International Journal of Economy, Management and Social Sciences, 2(6) June 2013, Pages: 237-241
TI Journals
International Journal of Economy, Management and Social Sciences
ISSN 2306-7276
www.tijournals.com
The Effect of Board Size, Board Indep I ndependence endence and CEO Duality on Dividend Policy of Companies: Evidence from Tehran Stock Exchange 1
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Elham Mansourinia* , Milad Emamgholipour , Esmail Abedi Rekabdarkolaei , Mahboobeh M ahboobeh Hozoori
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1,2
Young Researchers Club, Babol Branch, Islamic Azad University, Babol, Iran Department of Public Administration, Qaemshahr Branch, Islamic Azad University, Qaemshahr, Iran 4 MA student, Department of Accounting, University College of Rouzbahan, Sari, Iran. 3
ARTICLE INFO
ABSTRACT
Keywords:
Corporate governance as a mechanism and means of creating balance between shareholders and management, cause to reduce agency problems and will reduce this probability that managers pursue suboptimal dividend policy. Therefore, the main objecti ve of the present study is to investigate the effect of board size, board i ndependence ndependence and CEO duality on the di vidend policy of listed companies in Tehran Stock Exchange. For this purpose, a sample of 140 companies over the time span of 2006-2010 was chosen for this study. Using F-Limer and Hausman tests, among the methods of common effects, fixed effects and random effects for model fitting and hypotheses testing, the fixed effects method was chosen. The results have shown that there is significant and positi ve relati onship bet ween board size and divide nd poli cy. But significant relationshi p bet ween the variables of board independent and CEO duality with dividend policy of companies has not been obser ved.
corporate governance board size board indepe ndence CEO duality dividend policy
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1.
Introduction
Due to the extent of business re lationships lationships and therefore forming agency relationships, relationships, investors are skeptical that managers make decisions decisions which have best benefits for them. So the main reason to need for corporate governance is the necessity to restore investors’ confidence to business business operations through transparency, transparency, acc ountability ountability and responsibility. responsibility. Each country country according to factors such as financial and legal systems, corporate ownership structure, culture and economic situation of investors has unique corporate governance practices. Corporate governance includes a set of relationships between a company's management, board, shareholders and other interested parties which will determine the direction of companies’ movement. What is the most attention is the presence of an independent board with professional professional knowledge knowledge in the organization. organization. OECD principles principles explicitly explicitly and and clearly stated that the the board is final final responsible responsible for governance governance and conduction of a company [11]. In fact, one of the objectives of corporate governance is having an effective and efficient board and achieving this goal requires to assessment of the board's features. One of these features is the board size. According to the literature of corporate governance, small board due to the lake of communication problems and also more coordination of members, are able to exercise more effective control than large board [13]. One of the main pieces of corporate governance system are shareholders, they indirectly play a role in corporate decision-making by choosing board members and can be effective in reducing agency costs. So in a good corporate governance system, directors are accountable to the board and the board is accountable to shareholders and other interested parties [4]. Another feature of the board, that its evaluation is felt, is board independent. Board independence is an important feature to assess the effectiveness of the board. So in the area of corporate governance, corporate board position as a leading institution that is responsible for the care and monitoring of business executives is more important. According to the conducted research, separating the duties of CEO and Chairman of the board is one of the items that help to more board independence [4]. Also duality of board responsibility arises when the CEO is also the Chairman or Vice Chairman of the Board, in this case, due to increase CEO options and lack of separation of CEO and Chairman of the B oard duties, supervision supervision role of the board is reduced and there is this probability probability that harm to the rights of shareholders and interested parties. Since shareholders are aware of this issue that interests of executives are not consistent with them, they also use other mechanism for controlling managers. One of these mechanisms is paying a lot of interest. Therefore one way to reduce the cost of conflict of interests between managers and owners is through increasing increasing the dividend. dividend. It means that directors by increasing increasing the dividend dividend and pay it to owners inform that they are moving in line with corporate goals and shareholders also gain more confidence about performance of the directors. Thus, Thus, the dividend dividend is a f actor to reduce the cost of conflicts conflicts of interest and dividend dividend payment or its increase will settle shareholders [9] and * Corresponding author. Email address:
[email protected],
[email protected]
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Elham Mansourinia et al. International International Journal of Economy, Economy, Management and Social Sciences, Sciences, 2(6) June 2013
corporate governance as a mechanism and means of creating balance between shareholders and management can be reduced agency problems and will reduce this probability probability that managers pursue suboptimal suboptimal di vidend vidend policy [5]. Therefore we expect that the index of corporate governance has effect on dividend policy. Given to the above theoretical bases, the main objective of this study is to investigate this issue whether board size, board independence, duality of CEOs’ duty is effective on the dividend policy of listed companies in Tehran stock exchange?
