Upload
others
View
1
Download
0
Embed Size (px)
Citation preview
Impact of Leverage, Dividend Payout and Family Ownership on Value of
the Firm: Role of Growth Opportunity as a Moderator
Ph.D. Dissertation
By
Muhammad Abbas
Student ID # 11058-P
Ph.D Management Sciences
Qurtuba University of Science & Information Technology,
Peshawar, Khyber Pakhtunkhwa (Pakistan)
(2019)
Impact of Leverage, Dividend Payout and Family Ownership on Value of
the Firm: Role of Growth Opportunity as a Moderator
By
Muhammad Abbas
Student ID # 11058
Ph.D. Management Sciences
Department of Management Sciences
Date of Submission: 27/08/2019
Supervisor: Dr. Muhammad Junaid
Qurtuba University of Science and Information Technology
Peshawar, Khyber Pakhtunkhwa (Pakistan)
2019
Author’s Declaration
I Muhammad Abbas hereby state that my PhD thesis titled “Impact of Leverage, dividend payout and
family ownership on value of the firm: Role of Growth Opportunity as a Moderator” is my own work
and has not been submitted previously by me for taking any degree from this university, Qurtuba
University of Science & Information Technology Peshawar Campus or anywhere else in the
country/world. At any time if my statement is found to be incorrect even after my graduate the
University has the right to withdraw my PhD degree.
Name of Author: Muhammad Abbas
Date: 27 / 08 / 2019
Signature: ________________
Plagiarism Undertaking
I solemnly declare that research work presented in the thesis titled “Impact of Leverage, dividend
payout and family ownership on value of the firm: Role of Growth Opportunity as a Moderator” is
solely my research work with no significant contribution from any other person. Small contribution/help
wherever taken has been duly acknowledged and that complete thesis has been written by me. I
understand the zero tolerance policy of the HEC and University ―Qurtuba University of Science &
Information Technology‖towards plagiarism.
Therefore I as an author of the above titled thesis declare that no portion of my thesis has been
plagiarized and any material used as reference is properly referred/cited.
I undertake that if I am found guilty of any formal plagiarism in the above titled thesis even after award
of PhD degree, the University reserves the rights to withdraw/revoke my PhD degree and that HEC and
the University has the right to Publish my name on the HEC/University website on which names of
students are placed who submitted plagiarized thesis.
Author Name: Muhammad Abbas
Student/Author Signature: ___________________
Dedicated
TO
MY LOVING PARENTS
Who taught me the first word I
spoke The first alphabet I wrote
First step I walked
I feel I am nothing without them
Encouraged and helped me at every step of life
AND To
MY LOVELY BROTERs
Whose support have given me Strength,
Determination and Attitude to accomplish my goal
ii
ACKNOWLEDGEMENTS
Primary and foremost, all praises for Almighty Allah, the benevolent and merciful,
the creator of the universe, who provided me the strength and courage to complete
the work. I invoke peace for Hazrat Muhammad (peace be upon him), the last
prophet of Allah who is forever a torch of guidance for humanity as a whole.
This thesis is the end of my journey in obtaining my Ph.D. I have not traveled in
a vacuum in this journey. This thesis has been kept on track and been seen through to
completion with the support and encouragement of numerous people including my well-
wishers, my friends, colleagues and various institutions. At the end of my thesis I would
like to thanks all those people who made this thesis possible and an unforgettable
experience for me. At this moment of accomplishment, first of all I pay homage to my
honorable supervisor, Dr. Farzand Ali Jan, Professor/Dean of Iqra National University,
Peshawar. This work would not have been possible without his guidance, support and
encouragement. Under his guidance, I have successfully overcome many difficulties and
learned a lot. I can’t forget his hard times. Despite of his illness and health problems, he
used to review my thesis progress, give valuable suggestions and made corrections. His
unflinching courage and conviction will always inspire me in future, and I hope to
continue to work with his noble thoughts.
Thanks are due to Prof. Dr. Khursheed Iqbal, HOD, Faculty of Management
Sciences, Iqra National University Peshawarfor his encouraging discussions, valuable
guidance, and suggestions which enable me in broadening and improving my
capabilities. I want to express my heartiest gratitude to my affectionate and devoted
teacher Dr. Junaid, Assistant Professor at PIDE, Islamabad for helping me in
understanding the Stata Software which helped me a lot to complete this work.
I cannot finish without expressing my feeling for Higher Education
Commission, Islamabad for supporting me financially and helped me a lot in
accomplishing my PhD Degree. I would suggest that such organizations may be
supported more by the Government of Pakistan in order to provide research and
scholarship facilities to talented and poor students who can’t pursue their education
due to financial constraints.
iii
I would certainly be not where I stand today without the continuous support,
help and most of all encouragement of my family. Credit goes to them for their help
that held me up in the hour of need. Their support and sincere prayers made me
achieve whatever I aimed in my life. My family members especially my mother
suffered a lot due to her illness as I couldn’t give her sufficient time. My dearest
father sacrificed many things due to my busy daily schedule. Thanks to all my
family.
Muhammad Abbas
iv
TABLE OF CONTENTS
Title page --------------------------------------------------------------------------------
Cover page ------------------------------------------------------------------------------
Author’s Declaration-------------------------------------------------------------------
Plagiarism Undertaking----------------------------------------------------------------
Certificate of Approval----------------------------------------------------------------
Dedication ----------------------------------------------------------------------------------i
Acknowledgement ------------------------------------------------------------------------ii
Table of Contents--------------------------------------------------------------------------iv
List of Tables------------------------------------------------------------------------------vii
List of Abbreviations---------------------------------------------------------------------viii
Abstract--------------------------------------------------------------------------------------x
CHAPTER-1 Introduction-----------------------------------------------------------------------------------1
Chapter Introduction------------------------------------------------------------------------1
Study Background ----------------------------------------------------------------------- --1
Problem Statement-------------------------------------------------------------------------16
Research Questions-------------------------------------------------------------------------17
Objectives of the Study---------------------------------------------------------------------17
Significance of the Study-------------------------------------------------------------------18
Organization of Study-----------------------------------------------------------------------22
CHAPTER-2 Literature Review----------------------------------------------------------------------------23
Chapter Introduction ---------------------------------------------------------------------- 23
Leverage and growth opportunities ---------------------------------------------------- 23
Dividend and growth opportunities ---------------------------------------------------- 43
Family ownership and growth opportunities ----------------------------------------- 61
CHAPTER-3 Research Methodology----------------------------------------------------------------------77
Chapter Introduction ---------------------------------------------------------------------- 77
Empirical Model --------------------------------------------------------------------------- 77
Panel Regression Model ------------------------------------------------------------------ 78
v
Model Specification ----------------------------------------------------------------------- 78
Research Design --------------------------------------------------------------------------- 80
Data and Sample Selection --------------------------------------------------------------- 80
Dependent Variable ----------------------------------------------------------------------- 82
Independent Variables -------------------------------------------------------------------- 84
Conceptual Framework ------------------------------------------------------------------- 88
Theoretical Perspective of the Study ---------------------------------------------------- 88
Empirical Methods------------------------------------------------------------------------103
CHAPTER-4 Results and Interpretation----------------------------------------------------------------106
Chapter Introduction----------------------------------------------------------------------106
Descriptive Statistics ------------------------------------------------------------------ ---107
Matrix of Correlation----------------------------------------------------------------------109
Results of VIF Test------------------------------------------------------------------------110
Pooled OLS---------------------------------------------------------------------------------111
Moderation Regression-------------------------------------------------------------------112
Comparison of Means Test---------------------------------------------------------------113
Regression results of MBA Ratio-------------------------------------------------------115
Results of GMM Model------------------------------------------------------------------116
Regression results of SMBA-------------------------------------------------------------118
Leverage and Firm Performance--------------------------------------------------------119
Relevance and Contradiction with Previous Literature ----------------------------- 120
Dividend and Firm Performance ------------------------------------------------------- 121
Relevance and Contradiction with Previous Literature ----------------------------- 122
Family Ownership and Firm Performance -------------------------------------------- 123
Relevance and Contradiction with Previous Literature ----------------------------- 123
CHAPTER-5 Conclusion, Recommendations and Limitations-------------------------------------126
Chapter Introduction----------------------------------------------------------------------126
Conclusion ---------------------------------------------------------------------------------126
Summary of Hypothesis Acceptance and Rejection----------------------------------130
vi
Future Recommendations ----------------------------------------------------------------130
Limitations of the Study------------------------------------------------------------------134
References ---------------------------------------------------------------------------------------135
Annexure------------------------------------------------------------------------------------------165
vii
LIST OF TABLES
Table 3.1: Sectors Contribution………………………………………………………..81
Table 3.2: Measurement of Growth Opportunity in Context of Past Studies………....83
Table 3.3: Measurement of Independent Variables………………………………..…..87
Table 4.1: Descriptive Statistics…………………………………………………..…107
Table 4.2: Matrix of Correlation……………………………………………………..109
Table 4.3: Results of VIF Test………………………………………………………...110
Table: 4.4 Pooled OLS…………………………………………………………..…….111
Table: 4.5 Moderation Regression……………………………………………….…....112
Table 4.6: Comparison of Means Test…………………………………………………113
Table 4.7: Regression results of MBA Ratio…………………………………………..115
Table 4.8: Results of GMM Model…………………………………………………….116
Table 4.9: Regression results of SMBA……………………………………………......118
Table 5.1: Summary of Hypothesis Acceptance and Rejection………………………...130
viii
LIST OF ABBREVIATIONS
FOB FOC
Family Owned Business Family Ownership Concentration
NFOB Non-family Owned Business
GDP Gross Domestic Product
CEO Chief Executive Officer
PSE Pakistan Stock Exchange
GMM Generalized Method of Moments
MM
MBA
Modigliani and Miller
Market to Book Asset
IPO Initial Public Offering
ROE Return on Equity
ROA Return on Assets
P/E Price Earnings Ratio
OC Ownership Concentration
CCG Code of Corporate Governance
R & D Research and Development
EPS
SMBA
Earnings per Share
Sector Adjusted Market to Book Asset
ix
FV Firm’s Value
MV Market Value
SBP State Bank of Pakistan
IAFV Industry Adjusted Firm’s Value
CF Cashflows
IAI Industry Adjusted Investment
DIV Dividend
SECP Security Exchange Commission of Pakistan
DR Debt Ratio
DPR
Dividend Payout Ratio
x
ABSTRACT
Different factors are at play while impacting the value of a firm. Some factors have a monumental
influence in one context as compared to the other. Pakistan, being mostly comprised of family owned
firms, is affected due to the decisions which are made by the owners of family owned organizations
regarding the capital structure of its organization. This study intends to highlight the role of growth
opportunity as moderator while impacting the relationship among financial decisions, ownership structure and
value of firms. The study has examined the influence of leverage, dividend and family ownership
concentration on the value of firms under two conditions. Firstly, when there is growth opportunity what
would be the impact of leverage, dividend and family ownership concentration on the value of a firm?
