak corporate governance need to establish a reputation by paying dividends. In other words, dividends substitute for independent directors on the board. This finding offers novel insights to policy makers interested in agency conflicts of interest within the firm. It also provides evidence on the use of different substitute mechanisms for reducing agency costs.



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