2.
Literature review
Chen et al. [3] tested the relationship between the financial characteristics, corporate governance and the propensity to pay cash dividends of Chinese Listed Companies. Their statistical sample consists of 1056 firm-year observations in the period 2001-2007. The results show that there is significant and positive relationship between the board size and composition of senior management with the propensity of companies to pay cash dividends. However another feature of corporate governance that is duality of CEOs’ duty has significant and negative relationship with the propensity of companies to pay cash dividends. Gill and Obradovich [6] in their research studied the effect of corporate governance, institutional ownership on the decision to pay the amount of dividends. Statistical Statistical sample of this research has been formed from 296 U.S. companies companies listed in the New Y ork Stock Exchange during the years 2009-2011. The research findings showed that there is positive and significant relationship between board size and duality of CEOs’ duty with dividend policy. And there is significant and negative relationship between institutional investors and dividend policy. Bokpin [1] investigated the effect of ownership structure, corporate governance on dividend performance in Ghana companies. In this study, a sample of 23 companies was selected during the time span 2002-2007. The results showed that there is significant and positive relationship between board size and dividend and there is negative and significant relationship between financial leverage and dividend. Subramaniam and Susela [14] in their study tested the effect of corporate governance on dividend policy over 300 listed companies in the Malaysian Stock Exchange. Results from this theory support that high-growth of companies reduce interest payment and relationship between investment investment opportunities and dividend policy is weaker for companies with larger board s ize. Thus, results indicate that there is negative and significant relationship between growth opportunities, board size and composition of the board with dividend policy. Kim and Lee [8] investigated the effect of corporate governance and external financing constraints on dividend policy in 4434 firm-years observations during the 6 years of the years 1993, 1995, 1998, 2000, 2002 and 2004. In their research they reach to this conclusion that companies with stronger corporate governance and higher external financing constraints pay lower dividend. While companies with weaker corporate governance and lower external financing constraints pay more dividends. Pornsit et al. [12] studied the relationship between corporate governance and dividend policy on a sample of 16013 firm-years observations during the period 2001-2004. Research findings has shown that there is significant and positive relationship between corporate governance and payouts policy and this result also does not change after controlling for firm characteristics such as firm size, profitability and growth opportunities. Mitton [10] in their study investigated the effect of corporate governance on dividend policy of 365 companies from 19 Asian countries. Using the agency model he showed that companies with higher rate of corporate governance will be higher interest payment. The research findings showed that in the companies with stronger corporate governance, there is negative and significant relationship between growth opportunities and dividend policy. Borokhovich et al. [2] studied the relationship between board independence and dividend policy on a sample of 192 U.S. companies over the period 1992-1999. Research findings have shown that there is significant and negative relationship between board independence and dividend policy. Fakhari and Yosofalitabar [5] in their study investigated the relationship between dividend policy and corporate governance. This research studied 125 companies among the listed companies in Tehran Stock Exchange during the years 2004-2007. Also indicators of corporate governance in this study were calculated based on a list which was divided to eight categories disclosure, business ethics, training of legal commitments observance, auditing, ownership, board structure, assets management and liquidity. The results suggest that there is negative and significant relationship between indicators of corporate governance and dividend.
3.
Research methodology
3.1. Statistical Statistical Society Society and and Sample Sample All companies listed in Tehran Stock Exchange constitute the statistical Society of present study. The time period of this study is five years from 2006 to 2010. To select the statistical sample, the following conditions are considered: 1. In order to increase comparability, the end of their fiscal year lead up to December 31 2. In order to information homogeneity, activity of companies should be manufacturing. 3. Companies are listed in stock before the year 2006. 4. Their financial period has not changed during the studied fiscal year. 5. Needed financial information is available. Thus, considering the above conditions, 140 companies are selected to test the research hypotheses.