Secondly, when there is no growth opportunity then what would be the possible outcomes? The study
employs annual panel data of firms which are listed at Pakistan Stock Exchange (PSX). Sector wise data
over the period 2005 to 2014 has been used. The study has been carried out on non-financial firms. The
first finding of this study reveals that debt has a positive impact on the value of a firm in both cases e.g.,
when there are growth opportunities and when there are few or no growth opportunities. The second
finding about positive relationship between dividend and firm’s value is uncertain when there are growth
opportunities. While in case of no or few growth opportunities the relationship between paying dividend
and firm’s value is positive. The third finding of this study is about non-linear relationship between
family ownership concentration and the value of a firm .When family ownership concentration is not at
extreme then it causes a negative impact on the value of a firm. But after a certain threshold level the
reverse impact get started. Generalized Method of Moments (GMM) has also been applied for the
purpose of detecting the problem of endogeneity. Besides these, the study also incorporates the steps followed
for finding the role of growth opportunity as a moderator.
Key words: Leverage, dividend, family ownership concentration, firms value, growth opportunity
1
CHAPTER # 1
INTRODUCTION
1.1 Chapter Introduction
This chapter gives an insight about the definition of main variables of the study which are
leverage, dividend payout, family ownership, firm value and growth opportunity. These variables
play an important role in corporate finance due to which it has a significant impact on the overall
structure and performance of Pakistani listed organizations at Pakistan Stock Exchange. Then
Problem Statement with reference to developed and developing countries is discussed that what
research gap is basically present in the context of Pakistan. This chapter also enriches the current
study with Objectives , Research Questions and significance of the study which briefly
highlights the stakeholders who can get benefits from the current studies e.g., Managers,
Investors, Lenders, institutional owners, Government and other Regularity Authorities like
Security and Exchange Commission of Pakistan in devising policies meticulously.
1.2 Study Background
Leverage, dividend and family ownership have an important role in value creation process of an
organization (Bae, Kang and Wang, 2011). Leverage has been defined by Pandya (2016) as the
sensitivity of an organization’s earnings per share to changes in its operating income, as a result
of the change in its capital structure. According to Brealey, Myers and Allen (2017), leverage
can lead to better financial performance which causes an increase in the value of a firm. The firm
value has been defined by Jensen (2002) as it’s the sum of values of all financial liabilities on
2
firm which includes debt, equity, preferred stocks and warrants. On the other hand Stakeholder
theory states that the value of a firm is composed of all stakeholders that includes all individuals
or groups who could substantially affects the welfare of a firm. The value of a firm is firmly
linked with the value of shareholders (Lonkani, 2018).In the current study family firms are the
main shareholders. According to Blondel, Rowell and Heyden (2002), a family firm is an
organization where one or several families or individuals are the ultimate owners and represents
the largest block of shares. The value of a firm is also affected through dividend which was
defined by Rustagi (2001) that it is that fraction of profits (after tax) which is going to be
distributed among the owners or shareholders of the firm. Similarly, Rika and Islahudin (2008)
defined the firm value as the market value. According to Myers (1977), the value of a firm is
comprised of two building blocks i.e. the value of Assets-in-place and value of growth
opportunities. Growth opportunities of firms, according to Mason and Merton (1985),refers to
new product lines, maintenance and replacements of existing assets, more capacity expansion
projects and acquisition of other firms.
The base of current vibrant and well developed literature in area of corporate finance was laid
down through seminal paper of Modigliani and Miller (1958) e.g. having an argument that cost
of raising funds is independent aspect of its capital structure by assuming perfect competition
with no transaction cost, no agency cost and no bankruptcy cost. Modigliani and Miller (1963)
also argued that dividend policy has no role in value creation process of a firm. However, with
the passage of time it was found that, dividend payout policy plays a major role in value creation
of an organization.
"How capital structure is chosen by firms?" "We don't know." is the statement enumerated by
Myers in 1984 in response to the well known note of Fischer Black at "The Dividend Puzzle" in
3
which it was stated that "What should a corporation does about dividend policy? We don't
know". Myers (1984) enumerated that capital structure puzzle is more hard than dividend puzzle
because we have much information about dividend policy through dividend signaling hypothesis.
But what about the capital structure puzzle where we have least information about capital
structure that how firms issue equity, debt or hybrid securities. According to Myers (1984) our
understanding about corporate financing is inadequate. Barclay and Smith (2005) argued that
capital structure is still debatable due to different inconclusive theories. These theories do not
align with each other. Some scholars (Tang &Jang, 2007; Ebaid, 2009) support the Modiglani
and Miller (1958) irrelevancy proposition of value creation of organization which isn’t affected
through both dividends and debts while other (Roden & Lewellence, 1995;Abor, 2005) support
the debt component of capital structure, due to its taxes deductibility of the interest which causes
an increase in an organization’s value.
Barclay and Smith (2005) stated that theories regarding capital structure are inconclusive
because of the reason that the corporate finance empirical methods are not properly equipped.
They added by comparing the capital market and capital structure that corporate finance lagged
behind. The first reason is that corporate finance models are less precise as compared to capital
asset pricing models regarding decision making. Capital structure models only provide direction
or qualitative analysis. For example a theory may argue that the less debt should to be used in a
capital structure for increasing an organization’s value. Then it raises a question that how much
less debt should be used. No mutual exclusiveness of theories is the second reason. For example,
underinvestment theory does not take into account overinvestment, although both play an
important role in optimal capital structure formation. The third reason is of the issue of
measurability of variables which have an impact on the optimal capital structure. For example,
4
according to signaling theory, managers have private information regarding company’s
prospects. Then the problem of its testing arise and also timing of this proprietary information
that when managers have these informations. Barclay and Smith (2005) further enumerated that
due to the above mentioned and other reasons corporation finance is underdeveloped as
compared to assets pricing, but still there is voluminous literature available through which we are
able to learn about the tradeoffs between debts and equity while forming capital structures.
The decisions regarding Capital structure which are taken by the management are the most
important decision because capital-structures is an amalgamation of debts and equity shows that
for financing a project how much debt and how much equity has been used, it includes decisions
regarding dividend pay-out policy, financing a project ,issues of long-term securities and merger
financing etc. Corporate financial managers can increase the wealth of shareholders through
ensuring lower cost of capital, Management can use capital structure as a tool for managing the
cost of capital. The position, at which the costs of capital are minimum, is called optimal capital
structure. Different results are reported concerning the relationships between capital structures
and an organization performance some studies revealed that both organizational performance and
the capital structure are negatively interrelated (Huang & Song, 2006; Chakraborty, 2010) while
other shows a direct relationship (Abor, 2005; Khan, 2014).
Companies can use different kind of sources for financing a project i.e. companies can fulfill its
capital requirement from three sources e.g. through retained earnings short and long-terms debt
& through issuing shares. A firm can also use a combination of these three sources but it should
to be selected meticulously. According to Jensan and Mackling (1976) when capital structures
are comprised of debts then it performs the function of monitoring of managers through which
firm performance improves.
5
The previous studies of Rapaport (1986) and Caby (1996) have reported that several different
strategic factors affecting the value of organizations in developed countries. Value creation
literature has been used by Rapaport(1986) for mergers and acquisitions of corporations, and has
highlighted the significance of income-tax rates, fixed capital investments and growth rates as
the main factors which affects the values of a firm. Recently, study of Naceur and Goaied (2002)
has focused on emerging markets for the analysis of factors which influence an organization’s
value. They conducted a study at Tunisian stock exchange and founded that managers maximize
the wealth of shareholders by increasing the market values of shares .They studied the value of
an organization by focusing on dividend policy, financial policy and profitability.
Both debt and equity, in corporate finance theory, are key source of financing a project but the
question arises that what level of both should to be used for the minimization of agency costs as
well as maximization of value creation of an organization. Modiglani and Miller (1963) argued,
that there is a distinction between values of a leveraged and unleveraged firms. This difference in
values is due to interest tax shield. According to Jensen and Mackling (1976), there is a level of
optimal leverages which causes minimum agency cost. The organization’s value is enhanced
through the optimal debts to equity ratios. This optimal debts-to-equity ratio is termed as the
point on which both the marginal benefit and cost debts become equal. Myers and Majliuf (1984)
in its theory of pecking order argued that, when organizations are utilizing the external financing
then it prefers debt over equity financing. According to signaling theory a firm will use debt
financing when there are favorable prospects and will use equity financing when there are
unfavorable prospects.
Myers (1977) argued that when a large amount of debt is used then it affects managers and they
don’t work in shareholder’s best interest by ignoring projects which have positives net present
6
values. The mentioned phenomenon was named as under-investments problem of the debts
financing, for example, that for organizations which have growth opportunities debt negatively
affects the value of firms .Nevertheless, Jensens (1986) proposed, that when an organization has
more free-cash than positives net present value projects then in such cases presence of debt
positively influence the value of an organization .The intuition behind that is managers will
have to pay out funds to debt providers, which make managers unable to do the misuse of cash
resources. If debt was not taken in such cases then there are chances of utilizing the free-cash in
the investment opportunities which have a negative net present value. The mentioned
phenomenon was named as over-investment problem. This over-investments problem could be
mitigated through payout excess funds in order to service debt if debt is taken by the firm. The
over-investments problem basically created due to separations between management and equity
ownerships. The aforementioned problem can be reduced through making managers shareholders
as well due to which the interest of both shareholders and managers will align.
In modern financial literature the widely addressed topic is Dividend policy. We can estimate the
importance of dividend policy from theories inconclusiveness. That’s why it is still a debatable
topic in the recent empirical studies. This discussion dates backs to seminal paper of Modiglani
and Miler (1961), in which it was discussed that dividends cause an increase in values of
organizations. Modiglani and Miller (1961) enumerated regarding the perfect capital-market that
the values of organizations are not affected through dividends policy. Modiglani and Miller’s
(1961) findings were challenged by Lintnar (1962) and Gordon(1963) through supporting Bird
in-hand theory. According to this theory, the investors prefers current divided over future
earnings and profits, which mean in the value creation process of an organization the dividend
policy plays an important role. The issue of dividend policy is still perplexed and unresolved;
7
where Black (1976) named it a puzzle whose parts don’t fits together. Black (1976) raised a
question that how do firms decide about dividend policy and at the same time answered it by
saying we don’t know. However, in previous literature many factors have been identified that
explained dividend policy instead of one factor (Anil & Sujjata, 2008).
Companies which are efficient and goal oriented earn Profits. The earned profits can be used for
different purposes. It can be used for acquiring other securities, retiring debt, invest in operating
assets and can be for distributing among the shareholders of the company. The income
distributed among the shareholders is called dividend. When a firm earn profit and does not
distribute that profit among the shareholders then shareholders expect a higher dividend from the
company in subsequent years as compare to previous year’s dividends. But, in organization
which is not giving the dividends, it could have an effect on shareholders because for some
shareholders it’s a source of living. Due to which they may want to sell their shares in a
secondary market. When supply of shares increases in the market as compared to demand then
consequently the share price of company will decrease. The ultimate result culminates in the
form of decreasing value of the firm. So therefore, company should meticulously deal the
dividend policy. There is also another issue related to dividend policy and that is the decision
about the distribution of dividends. The issue arises when a company has a hard time to decide
whether dividend should be paid in cash or issue the rights or should be paid in the form of
bonuses.
Dividend is basically a reward for shareholder for helping in financing the projects of a firm
otherwise if dividends are not paid to shareholders it would make share valueless (Kumar,
2003).The worthiness of dividend policy can be explained through two theories; agency cost and
signaling theory. According to the theory of dividend signaling, a manager has private
8
information regarding the future prospects of the company while shareholders do not. So when
the managers want to inform the shareholders as well then they issue dividends as a signaling
device for informing shareholders that there are projects which have a positive NPV (Net Present
Value) and growth opportunities, also recognized as information content of dividend. While on
the other hand, agency cost of dividend refers to the cost which shareholders basically borne due
to have a check on the activities of managers. When management and ownership are separated it
causes a tussle between the shareholders and manager as consequence, the manager may involve
in moral hazard problems and increase their assets at the costs of shareholder. Keeping in mind,
shareholders monitor the managers and bearing monitoring cost. This agency cost among the
manager and shareholder could be mitigated through offering shares managers and making them
shareholders as well. Due to which the interest of both managers and shareholders will align and
the performance of organization will be enhanced as a result.
La-Porta,Lopaz, Shleifer and Vishny(2000) had pointed out two hypotheses regarding
relationships between agency theory and dividend. First is Competing hypothesis and according
to competing hypothesis, if minority shareholders are made powerful and protected them will
pressurize managers for distributing dividends. Therefore dividend payouts can be used as
mechanisms for mitigating the agency cost, and thereby enhancing the performance and value of
firm. Substitution hypothesis is the second hypotheses, according to this hypothesis; a positive
image is made in mind of the minority shareholder due to which acquiring additional capital is
easy.
In today’s business environment dividends policy has an important role in the decisions making.
Dividend policy is not only important from company’s point of view, but also employees,
consumers, shareholders and government have a keen interest in dividend policy. It’s a pivotal
9
policy for the company on the bases of which other decisions are made (Alii, 1993).According to
Ross (2002) dividend policy determines that what funds will be retained for investment purpose
and what portion will be distributed among the shareholders. Through investments future
earnings and potential dividends are determined which affects the cost of capital (Foong,Zakaria
and Tan, 2007).
In literature of corporate finance there is an intense discussion regarding the interrelationship
between ownership-structure and performance of organization. Such relationship, as explored by
Berle and Means (1932) through finding dispersed ownership and organization’s performance
inversely correlated. According to their point of view when ownership is dispersed among many
minority shareholders then these minority shareholders are unable to exert influence and pressure
on firm’s management who are the controlling figure of the company. The management of such
firms hold minimal share of profit and are not effectively working for the welfare of
stockholders. Therefore, they start working for pursuing their own objectives and maximizing
their own wealth at expense of shareholder’s wealth. Later on this conflict was named as agency
theory. The managers, according to the Agency theory, are hired by the company’s owners for
their entrepreneurial and professional skills for increasing organizational performance. But when
both managers end shareholder’s interest do not coincide then shareholders have to maintain a
check on the activities of the managers and need to monitoring and the cost associated with such
monitoring is termed as agency cost.
A formal study was carried out on the influence of shares allocation between outsiders and
insiders on value of firm by Jensen and Meckling in 1976.After the research of Jenson and
Meckling (1976), the literature on ownership and its influence on organizational was
continuously evolved through theory of finance with lot of studies were done on it both
10
theoretically and empirically .Subsequently, it was also found by Stulz (1988) who concluded
that when the ownership concentration remains with insiders then the firm’s market value first
increases and then decreases. A non-linear relationship between insider ownerships and firm
performance was also founded by Morch, Shleifer and Vishny (1988). They viewed the
relationship between ownership structure and firm’s performance. The same was explored by
Holderness and Sheeshan (1988) and Domsetz and Lehn (1985), too.
The performance of an organization, according to Jensen and Mecklling (1976), is positively
affected through ownership concentration, as it causes a decrease in shareholders and manager’s
conflicts of interest. But on other hand, there are studies which enumerate a negative impact of
concentrated ownership (Fama, and Jensen, 1983). The controlling-shareholders, as enumerated
by La Pota et. al. (2000) and Shlefer and Vishney (1997), exploit the shareholders (minority) by
extracting privates benefit. When controlling shareholders involved in such activities they not
only harm the interest of minority shareholders but at the same time affect future prospects of the
company as well. Due to which company is not in a position to take project that had a positive
present value and its growth opportunities are going towards decline.
The association between organization’s value and structure of ownership is an important
dilemma in corporate-governance literature. If talk about it from firm’s perspective, the
profitability is basically determined through ownership structure which is enjoyed by all stake
holders. Ownership structures may be utilized as incentives device for minimizing the cost of
agency which basically arises from separation of management from ownership that could be use
for protecting the company’s property right (Babosa and Louri, 2002).
11
According to Javed and Iqbal (2008), closely held firms in most developing countries including
Pakistan control the economic landscape. Here the core problems are not the conflict between
manager and shareholders, but rather minority shareholder’s expropriation through majority or
controlling shareholders where all the expense is borne by the minority shareholders. They
further added that the main problem here is of getting control through interlock directorship,
complex pyramid structure, voting’s pact, and dual class voting-shares which allows the final
owner the controls while owning the small fractions of the ownerships. The decisions are made
by the dominant shareholders but they do not bear the full cost. When the members of a family
hold key official positions in the organization, mostly it results negative effect on the
performances and value and of an organization. Similarly, when family members are appointed
at Chief Executives Officer’s (CEO) position and they don’t possess the required talent,
competency or expertise to run the affairs of the business then a more severe effect it causes on
organizational performance.
From the last two decades, the relationships between organizational performance and ownerships
structure are a central area in corporation governance (Shah, Wahla and Hussain, 2012). Interest
of both manager and main shareholders on company’s value has remained the main focus of
researchers. These scholars found the relationships among organization’s performance and
ownerships structure while having conflict in mind among manager and own and also
enumerated that organizational value is not affected through one factor while there are numerous
factor which significantly affects firm’s value e.g., divided policy, financial structure,
control/governance and the role of ownership has also now proved to add value to the firm.
The Principal-Agent relationships, according to Adam smith, 1976), is the premise of research on
ownerships structure. After Adam Smith, Berle and Mean (1932), and Jensen and Meckling
12
(1976) made notable extension. Fama and Jensen (1985) further explored ownership structure by
studying its benefits, and potential problem which it might pose to firm performances. Later La
Pota, Lopez-de-Salinas, and Shlefer (1999) investigated that nearly all large firms are structured
into business groups which are control by few old rich families. The structure proposed these old
families also plays a vital role in the overall developments of economy e.g. according to
Abdullah, Shah and Khan (2011),Noboa family of Ecuador provides income of about three
million people of the total population of eleven million people and has about five percent
contribution to GDP. Similarly, 43 percent of Swedish economy is controlled by Wallenberg
family (Agnblad, Berglöf, Högfeldt and Svancar, 2001). Barca and Becht (2001) have described
identical situation throughout the European continent. Likewise, Asia also presents the same
situation where corporate controls are in the hand of some leading families (Claessens, Dejankov
and Lang, 2000).Similarly, the chief owners in Pakistan, according to Javid and Iqbal (2010), are
business-groups which are controlled through family.
Founding family ownership is one of the ownership structures. In founding family structure, the
founding family or members of the founding family who holds majority of the common shares
are vigorously involved in the affairs of business management (Wang, 2006). According to
Anderson and Reeb it is a unique structure as well in a sense that they hold poorly diversified
portfolio and they are also long-terms investor and frequently senior management positions are
also controlled by them. Founding-family ownership structures are also important ownership
structures. The importance of these families businesses are apparent from the fact that these
families businesses have employed more than seventy five percent of workforce around the
world with a GDP contribution of seventy five percent or even more in most of the countries (
Wang, 2006). It is also worth mentioning that 37 percent companies in Fortune 500 are families
13
businesses, and 80 to 90 percent business around the world is family business. (Gashi &
Ramadani, 2013). Thus, according to Akhtar, Hussain, Hassan and Iqbal (2015), due to their
contribution to economic development, their success and performance had remained the focus of
several researcher studies.
Different researchers studied ownership structure from different angles.For example, Fama and
Jensen (1985) studied ownership structure by stating its advantage and probable problem which
it might pose to firm’s performances. Similarly, Tahir and Sabir (2015)studied Family owned
business and noted down that Family owned business are attached with some possible benefits
that it may contribute to decrease investment-cash flow sensitivity. They stated the following
reasons. First, it helps in reducing the imperfection of financial markets. Second, strategic
investment projects are better evaluated by family owned businesses due to the fact that they
have deep knowledge of the business and have long-life attachment to the operation of business.
It enables them to decrease the variance of new investments from optimal level. This optimal
level helps in controlling the sensitivities of investment’s cash flows (Morgado & Pindado,
2003).Third, agency costs between bondholder and shareholders are decreased. It helps in
lowering the space among the costs of internal, and external funds (Jensen & Meckling,
1976).When financial constrains are lowered then it leads to select optimal investment projects
which at the end decreases the sensitivity of investment cash flows. Fourth, family owners are
more concerned with the reputation of their business which leads to higher earning quality due to
which the agency conflicts are reduced. When agency conflicts are reduced then sensitivity of
investment-cash flows alleviated in family owned businesses. Abdullah, Shah and Khan (2011)
compared family-own firm with non-family organizations and stated two reasons due to which
family ownership can outperform non-family firms. First, better investment decisions are made
14
by management of family firms. Because family managers have more knowledge about the firm
end are more foresighted, and also has longs term investments ideas. Second, the notorious
principal agent problem can be reduced by family management because it assists in the
alignment of incentives of the management with expectations of shareholders.
Family ownership if on the one side is beneficial for the performance of the firm then on the
other side it has disadvantages too. For example, Westhead and Howorth (2006) has
documented that if concentrate ownerships and management (Singel & Thornton, 1997) is in
hands of kinship-group who owns bulk of share in business then it may limits the pool of
experience, and may slow down the performances of the firm. Similarly, focus on objectives of
the family (Birley,Ng& Godfry, 1999), and unwillingness to work for the expansion of the firm
(Werd, 1997; Upton,, Teal, & Felan, 2001), may also limit the organizational performance.