The Effect of Board Size, Board Independence and CEO Duality on Dividend Policy of Companies: Evidence from Tehran …
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International Journal of Economy, Management and Social Sciences, 2(6) June 2013
The data used in this study are the actual data from the site that has been extracted from the site of the Tehran Stock Exchange (Note 1) and CDs of financial information of companies listed in Tehran Stock Exchange. 3.2. Research Research Hypotheses Hypotheses To investigate the effect of board size, board independence and CEO duality on dividend policy, the following hypotheses are developed to test: H1: There is significant relationship between the board size and dividend policy of company. H2: There is significant relationship between the board independence and dividend policy of company. H3: There is significant relationship between the duality of CEO responsibility and dividend policy of company. 3.3. Methods Methods of Data Data Analysis Analysis and Hypotheses Hypotheses Testing The present study is application research in terms of purpose, and is descriptive in terms of nature. The statistical model used in this study is multivariable regression model. To estimate the research models is used panel data method. In this method, time series and cross sectional data are combined and it is used for those cases that cannot be investigated as a time series or cross-sectional. Integration crosssectional and time-series data and necessity to use it mostly is due to increase the number of observations, raising the degree of freedom, reduce heteroscedasticity and reduce multicollinearity between variables [7]. In order to estimate efficiency of a regression model using panel data, it is necessary to choose one of the models of common effects, fixed effects and random effects using appropriate tests. Therefore, first to choose between the common effects and fixed effects models is used F-Limer test. If fixed effects model is selected, Hausman test is performed to choose between the fixed effects and random effects models. If F-Limer test confirm using the common effects method, Hausman test is not need anymore and the model is estimated using common effect method. 3.4. Research Research Variables Variables and how they they are calculated calculated In this study, the board size (BS), board independence independence (BI) and CEO duality duality (CD) are used as t he independent independent variables; firm size (FS), the return on assets (ROA), financial leverage (LEV) and net sales growth of firm (FG) are used as control variables and dividend policy variable (DP) is used as the dependent variable. Table 1. How to calculate each of the Variables Variables Name
Symbol
How to Calculate
DP
Dividend per share to net income per share
Board Size
BS
Members existed in the board of company
CEO Duality
CD
If CEO is Chairman of the Board, its value is 1 and otherwise the value is zero.
Board Independent Independent
BI
Unbound members to all members of board
Firm Size
FS
Natural logarithm of to tal assets
Return on Assets
ROA
Net income to total assets ratio
Financial Leverage
FL
Total debts to total assets ratio
Firm Growth
FG
(Sales of previous year minus sales of current year) to sales of previous year
Dependent variable Dividend Policy (payment of dividends ratio) Independent variables
Control variables
3.5. The Model Model used used to test test the Research Research Hypotheses Hypotheses In this study to test the hypotheses, the following model is used:
DPit
0
1 BS it 2 BI it 3 CD it 4 FS it 5 ROAit 6 LEV it 7 FG it it
Which in this model: DPit =Dividend policy of firm i in year t. BSit = size board of firm i in year t. BIit = independent board of firm i in year t. CDit = CEO duality of firm i in year t. FSit = firm size of i in year t. ROAit = the return on the assets of firm i in year t. LEVit =Financial leverage of firm i in year t. FGit = net sales growth of firm i in year t.
it = residual component of model. 0 = constant coefficient (intercept) and 1 to 7 = coefficients of independent and control variables (explanatory).
Elham Mansourinia et al.
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International International Journal of Economy, Economy, Management and Social Sciences, Sciences, 2(6) June 2013
4.