According to Pérez-González (2001) firm performance may be affected negatively by family
succession through several ways. First, family succession reduces the prospective quality and
sizes of pool of liable successors. Because Professional managers constitute a self-select group of
extremely driven people, while family successors may the required skills and motivation of
managing the firm adequately. Secondly, whatever may be the characteristics of family
successors but firms under their control may underperform when a firm has long and staunch
tradition of honoring implicit contract which it has with related stakeholders e.g. employs or
local associations. Though it may be costly for the firm but these implicit contracts give benefits
to founding families indirectly. A CEO who is not from family members may renege on signed
contract and may transfers wealth to investors of organizations (Shleifer and Summers
(1988).Thirdly, when heir of a family is unrivaled in administration of a firm then he or she
might utilize the assets of the organization for its own needs. But unrelated managers may be
15
unable to exercise such misuse of resources because they may be controlled by founding family
and they may be under pressure to perform by labor market (Fama, 1980).Similarly, Anderson
and Reeb (2002) also carried out a study on founding families and found that, when Chief
Executives Officer is from family members then it has a detrimental effect on bondholder and
shareholder’s relationship. The costs of debts are high, when Chief Executives Officer is from
family members as compare to outside CEO. It is primarily attributed to founder descendent
rather than to founder CEO. It shows that unique and value adding skills are brought by founder
of the firm and descendents often detract from firm performance. It may be because of the fact
that descendents acquire the CEO position through family ties instead of required job
qualifications.
Shlefer and Vishny (1997) suggested that owners hip’s concentration may have more advantage
in countries which are not highly develop and have no systematic protection of property-right,
defined and enforced by judicial system. But La Portia,Lopez-de-Silanes, Shlefer and
Vishny(1999a), and Shlefer and Vishny (1997) focused on a new problem related to ownership-
concentration which is a clash between small shareholder and large shareholders. According to
Claessens, Djankov and Lang (1999), when corporation controls are in the hands of a large
shareholders then the policies framed by them often results in expropriations of the minority
shareholders. For example large shareholder enriches themselve through not paying dividends or
they transfer earnings to other firms which they control. Similarly other types of expropriations
include paying executives excessively, giving lucrative positions to unqualified relatives ,selling
products and assets to related parties on unfair prices and outright theft etc. (Abdullah,Shah and
Khan ,2011).Claessens, Djankov and Lang(1999) added that families mostly expropriate
minority shareholders and this expropriation of minority shareholders depend on country specific
16
circumstances e.g. individual shareholder’s legal and judicial protection, quality of banking
system and degree of financial disclosure required.
1.3 Problem Statement
There is a growing body of literature which has focused on the relationship between financial
decision and value of firm which is conditional to growth opportunities of firm ( López-Gracia,
Iturriaga and Sanz, 2015), but much less is known about impact of ownership concentration on
firm’s value (Al-Najjar and Al-Najjar, 2016) in Asian organizations like Pakistan (Sualeh and
Hussain, 2017) in the presence or absence of growth opportunities (Iturriaga and Crisóstomo,
2010). In Pakistan, only the nature of ownership-structure was explored by Cheema, Bari and
Saddique (2003) without checking its influence on performance of organization. The gap was
then filled by Javed and Iqbal (2007) in which they found a connection between corporate
ownership of an organization, firm’s performances and corporate-governance. Wahla, shah and
Hussain (2012) also documented the influence of managerial-ownership and ownership-
concentration on the performance of nonfinancial organizations which were listed at Karachi
Stock-Exchange. In all the above studies the relationship between firm’s ownership structure and
value has discussed from different dimensions. But no study relates the moderating role of
growth opportunity on the relationships of ownership structure and financial decisions with
firm’s value (Sualeh and Hussain, 2017). Therefore, this study aims at exploring the moderating
role of growth-opportunities on the relationship among family ownership, financial
decisions(leverage and dividend) and organization’s value as there are chances of expropriation
of minority-shareholders by family firms (Javed and Iqbal,2010).
17
Research Questions, based on the aforementioned arguments, are as follows.
1.4 Research Questions
1. How leverage affects organizational performance in the existence or nonexistence of
growth opportunity?
2. How dividend payout affects organizational performance in the presence or absences of
growth opportunity?
3. What is the influence of family ownerships on organization’s value conditioned to growth
opportunities?
4. Does a non-monotonic relationship exist between family-ownerships and value of an
organization?
5. Are minority shareholders expropriated by family owned organizations?
1.5 Objectives of the Study
This study aimed at determining the factors influencing the probability of future firm value for
Pakistani corporations. In particular, the objectives of this study were to find,
1. The link between value creation of a firm and leverage in the presence or absence of
growth opportunities.
2. The impact of dividend payout on performance of a firm when there are growth
opportunities.
3. The linkage between family ownerships and firm’s value; Conditioned to growth
opportunities.
4. The non-monotonic relationship between organization’s value and family-ownerships.
5. Expropriation of minority shareholders by family-owned firms.
18
1.6 Significance of the Study
The significance of this study is as follows.
First, it may help the firms in making appropriate decisions regarding leverage and dividend
policy. When there is growth opportunity the firms can focus on least debt otherwise all the
important decisions regarding investment will be done by debt providers. Similarly, this study
can also help the firms in making decisions regarding the dividend policy that in what
circumstance they should give dividend and in what not.
Secondly, this study is also beneficial in exploring the threshold levels of family ownerships
concentration that whether after certain threshold level the effect of family ownership on
organizational performance varies or not which will help Pakistani firms in making solid
decisions about the ownership structure.
Third, the study can also help regulatory body such as SECP in devising policies meticulously
for the wellbeing of minority shareholders and framing limits for debt and ownership
concentration.
The leverage, according to Signaling theory, is negatively linked with the dividend payments.
The negative relationship could be because of fact, that those organizations which are more
levered face large transactions costs due to the external financings. In such situations, the
organizations should utilize their internal finance in order to sustain their operation.
Furthermore, it is also worth mentioning that commitments towards creditors inhigh levered
organizations are greater which reduce the discretions of manager to utilize their funds. It in
turns causes a drop in agency cost. In addition, the negatives linkage between dividend payment
and financial leverage could also imply that the financial leverages are the major rationing
criterions for creditors of the financial markets of Pakistan.
19
Investments opportunity of organizations has negative relationships with the dividend policy.
The negative relationships may help the Management of an organization to realize that the future
investments opportunities have an important effect on deciding the directions o dividend
decisions of listed companies of Pakistan. The Policy which leads to the growth may generate
opportunity for the Profitable investments, and may helps the top management of an organization
regarding distributions of earning-cut short by keeping them for the expansion of the business.
As organizations, according to the signaling theory of dividend policy, which are devising plans
for the expansions are trying to avoid the selling of stocks. These organizations rather depends
upon retain earning and debts and give a message to outer shareholders for not paying dividend
for a specific time.
This study may also help the government and regulatory authorities in introducing a broad based
reform programs(e.g. Financial liberalization) in order to enhance the economic growth of
Pakistan through instilling competitions in the financial institution, framing a marketed adjusted
monetary, ex-change, and credits management-systems, and also strengthening governance and
supervisions of these financial institutions. Furthermore, Financial liberalization may cause an
increase in the dividend payments as once the financial constraint are eased-out then the
organizations will start shifting from the debts market to the equity markets for meeting their
monetary needs.
The study may be beneficial from the legal and political perspective as well for Pakistan. As
according to Shingade and Rastogi (2019), very little steps has been taken by the politicians for
stopping shareholder’s activism in Asia regarding raising and framing policies for stopping the
expropriation of minority shareholders. So the study will help in order to raise awareness in
politicians in Pakistan regarding the protection of minority shareholders.
20
According to Tax-preference theory the tax rates and dividend payments are negatively
associated. So, the study may help the management of an organization in understanding that
whenever the tax rates are increases then the organizations should lessen their dividend
payments, and invest their retain earnings in positive NPV projects in the presence of growth
opportunity.
Similarly, when an organization make a decision to pay the dividends, then the profits of
organizations are taxed two times by the government because of the transfers of money from the
firm to the shareholder. The first time taxation is occurred at the firm's year end when the
organizations have to pay the taxes on earnings while second times taxes are deducted when
dividends are received by the shareholder, which comes from organizations after-tax earnings.,
The shareholder first pay taxes as the owner of an organization that brings-in earning, and then
again as individuals, who must pay income tax on their own personnel dividends earnings .So,
for avoiding the double taxations of shareholders through paying divided when tax rate is high
then it would be more logical for the CEO of an organization to reinvests the profits in project
which may as a substitute give shareholders earnings in the form of capital-gain.
Managers who are holding substantial shares in an organization shall try to stay away from the
utilization of high leverage and will require high dividends payments to pay compensation for
their financial risks. As a result, the small investor needs to avoid organizations that comprise of
high leverage and high managerial ownerships. In terms of agency perspectives,, leverage and
the dividend policy can be utilized as substitutes as an internal mechanisms for mitigating the
agency conflict. It also helps in framing a precise policy for causing a reduction in organizational
conflicts (Agency conflicts) and improving the quality of corporate governance quality of an
organization.
21
The study may help the Institutional investors in deciding the financial structure of an
organization. Institutional investors, Conditioned to growth opportunities, play a very crucial role
in the elimination of un-systematic risks of an organization with the help of portfolio. Institutions
have a great interest in monitoring the decisions of managers and profitability of an organization
due to their diversified portfolios. Institutions always prefer debt financing over the equity
because debt gives them incentives to monitor the management and mitigate the managerial
opportunism.
The study also carries importance for the family businesses regarding deciding the capital
structure of their organization. For example, in order to avoid agency costs the family owned
firms should issue debt instead of equity. Debts decrease the conflicts among the shareholders
and mangers of an organization and give an incentive to the shareholders for investing in high
risky business when there are chances of growth opportunities for getting high returns in case of
success. But if the investments fail then the whole burden will be tolerated by the external
lenders.
This study also helps in increasing the interests of academia and other practitioners in the
understanding of the family business due to their special characteristics and peculiarities. The
specific characteristics and peculiarities of family business plays crucial roles in the shaping of
behavior of manager and also decision-making processes of the corporations that ultimately
shapes the corporate culture with the passage of time. Similarly, the study also helps the
academician in understanding the moderating roles of growth-opportunities which it plays in
making financial decisions and its impact on the performance of an organization while taking a
net present value project.
22
1.7 Organization of Study
The Study is organized as follows;
Chapter-1 gives insight about the Introduction of the Study which includes definitions of
main variables and also present the research gap which has been crafted in the context of
Pakistan while examining the Previous studies .
Chapter-2 presents overview of the Literature .In this chapter a funneling process has
been carried out where first literature regarding the main variables have been analyzed in
the context of developed countries, then in Asia and finally the analysis have been
dragged to Pakistani context.
Chapter-3 is about Research Methodology. In this chapter the criteria for sample
selection has been mentioned along with an insight of the sectors and its contribution as
well. Furthermore, details regarding the Panel regression model and model specification
etc are included.
Chapter-4 describes Result and Interpretations. This section includes software generated
output along with the relevance and contraction of those results in the context of Pakistan
which are framed and premised on the generated results.
Chapter-5 shows Conclusion, Recommendation and Limitations. The Conclusion is based
upon the generated results and then recommendations are crafted in the context of
Pakistan and also some limitations of the study have been enumerated.
23
CHAPTER # 2
LITERATURE REVIEW
2.1Chapter Introduction
This chapter gives an insight about past studies conducted regarding the main variables of the
study under consideration. It shows that how leverage, dividend and family ownership are linked
with growth opportunities. The scheme of this chapter comprise of studies which have conducted
first in the developed economies and then have dragged the topic to the developing countries.
Furthermore, studies from Pakistan have been incorporated in order to show that what areas of
corporate finance have already been discussed and what are missing. This chapter also presents
an evolution (in terms of progressive work) of the main variables of the study. In the last
literature based hypothesis have been presented which are developed on the basis of past studies
conducted in the developed and developing countries in order to show what needs to be explored
in the context of Pakistan.
2.2 Leverage and growth opportunities
Corporate Governance is the system by which business organizations are directed and controlled
because the corporate governance structures specifies the distribution of rights and
responsibilities among different participants of the corporations, such as, management ,board of
directors, external auditor and shareholders ( Mansur and Tangl,2018). According to Fu (2019)
,Corporate governance has been considered an important factor in the finance filed over the last
few years because the management of companies, according to Aslam, Haroon and Tahir (2019),
is regarded as an important element of organizational performance in terms of monitoring and
evaluation. The Asian financial-crisis which started in 1997 deteriorated many of East Asian
24
organizations financial performance caused mainly due to the failure of good governance (Haat,
Rahman and Mahenthiran, 2008). Better-governed organizations are relatively earning more
profits, valuable, and paying more cash to the shareholder (Brown end Caylor, 2004).When
Shareholders or Investors are making decisions regarding the investment, they consider
organization’s growth rates, business risk and capital structure (Al-Najjar, 2010).A good number
of studies regarding relationships between capital structure and controlling shareholder’s
ownership already exists, which shows mix results (Chakraborty, 2016). Boubaker (2007)
established positive relationships between the capital structures and controlling shareholder’s
ownership. On the other side, Neilsen (2006) found negative relationships between the debt and
control while Ellul (2008) found a curvilinear relationship between control and debts. Due to
liberalizations in developing-economies, dissimilar sectors has become meticulous about the
choice of sources of fund and forming their capital-structures, known-as optimal capital-structure
(Bhardawaj, 2012).she further stated that in spite of abundant empirical and theoretical findings,
the corporate capital structure still remains a controversy as concepts of capital structure and
costs of capital carry an important position in the modem corporate finance.
In 1958, Modigliani and Miller laid the foundation of the modern theory of capital structure. It
was proposed by them that the capital structure irrelevance theory that states that the value of an
organization is unaffected by the capital structures of a firm. It means that Weighted Average
Cost of Capital (WACC) has no role in firm’s value creation process. However, M&M had
assumed markets, wherever there are no-transactions’ charges, symmetric mention, risks free
debts and no tax. These all assumptions are in contradiction with real-world. In 1963,
Modigiliani and Miller modified their old M&M’s model. They included tax deductibility of
interest in their new model. They argued that when interests are tax deductible expenses then
25
firm value is increased by taking leverage. So, it means that firms can increase its value by
taking 100 percent of debt for financing a project. But in reality, probably there exist such firms
because of no debt tax shields (DeAngalo & Masulis, 1980) interest tax-savings, and personal tax
(Miller, 1977).Due to which taking infinite loan is limited. When a firm capital structure is more
composed of debt it may cause financial distress which was defined by Warner (1977) as a state
in which an organization is incapable to pay its debt or a situation which leads to deteriorating
financial decisions. Financial distress was also defined by Wruck (1990) as a situation where
current obligations are not fully satisfied through operating cash flows and compels the firm to
take corrective measures. Warners (1977) and Kim (1978) found the relationships between
leverages and bankruptcy. They enumerated that when an organization increases its debts then
financial distress also increases due to which its chances of bankruptcy also increases (Cheng &
Tzeng, 2011).
There is amalgamation of results regarding relationships between capital structures and firm’s
value. Some of studies (Brger & Bonaccorsi de Patti, 2006; Roden & Lewellen, 1995) have
indicated positives relationship between capital structures and firm’s value While others
(Chakraborty, 2010; Huang and Songs, 2006), have reported a negative relation between capital
structures and firm performance. Similarly, Murtaza et al. (2020) found that Tangibility and
leverage are negatively associated with the performance of organization. There are other studies
(Tang and Jang, 2007) as well which have shown fragile or non-statistical relationship among
capital structure and organizational performance.
Myers (1984) presented two theories e.g. statics trade- off and pecking order theory regarding the
optimal structure. The static trade off theory is about cost benefit analysis. It states, that an
organization can reach optima’s capital structure through balancing benefit and financial distress
26
cost. According to this theory a firm will keep increasing the levels of debts until benefit of debts
are greater than perceived financial distress cost. Interest tax-shield are the benefits of debt while
the distress include agency and bankruptcy cost. Static trade- off theory indicates positive
relationships between organizational performances and capital structures (Kardeniz et al., 2009;
Chakrborty, 2010). According to the trade off theory ,organization’s adjustments toward optimal
leverage is effected through three factors which are taxes, agency costs and financial distres
.Baxter (1967) stated thathigh utilization of debts increase the probability of bankruptcy due to
that creditor demands extra risks premiums. He suggested that organizations shouldn’t use debts
beyond the points where cost of debts become larger then tax advantages. Kraus and Litzenbrger
(1973) argued that if an organization’s debts obligations are greater than its earning, then
organization’s market-value is essentially a concaved function of its debts obligation. DeAngelo
and Masulus (1980) further worked-on Miller’s differential tax models by entering other non
debt shield, for example, investment tax credits and depreciation charges. They enumerated that
every organization has internal optimal capital structures which maximize the values of their
relevant organizations. The determination of capital structure is only through positives defaults
cost and interactions of personnel and corporate tax. Altmann (1984) is the first who documented
direct and indirect cost of bankruptcy. Through study in twelve retails and seven industrial
organizations, he mentioned that organizations in the simple faced almost twelve percent of
indirect liquidation cost at times t-1, and sixteen percent at times t. He inferred that the capital
structures ought to be such that present value of marginal taxes benefit is equivalent to the
marginal present-value of bankruptcy cost. Bradly, Kim and Jarrell (1984) made use of model
which synthesize the contemporary balancing theory of optimal capital structures. They
established strong direct relations between an organization’s debts level and no tax shields.
27
According to the Pecking order theory for a firm there is no optimal capital structures. It also
states that managers and shareholders have different level of information. In order to reduce
asymmetry of information between shareholders and managers, company give first priority to
internal sources of finance e.g. retain earnings for financing the operations of an organization.
The reason behind the transaction is small or zero price and availability is easy. The company's
next preference is for debt because it does not alter the company's voting pattern. The firm is
ultimately issuing equity shares, following the withheld income and debt. Capital structures and
organizational value according to Pecking Order Theory are negatively linked.
Most of the early research on the capital structure favors the scheme of optimal capital structure.
For example, Schwartz and Aronson (1967), carried out a study in which they showed that
average o debt to asset ratio of dissimilar firms are different in different industries and also
indicated that organizations have a tendency in similar industry to clusters around the average of
their relevant industries. Furthermore, the averages of such industries had a negative relationship
with research and development spending and other proxy for the corporate growth opportunities.
Long and Malitz (1985) conducted a study in which they showed five highly leveraged
industries, for example, petroleum refining, paper and allied products, textiles, blast furnaces and
steel and cement which all were asset intensive and mature. On the other hand showed five
lowest debt ratios industries ,for example, radio and TV receiving, aircraft, photographic
equipment, drugs and cosmetics which all were growth industries with high Research and
Development and advertisement. Other studies (Bradley, Jarell, and Kim, 1984) had used cross
sectional regression technique for determining theoretically the extent to which optimal capital
structures seems to effect the actual financing decision.
28
Barclay and smith (2005) conducted a study on 8800 organizations for the period of 1950 to
2003.The Differences in the leverage ratio were recognized both in each organization during
each year and for the same organizations. They tried to figure out how far the choice and
leverage of the corporate dividends can be demonstrated by the variations in investment
opportunity, relatives to the size of organizations, the higher is the possible problem of
underinvestment related with the debt financing, and so, the lower would be an organization’s
leverage ratio. On the other side, the more limited an organization growth opportunities’, the
higher is the possible problem of overinvestment, and hence the greater would be an
organization’s leverage.
Margariitis and Psillaki (2010) analyzed effect of efficiency on the capital structures through two
opposing hypotheses. Under the efficiency risks hypothesis, organizations which are more
efficient might prefer higher debt to equity ratio, because high efficiency decreases the
predictable cost of financial distress and bankruptcy. On the other side, according to franchise
value hypothesis, Organizations which are more efficient might choose low debts to equity ratios
in order to shield the economic rent resulting from high efficiency from likelihood of liquidations
(Berger & Patti, 2006). They added additionally that organizations with t large external block-
holdings are probably has high debt ratio at least up to the point where risks of liquidation might
encourage them to the lower debts. According to Smith (2005), Managers prefer some type of
owner as compared to other because different type has different capabilities hinder their choice.
As an outcome, manager are trying to get the most out of organization value if their favorite
owner remains in-charge when organization performance is good, but effective debts covenant
constrains managerial preference following appalling performance.
29
Driffield et al. (2016) suggested that the relationships between leverage and managerial share
ownerships might be no-linear. At small level of managerial’ ownerships, agency’ conflict
decreases leading to high debts. Nevertheless, once manager holds a noteworthy portions of an
organization’s equity, an increases in the managerial’ ownerships might leads toin the
managerial opportunism and consequently may cause lesser debts. Other author, for example,
Friand and Hasbrouck (1988), and Friand and Lang (1988) argued that a raise in the managerial
ownerships push organizations for decreasing leverage in orders to reduce defaults risks, thus
advocate a negatives relationships between leverage and managerial’ ownership. Similarly Lang,
Stulz, and Ofek (1994) explored the relation between future growth and leverage for
organizations over the period from 1970 to 1989. They identified a strong negative relationships
between leverage and succeeding growths in number of employee and capital expenditure but
only for organizations with poor investments opportunity (for example, Tobin’s Q < 1).
Therefore, it can be suggested that leverage prevents organizations with poor investments
opportunities from overinvesting.
The relationship between working-capital management, organizational value is being discovered
by Banos-Caballero, Teruel and Solano (2014)and stated that earlier’ study on the working
capital-management fall in two competing views regarding working-capital investments. Under
one views, the higher working-capital level allows organizations to raise their sale and gain
greater discount for premature payment (Delooff, 2003) which may increases organization’s’
performance. On the other hand, the other views states that higher working-capital level needs to
be financed and as a result organizations are facing supplementary financing expense which
increases its chances of bankruptcy (Kieschick, Moussawi & LaPlante, 2009). Incorporating
30
positive and negative working capitals effect lead to then on-linear’ relationships between the
value of an organizational and investments working capital.