Research findings
4.1. Statistical Statistical Tests Tests As can be seen in the results of Table (2), p-value of F statistic is equal to 0.000. As a result, compilation data estimation method (common effect method) is rejected. F-Limer test results showed that the common effect method for estimating the regression models is not suitable. So Hausman test is done to select the appropriate method of estimation. P-value of Hausman statistics also show that fixed effects method to estimate the model is more appropriate option. Table 2. Results 2. Results of F-Limer Test and Hausman Test Test type
Test statistic
Degrees of freedom
p-value
Test result
F-Limer
98.661400
139.553
0.0000
fixed effects method
Hausman
27.013150
7
0.0003
fixed effects method
4.2. Results Results of Research Research Hypotheses Hypotheses Testing Testing Results of research hypotheses testing testing for the whole investigated sample sample over the period 2006-2010 are presented in Table (2) based on the fixed effects e stimation method. method. The first research hypothesis states that there is significant relationship between board size and dividend policy of companies. As can be seen in the results of Table (3), there is significant and positive relationship between board size (BS) and dividend policy of companies (DP) at error level less than 5%. Consequently, the first hypothesis is confirmed. The second research hypothesis tested the relationship between board independence and dividend policy of companies. The results show that there is no significant relationship between board independence (BI) and dividend policy of companies (DP). Therefore, the second research hypothesis is rejected. The third research hypothesis states that there is significant relationship between CEO duality and dividend policy of companies. The results show that there is no significant relationship between CEO duality (CD) and dividend policy of companies (DP). Therefore, the third research hypothesis is also rejected. Among the research control variables, significant and positive relationship between the variables of firm size (FS) and return on assets ratio (ROA) and net sales growth of firm (FG) was observed with dividend policy at error level less than 1%. While control variable of financial leverage (LEV) has negative and significant relationship with dividend policy at error level less than 1%.
Table 3. Results 3. Results of Research Hypotheses Testing Variables
Coefficient
t-statistics
Sign.
Constant
-1.076046
-2.601841
0.0095
BS
0.157375
2.449094
0.0146
BI
-0.024896
-0.932493
0.3515
CD
-0.007563
-0.127898
0.8983
FS
0.070939
3.840712
0.0001
ROA
0.069653
4.333425
0.0000
LEV
-0.071124
-2.602564
0.0095
0.022828
4.524399
0.0000
FG 2
Adjusted R
0.968
F-Statistics
145.6407
Prob(F-statistic)
0.0000
Durbin-Watson
2.1199
Given to the adjusted R 2 value in Table (3) can be claimed that about 97% of changes in dividend policy of companies (as dependent variable) are explained by variables of board size (BS) and board independence (BI) and CEO duality (CD) (as independent variables) and control variables of the study. P-value of F-Fisher statistic for the research regression model is equal to 0.0000 and indicates that the regression model generally is significant. Durbin-Watson statistic for the present study is equal to 2.1199 and since this value is between 1.5 and 2.5, can be expressed that the residual component of model in studied course are independent. In other words, the values of residual component of models are random and existence of autocorrelation assumption between variables is rejected.
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5.
Conclusion
The present study investigates the effect of board size, board independence, CEO duality on dividend policy of companies. The statistical universe of this study is all companies that are listed in the Tehran St ock Exchange Exchange from the beginning of 2006. Among member companies of statistical Society, 140 companies which were eligible for the study were chosen randomly as statistical sample to test the hypotheses. In the present study, variables of board size (BS) and board independence (BI) and CEO duality (CD) are considered as independent variables and dividend policy is considered as dependent variable. To determine the appropriate method for estimating regression model and hypotheses testing was used F-Limer test and Hausman test that in both tests the fixed effects method was chosen to estimation of model. The first research hypothesis test results indicate that there is significant and positive relationship between board size (BS) and dividend policy of companies (DP). It means whatever the number of board members is greater, companies pursue more payout policies. The The obtained results are consistent with the research results of Chen et al. [3], and Gill and Obradovich [6] and Bokpin [1]. But they are contrary to the research results of Subramaniam and Susela [14]. But in the survey of the second research hypothesis test, no significant relationship is not observed between board independence (BI) and dividend policy (DP) and indicates that existence of executive and unbound manager among board members of companies has no effect on the cash or non-cash dividend payments to shareholders. The obtained results do not match with the research results of Borokhovich et al. [2]. The results of the third research hypothesis testing indicates that there is no significant relationship between CEO duality and dividend policy and and indicates that existence existence of CEO and chairman of the board posts for one person in companies has no effect on dividend. dividend. The obtained results do not match with the research results of Chen et al. [3] and Gill and Obradovich [6].
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Notes Note 1. www.irbour se.com.