Wang (2002) found that organizations from Taiwan and Japan with high values hold
significantly lower investments in working capital than organizations with lower values.
Faulkender and Wang (2006) evaluated how an additional dollar invested in net working capital i
s appreciated by U.S. corporate shareholders using surplus stock returns as a proxy for the value
of the company.The results show that an extra dollar invested in net working capital is, on
average, less useful than a dollar invested in cash. They also found that an average increase in
net working capital will decrease excess reserves and that that decrease will be greater for
organizations with limited access to internal financing. As market imperfection raises external
capital expenses relative to the externally produced fund (Myers & Majluf, 1984) and could
result in debt rationing (Stiglitz and Weiss, 1981). Fazzari, Petersen and Hubbard (1988)
proposed that the organization's investments may rely on economic variables such as funding
expenses, access to capital markets, or domestic finance accessibility.
Furthermore, in their assessment, Fazzari and Petersen (1993) proposed that investment in worki
ng capital is more susceptible to funding limitations than investment in fixed capital.
Various explanations on the incentives for organizations to maintain a favorable working capital
have been provided. First, for many reasons, a large investment in stocks and expanded trade
credits may improve corporate efficiency. Large inventories may, according to Blinder and
Maccini (1991), reduce supply costs and price fluctuations and prevent disruption of
manufacturing procedures and company loss owing to product shortages.It also provides
organizations with better customer service and prevents greater production costs due to the
elevated production fluctuation (Schiff & Lieber 1974). On the other hand, the granting of trade
31
credits may also boost the sale of an organization as it is used as an efficient cost
reduction.It enables clients to acquire goods at low demand times (Emery 1987). It strengthens th
e longterm connection between supplier and customer (Wilner 2000) and allows buyers to check
the value of the goods and services before payment (Malitz & Ravid 1993).Thus; it decreases the
asymmetric information between the seller and the buyer. Deloof and Jegers (1996) is of the
view that trade credits are an imperative supplier-selection measure when it is difficult to
differentiate the product. Furthermore, Emery (1984) proposed that business credits are more
valuable short-term investments than marketable securities. Second, labor capital can function as
precautionary liquidity stocks, offering insurance against future money shortfalls (Fazzari &
Petersen, 1993). Lastly, from the point of perspective of accounts payable, Wilner (2000)
showed that organizations can get significant early payment discounts when their supplier
funding is reduced.
Similarly, researchers (Munter and Kren, 1995) demonstrated a board of director’s effectiveness
as a monitoring mechanism as they communicate the interests and objectives of the shareholder
to the managers. It has been discovered empirically that enhanced outsiders on boards are likely
to encourage choices that are in the best interests of internal shareholders (Weisbach, 1988).This
perspective was questioned by the theory of managerial hegemony, which considers boards as a
passive tool that maintains loyalty to the managers of the organizations that select them, lacks the
vital understanding of the organizations and is strongly dependent on top executives for
information (Coles et al., 2006).Specific organizational definitions linked to things such as
organizational skills are investment opportunities (Anderson et al., 1993). As a consequence, it is
difficult to monitor the action of executives in development organizations as it is difficult to
decide whether it is the action of executives or external variables that led to good choices for
32
investments. Hutchinson (2004) discovered negative relationships between external directors '
ratios and the growth rates of the organization. On the contrary, Hossain et al. (2000) discovered
the proportion of external managers to be favorably correlated with the investment possibilities
of the organization. Anderson et al. (1993) is of the view that growth organizations incur higher-
monitoring cost (in term of directors and auditors fees) as compared to the non growth
organizations.
According to Tang and Jang (2007), several factors are suggesting that the negative
relationships between the organization’s performance and organization’s investments
opportunities are weaker for organizations with higher management share ownerships. First,
executives who own an organization's stocks are more likely to use their discretionary choices to
enhance the organization's value. In other words, ownership of management shares must
guarantee that executives undertake risk-bearing policies that boost the efficiency of the
organization. In addition, it is anticipated that there will be less need to encourage executives to
seek risky but lucrative investments as organisations with assets in location have dedicated
investment possibilities.
According to Ogden, Jen, and Connor (2003), the creditors or lenders are assuming the role of
active monitor for controlling the board composition as they demand reasonable returns on their
investment and for agency costs which they are facing. For three reasons, Shleifer and Vishny
(1997) given arguments about the impact of the creditor. First, when an organization makes a
debt repayment default, then lenders automatically assume certain freedoms of control. Second,
because of the facts that short-term lending is often preferred, these lenders are more frequently
approached for the resources. Third, interest payment liability must be made on a periodic basis,
which will persuade managing to be careful in creating cash flows (Ogden et al.,
33
2003).Therefore, the inclusion of debts would work as a governance mechanism in the
improvement of an organization’s performance. Myers (1977) also believes that short-term loans
are good to reduce conflicts such as underinvestment problem between shareholders and
executives. In particular for high quality organizations, short-term loans can benefit due to their
low refinancing threat (Diamond, 1991).
Gurbuz, Aybers and Kutlu (2010) used debt as control variable in their study of impact of
corporate-governance mechanism on organization’s performance. They examined forty one
organizations from Istanbul Stock-Exchange for periods from 2005 to 2008. The study carried
out panel-data analysis and GLS estimations. The outcome showed that debt sizes can influence
economic performance due to economic costs and default risks. The study considered that the
financial cost and the tendency for default worsen profitability of organizations and
showed negative links between leverage and organizational performance. From 1999 to 2003,
Florackis & Ozkan (2004) carried out a research using cross-sectional regression analyses on
publicly traded United Kingdom (UK) organizations. They realized that debt maturity has a
significant role to play in justifying the organizational costs. It demonstrates that shorts term debt
efficiency is reduced for high growth organization in terms of mitigating agency problems, given
that short-term debt utilization is not a governance criterion.
According to Al-Malkawi and Pillai (2012), the utilization of debt as governance-mechanism is
more appropriate for small organizations which are facing an uneven cashflows The use of debt
for these growing organisations would function as a surveillance mechanism and pacify the fresh
investors. Safieddne and Titman (1999) issued a further statement on debt role as a governance
mechanism. They have indicated that high leverage rejects the threats to takeover, because these
organizations are showing an increase in their efficiency, the organizations reduce employments,
34
become very vigilant in their operation, and sell off their assets. On the other side, Megginson
(1997) presented empirical evidences in support of positive relationships between the leverage
and agency costs. Meanwhile, Stulz (1990) provided results which were describing that debts
could have a positive or negative impact on the value of an organization due to the influence of
debt on the investments decision taken by the organizations.
According to Cheng and Tzeng (2011), when a firm’s quality(measured through Altman’s Z-
Score) is higher, it may improve the credit rationing of the firm due to which equity holders and
debt holders give such firms more importance. For example, equity holders and debt holder
demands lower required rate of return from better credit rationing firms which cause a decline in
the costs of capital, and increases the organizational value. Therefore, leverage positively affects
organizational value, and this influence tends to be stronger when an organization has good
financial quality which results in lower chances of bankruptcy. According to Barclay and Smith
(2005), the direct expenses related to the bankruptcy process appear smaller with relation to
market value of an organization but the indirect cost may be substantial. For many organizations,
the loss in value is the most important indirect cost which results in cutbacks in promising
investments when organizations get into financial trouble. In situations less extreme than
bankruptcy the high leveraged organizations are more likely to pass up valuable investments
opportunities as compared to their low debt counterparts when faced with prospect of default.
Mikkelson and Partch (2005) enumerated that on the basis of this information gap between
investors and managers of the firms, there are three distinct and related theories to the financial
decisions which are market timing, signaling and pecking order theories.
35
In the issuance of securities, Market timing has important role, for-example, which security
needs to be issued in what circumstances. Since bondholders are entitled to fix promised
payments and shareholders are entitled to the amount what is left after fulfilling the claims of
bondholders. Therefore, the prices of stocks are more sensitive to any proprietary information
regarding the future prospects of the company as compared to the bond prices. The stock prices
will increase if the management has any sort of favorable information’ which isn’t yet reflected
in the market-prices of the stock. So, the current-stock prices will be perceived more under-
valued as compare to the bond prices by the managers. To avoid diluting the values of current
stockholder’s claims (including manager’s claim), organizations that have profitable usage for
more capital and they believe that their shares are undervalued then they may opt debt to issue
not equity. But on t other side, if managers who are thinking that the shares of the companies are
overvalued then in such case the managers will issue the equity instead of bond which is a stock
for stock acquisition. Some organizations may be seen to issue overvalued securities e.g. equity
or debt, even if the capital they have is of no current profitable use because of the free cash flow
problem. Investors know that managers have more information than them and they also know
managements’ intensions to avoid issuing undervalued securities and issue overpriced securities.
This well recognized tendency of organizations to take inventory offerings offers helps to
explain the systemically adverse reactions of the market to the announcements. There has been
significant research showing that the shareholder marks down approximately 3% below the
share rates of issuing organizations. Market responses therefore do not differ from null on
average to fresh debt offers, although negatively.
Signaling theory like the market timing explanation is based on the idea that managers have an
edge over investors regarding information, for example, managers have better information
36
regarding the future prospects of the organization as compared to the investors. But as oppose to
the market timing, where securities are viewed as an attempt for raising the cheap capital, the
signaling model checks the confidence level of managers related to the decision making which
are made regarding the organization’s prospects and also in cases where management is of the
view that their shares are undervalued in order to increase the value of their shares. If the
executives think that the share of the business is undervalued, they can try to boost the value of
their stocks by only communicating this data to the market by providing in greater detail and
better data about the future value of the business in relation to shareholders. But this is not as
straightforward as it appears. As the management of an organization is often unsuccessful in
releasing strategic data or forecasting, and stating that organization is undervalued is suffice
normally. In such cases the managers of the firms need to introduce a credible signaling
mechanism which is a big challenge for the managers. According to the Economic theory which
suggests that information released from a biased source (e.g. management in this case) would
only be reliable when associated with significant consequences for misleading the market.
Increasing the level of the leverage might be one of an effective signaling device. Debt compels
an organization to make fixed amount of cash payments for the time for which the debt security
has been taken. There are serious consequences including bankruptcy, if payments obligations
are not fulfilled. Equity is more forgiving as shareholders expect cash pay-outs which are subject
to the discretion of the managers who can omit or mitigate theses payments when an
organization is facing financial distress. Due to this reason when an organization is adding more
debts to the capital structure serves as a credible signal for higher expected cash flows in the
future.
37
The third theory related to the information cost and decision making of capital structure is
pecking order theory. The pecking order theory suggests that the dilution caused by issuing
securities is large enough which dominates all other considerations. This theory states that
organization uses the cheapest source of funds for financing new investments in order to increase
the value of an organization. Managers give preference to internally generated funds as
compared to the external funds. Dead equity is preferred as outsides fund is compulsory because
of incurrence of lower information costs related to debt issuance. When all the debt capacities of
an organization has been exhausted then issuing equity shares is the last resort (Myers,
1984).Therefore, Pecking order theory suggests that organizations would have low debt ratios
which have few investment opportunities and have low or negative free cash flows because the
cash will first be used for servicing the debt obligations. On the other side, organizations which
have high growth and low operating cash flow will be having high debt ratio because of showing
resistance to raising new equity.
The signaling explanation and market timings theories, as discussed, are of the view that
organizations is expected to initiate debts instead of equities once it is undervalue due to high
informations cost associated with equity offering e.g. .in form of the expected dilution. The
pecking order model is even of an extreme view by suggesting that the information cost related
with the risky securities are so much high that most of the organizations would not issue equity
until their debt capacity is completely exhausted. Both the signaling and market timing theories
are suggesting that an organization’s financing decisions are influenced by the management that
whether they perceive the organization as overvalued or undervalued. According to Barclay and
smith (2005), the pecking order model is at more extreme which states that there is no target
capital structure for an organization and the leverage ratio of an organization will be determined
38
through the difference between investment requirement over time and operating cash flows.
Therefore, the pecking theory forecasts the organizations with persistent higher earnings and
moderate funding requirement tend for having low leverage ratio. It is mainly because of the
reason that outside capital is not needed by these organizations. Organizations with Low Profits
and those with high financing requirement will have high leverage ratio because of manager’s
resistance to issue the equity. According to Driffield et al. (2006), High leverage and high
dividends are somewhat complementary strategies which are driven by similar consideration and
common factors. They have suggested that organizations select rational package of finance
policy e.g. the small and higher growths organizations are trying low leverage and not
complicated capitals structure but also have low dividends pay-outs and considerable stock based
perks and compensations for the senior executive. On the other hand, large and mature
organizations are trying to have more complicated capital structure and broad series of debts
priority, high leverage, less incentive compensations e.g. great usage of earning base bonus then
stocks base compensations plan(smith and watts,1992), higher dividends and more long term
debts. Therefore, dividend, compensation policies and corporate financings are driven through
same basic considerations, for example, an organization’s investment opportunity and to a less
extent by its size.
Fan et al. (2007) said that knowing the connection between the corporate financing stocks and
flows is the way to reconcile the distinct theories and address the capital structure puzzle.
Current theories of capital structure generally focus on stocks (the amount of debt and equity
relative to the target) or flows (e.g. decisions about which securities to issue at a particular
moment). For instance, the contracting price theory focuses mainly on leverage ratios that are the
debts and equities stock measure. On the other side, information theory such as the Peck Order
39
Model tries to more focus on flows, such as the cost of data connected with a given equity choice
or debt decision. As stock and flow is likely to play a major role in these decisions, none of these
techniques alone can give credible suggestions to optimal capital structures.
An analysis was carried out into the relationship of intellectual capital, market value and
financial outcomes by Cheng, Cheng, and Hwang (2005).They discovered that both market value
and economic performance have beneficial effects on intellectual capital and this can be a
significant measure of the future economic performance. They also expanded the role of
intellectual-capital in generating corporate value and building sustainable benefits for emerging
economic organizations, where technological advancement would effects the intellectual-capital
valuation. Intellectual capital is generally immaterial in nature, according to Barnney (1991), but
it is widely accepted as a major corporate-strategic asset that can create lasting competitive
advantage and greater economic results. The difference between the book value of the company
and the market value was defined by Edvinsson and Malone (1997) as the value of intellectual
capital. The intellectual capital of an organization consists of human and structural capital
(Bontis, 1996). The primary driver of corporate and national development is intellectual capital.
Some nations such as Saudi Arabia and Venezuela, as Kaplan and Norton (2004) have elevated
natural assets, but bad investment has been made in their individuals and the system. This results
in far less per capita production and a much slower development rate compared to nations like
Taiwan and Singapore with a tiny amount of resources but high human capital and information
capital and effective inner structures. Its outcome is that the production is significantly lower per
individual.
Harford, Mansi and Maxwell (2008) carried out a study on US firms and suggested that nation
levelsgratings and enforcement of shareholders right is perhaps more essential than
40
organization’s levels attempts to limit the shareholders right. They found reduced reserves for
weaker corporate governance organizations. When weakened government organizations
distribute cash to investors, they choose to repurchase shares rather than increase dividends and
thus avoid future payout commitments. They further stated that the combination of weak
shareholder rights and excess cash leads to an increases in acquisitions and capital expenditure.
Low shareholders and surplus cash farm have low returns and low value. Cross-country evidence
depicts that reduced money holdings are linked to higher correct investors (Pinkowitz, Stulz &
Williamson, 2006).It indicates that shareholders want executives to disburse the money (most
likely to shareholders) and, when empowered, force them to do so (La Porta et, al., 2000).
Pinkowitz, Stulz, Williamson (2006) examined impact of country level protections of right on
cash holdings and showed that cash is worth less to minority shareholders of organizations in
countries with the low investor protections. It portrays that bad protection of investor rights
makes expropriating corporate assets for their own benefit easy for the controlling shareholders
and management. In addition, Lin and Kalchev (2004) included corporate governance controls at
the organizational level and examined how the protection of investors in countries has a marginal
influence on financial holdings. They have found that weaker shareholders ' rights organizations
have more cash worldwide and this link is particularly powerful and strengthened in low
shareholder protection countries. They also found that the value of cash holdings corresponds
negatively to the value of the company and that, the greater the control on management, the less
the inner security for the shareholder. These findings assist us to understand how shareholder
freedoms at country level act in conjunction with the issue of firm-level agency and shareholder
authority.
41
The debt-firm value relationship was also examined in Pakistan, and various studies were
conducted by distinct writers in separate industries of Pakistan. Khan (2012) carried out a survey
on Pakistan's engineering industry. He discovered a important and negative relationship between
debt and company performance measured by Tobin's Q and Asset Return (ROA). Memon et al.
(2012) confirmed the same outcomes. They also report a negative relationships between
accounting-based-performance measure e.g. ROA and debt. Siddiqui and Shoaib (2013)
performed a research on Pakistan's banking sector and discovered no connection between
leverage and bank performance. They used Tobin's Q for the company's performance. Amjed
(2011) also explored the connection between leverage and company performance and reported a
important and negative connection. The moderating role of leverage between ownership structure
and firm’s performance was studied in the context of Pakistan but no significant results were
found (Ali et al., 2015).
Rao,Khursheed and Mustafa (2020) tried to explore the influence of concentrate leverage and
ownerships over the performance of logistic sector organizations of Pakistan conditioned to
presence and absence of growth opportunities. A non linear relationship was found between
ownership and performance of organization while the relationship between leverage and firm’s
value was positive. Similarly a relationship was found byLópez-de-Foronda (2019) between
corporation leverage and overinvestment. A significant positive association was found between
overinvestment and corporate leverage. Ciftci et al. [ 2019 ] analyzed, by examining firms
operating in Turkey, the relationship between corporate performance and internal governance. It
was found that concentration ownership in family-owned enterprises leads to better
performances and controls. According to Cheng and Tzeng (2011),asset substitution effect can
be created by debt which can be explained as when the shareholders give a free hand to
42
management to invest in risky projects without knowing the debt holder’s anticipated risk,
because the debt holders may not be willing to invest in more risky projects. If the risky projects
performed well then the debt provider will get only the pre-determine returns while the
shareholders will get all the extra benefits. On the other hand, if this risky project results in
losses then debt-holders will share those losses jointly with shareholders. For keeping themselves
on a safe side, debt-holders should monitor the firm and also need to impose covenant .( Skinner,
1993).Debt can also result in underinvestment problems. Which can be explained as when the
debt lender provide the debt to firm and the management comes to know that all the benefits
from the project will go to the debt providers, then they will try to avoid investment in those
projects which are profitable to the firm. (Myers, 1997).
The agency cost theory is based on the concept of conflict of interest between managers and
shareholders. It states that intersts of both manager and share-holders are contradictory, and are
not perfectly aligned. Jensen and Mecklling (1976) in their seminal paper focused on the
importance of agency-cost of equity. They argued that agency-costs arise when we separate
ownerships from controls of a firm. In such case, manager’ tend to satisfy own needs and utilities
and ignore the value of firm. In simple words managers give priority to their own needs over the
value of firm. The problems of agency cost aren’t only exists between manager and shareholders,
it is also exists among equity end debt investor where premise of conflict is risk of default
(Margaritis & Psillaki, 2008). This risk of default may lead to underinvestment or debt overhang
problem (Myers, 1977).In this case the relationship between leverage and value of firm is
negative.
But on the other hand there may be other situations which make a shift in the intentions of
managers and they start working in the best interest of the firm. As enumerated in the theory of
43
free cash flow by Jensen (1986: p. 323),that ―the problem is how to motivate managers to
disgorge the cash rather than investing it below the cost of capital or wasting it on organizational
inefficiencies.‖ So for making managers disciplinary a high level of debt can be used which will
mitigate the misuse of cash flow by managers because of fear of insolvency (Grossman & Hart,
1982), or the pressure of fulfilling the debt obligations (Jensen, 1986).In such case we can expect
a positive relationship between leverage and a firm’s value.
Stulz (1990) extended the work of Myers (1977) and Jensen (1986) through developing a model
in which it was shown that on one side leverage decrease overinvestment problems but on the
other side it aggravates the underinvestment problems. This model shows the dual role of
leverage e.g. positive and negative on value of firm and presumed that all firms have both effects
(Margaritis & Psillaki, 2010). According to McConnell and Servaes (1995) leverage can have a
positive influence at firm’s performance when an organization has few growth opportunity and
will have a negative impact on value of firm when a firm has high growth opportunities.
H0: There is no relationship between leverage and firm’s value when there are growth
opportunities?
H1a: Leverage and firm’s value are negatively co-related when there are growth opportunities.
H1b: Leverage and firm’s value are positively co-related when there are no growth opportunities.
2.3 Dividend and growth opportunities
Dividend policy is widely used topic in the literature of finance. The importance of dividend in
determining the value of a company has result in theories inconclusiveness(Al-Malkawi, 2007),
due to which for researchers it is one of the debatable topic (Ramcharan, 2001).According to
Brealey and Mayers (2005), dividend policy is among the list of top ten unsolved problems in
financial economics. This argument supports Black’s (1976) statement about dividend that “The
44
harder we look at the dividend picture, the more it seems like a puzzle, with pieces that don’t fit
together‖. The discussion on divided policy is dated back to work of Modigliani and Miler
(1961).MM said that in a perfect market dividend does not affect the value of a firm. But MM’s
claim was challenged by Linter (1962) and Gordon (1963) by supporting ―Bird in hand theory‖
while stating that high dividend leads to high firm value because of asymmetry and imperfection
of information.
Different researchers (Amidu and Abor, 2006) have criticized the theory of irrelevance of Miler
and Modigliani (1961) that divided has no impact on the share prices. They stated that those
assumptions out-lined by MM are not working in real life. According to Amidu (2007),
organizations incur floatation costs in their bids for raising additional capitals whereas investors
are incurring transaction costs whenever they are buying or selling their shares, organization
pays brokerage or subscription charges when issuing fresh stocks, investors pay income tax on
dividends received, dividends are also subject to withholding tax while capital gains are exempt
from tax. In addition, insiders have more access to information than outsiders, which
demonstrates that not all accessible information is fully reflected in the markets. It therefore
demonstrates that dividend policy has a important effect on the share price .According to Anil
and Sujjata (2008) there is not only one factor through which dividend behavior can be
explained. It means that there are many factors which explain dividends policy. A numbers of
factor had been recognized in the earlier studies regarding relevance of dividends policy of
organizations which includes agency costs, signaling and cash-flows (see Gordon, 1961, 1962;
Allen & Michaely, 2002; Bhattacharya, 1979).
Dividend plays an important role in agency problem. According to Jensen (1986) agency
problem can be reduced through paying dividend. He argued through in his free cash theory that
45
when firm pays dividends then the managers have least opportunity to do exploitation and
misuse of frees-cash. Akbar and Baig (2010) argued that when high divided are paid to share-
holder after investing in positive net present value projects then the share price goes up due to
increasing level of dividend payouts. According to Linter (1956) a firm will increase dividends
until its management is sure that this increase will be permanent. As Bhattacharya (1979)
enumerated that shareholders and managers have not the same level of information, therefore an
increase or decrease in dividends give a signal about price sensitivity to equity holders as well as
prospective investors. This signaling proposition was also supported by johm and Williams
(1985), and Miler and Rock (1985).The information-contents’ hypothesis was also favored by
Aharony and Dotan (1994) and Brickley (1983). While Benartzi et al. (1997) failed to do so.
Mirza and Afza (2010) listed that, over the last five centuries, the discussion on dividend policy
has generate a rich body of literature in which most scientists (Rasheed & Rehman, 2009)
endorsed the beneficial connection between dividends and organization’s value, but there are
other results (Baker and Powell, 1999) showing a adverse connection between the value of the
company and dividends, whereas there are other results. Gordon and Walter (1985) suggested
"Bird In Hand" theory, which states that investors favor present dividends to future earnings.
Bhattacharya (1980) favored Signaling-hypothesis. According to Signaling theory dividends
provides informations regarding a firm’s future growth dues to which the conflicts among
managers-shareholders reduces. Dividend has a leading role in providing information to equity
holders about value of a firm (Li & Zhao, 2008).Investors will invest in that firm which pays
high dividends due to which the market value of that firm will be high than the one which does
not pay any dividend (Ullah et, 2012). There is a positive impact of timely payment of dividend
on the reputation of an organization in the equity market but unluckily the dividend pay-outs in
46
Pakistan as compared to other emerging economies are very low. According to the annual report
of Karachi Stock Exchange (2008), the ratio of dividend paying organizations has been
decreased to forty percent in 2007 while it was forty six percent in 2005.
Developing market’s dividends-policy as stated by Al- Kuwari (2009) is dissimilar from that of
develop markets while a number of factors are involved in it. According to Imran (2011) stock
market volatility, asymmetric information and tax- paying procedures are the factors which make
dividend policy different in developed and emerging-markets. The other reason is the focus of
emerging markets on dividend payout ratio rather than dividend paid up level (Glen et al.
1995).But on the other hand Aivazian et al. (2003) found no differences in dividend’ policy
between emerging-markets and U.S firms. Ayub (2005) conducted a study which was intended
to capture the impact on corporate dividend payments in terms of company specific factors. The
study was carried on 180 firms far periods 1981-2002.The results indicated 23 percent of
incremental profits which were meant to transform into dividends while remaining amount was
meant for additional investment. The study also concluded that the company pays dividend after
certain levels of growths.
According to Murtaza et al. (2020) both dividend policy and performance of firm are positively
correlated .A study conducted by Kumar (2006) which exhibited a positive relationship among
dividend, investment opportunities and earning trends. Similarly, a study was carried out by Ben-
Naceur et al. (2006) at Tunisian Stock-Exchange for periods of 1996 to 2004 on 84 companies.
Results of the findings revealed that firms which are profitable and have more stable earnings are
in a position to generate large cash flows. The study further added that these firms have high
dividend payouts and these firms give high dividends when they are growing with a fast pace .It
was found by Emmery and Finnerty (1997) that firms which are paying high dividends will need
47
more funds which they will get from the debt providers. This statement was also supported by
Miller and Rock (1985) and they added that paying high dividend is a sign of future profitable
growth. Din and Javid (2012) argued that for informing investors about the promissory
investment opportunities the management gives a positive signal to investors through dividend
payments which results an increase in the value of a firm. They further added that high dividend
payments indicate that the firms will use more leverage for funding investments in order to make
their capital structure optimum. That’s why Rozeff (1982) enumerated that agency problem is
reduced between shareholders and managers through high dividend payouts and assured the
relationship among dividends, profitability and growth.
González, Guzmán, Pombo and Trujillo (2014) conducted a study on 458 Colombian
organization for the period 1996 to 2006.The study’ was intended exploring family
involvement’s effect on dividends policy with some level of level of disperse ownership in
closely held organizations. Their main argument was related to demand of minority shareholders
for demand which increases the likelihood of dividends payment and prevention of misuse of
assets by insiders. They found that in such agency conflicts the type of family involvements have
a great impact. Their findings are as follows.
First, no significant impacts were found regarding family involvement in managements in
explaining that dividends policy will be used as a means for decreasing the agency-conflicts. It
shows that family Chief Executives Officers neither worsen-nor-alleviate the agency problems
which exists among minority shareholder and majority shareholders.
Second, involvement of family in ownership increases the supervision on the chief Executive
Officers which decreases the chances of opportunistic behavior which try to create shared-
48
benefits of controls for the minority-shareholders. Moreover, such benefit increases other
agency-costs which is created by the concentration of ownership. Consistent with this idea they
found that family involvement in ownerships had an important and negative impact on the
dividends policy of an organization.
Third, they originate that dividend policy is negatively affected by family involvement in the
control through pyramidal structures. Albeit pyramids structures which are used as a controlling
enhance mechanisms might let family get private benefits of pecuniary and non-pecuniary
nature, contestability among minority shareholders and majority shareholders within pyramids
structures might decrease the agency problem, counter balancing the negative effect. The
shareholders (minority) in the closely help organizations are usually very sophisticate- investor
e.g. prosperous families, international investors, large private organizations, equity and pension
funds etc.
Finally, they bring into being that Family involvement in control by disproportionate family
representations in board-of-directors increase likelihood and amount of dividends payments
considerably. Such type of involvement could cause the adverse effect which is correlated with
pure-control improving mechanisms (Villallonga and Amit, 2009); hence, the minority
shareholders are trying to limit the Chief Executive Officer approach for using cash-flows which
are free in order to avoid misuse of funds or wealth expropriation.
Family involvement in control is happened when different kind of control enhancing mechanism
are used by families which enables the families to increase its voting power which exceeds its
cash flows right. These structure includes disproportionate board representation, pyramids,
multiple share classes, voting agreements and cross holdings etc. (Villalonga and Amit, 2009).
49
Many studies (Sacristán-Navarro and Gómez-Ansón, 2007) have noted that such mechanisms are
used by family organizations .Pyramid structure allows the shareholders to control an
organization through one or more intermediates organizations which they don’t own fully
because Pyramid structures are organized which helps to put into effect the controlling-power
which exceed cash-flows rights are common in family organizations (Almeida and Wolfanzon,
2006). It allows family to get pecuniary and non-pecuniary private benefit e.g. appointment of
family member to the managerial position, high compensation, empire building, related- party
transactions, recognition as successful entrepreneurs, social status and societal power (Bjuggren
and Palmberg, 2010). Many studies which are summarize by Morck, Yeung and Wolfenzon,
(2005) show the problems of governance within pyramid business groups. If the pyramid
increases the conflicts-among shareholders (majority and minority) as enumerated by Bebchuks,
Kraakma, and Triantus (2000), the shareholders (minority) need to demand for additional
dividend in order to decreases assets expropriations.
It is argued by Villallonga and Amit (2009) that pyramids may serve aims other than just to have
control enhancement, so therefore, its impact on the value is not always negative e,g. the
privately held intermediate organizations may be used as investments vehicle for the
sophisticate-investor like pensions fund, institutional investors, private equity funds. A
monitoring role is played by such investors regarding the founding family and who are enough
vigilant to prevent the tunneling (Almeida and Wolfenzon, 2006). The other shareholders ,who
have large number of shares, in pyramids may monitor the managers and moderate the influence
of the family and reduce the expropriation of wealth by them (Maury & Pajuste, 2005).The
pyramidal family structures are common in Spain where potential extraction of private benefits
can be counter balanced by presence of an additional significant shareholder(Sacristáns-Navarro,
50
et. al., 2011).The potential benefits related to family board representation include better
management supervision, less managerial myopia, long-term’ perspective or long investment-
horizon etc (Sciascias & Mazzola, 2008).The representation of family can also produce shared
advantages and may reduce the organizational conflict with the shareholders (minority) through
developing longs term relationship with capital providers, supplier , customers (Andersons,
Mansi, & Reeb. 2003).However, a pure control enhancing mechanism can be affected badly
through family disproportionate-representations e.g. when the family member’s percentage on
board exceeds the cash flow rights(James, 1999).
According to Afza and Mirza (2010), the level of dividend can also be determined through an
organization’s financial and liquidity position e.g. If an organization faces the problem of
liquidity then it may choose to select stock-dividend a replacement for money dividend
.According to free cash flow hypothesis of Jenson (1986), organizations first choose to utilize
money in productive projects and then reimburse dividends from left over. Due to inefficient use
of funds as enumerated by Berle and Mean (1932), there is a conflict among manager and owner
ship. The dividend and payments of interest reduce management's frees cashflows, which
reduces the use of organizational funds for less productive projects or uses them for managers '
prerequisite.
For a panel of Indian organizations from 1994 to 2000, Kumar (2006) carried out a research on
the relation between pay-out policy and corporate-governance. He described dividend behavior
differences using the investment possibilities, economic structures, ownership structure, earning
patterns and dividend history of the organization. He discovered that earnings trend and
investment possibilities are strongly linked to dividend and debt-to-equity ratio and also
discovered that dividend choices are strongly linked to corporate and manager ownership, but
51
there are negatives relationships between squared corporate ownerships and dividends’ payout
policy. The link between dividend payment and foreign ownership has not been established. A
research by Sulong and nor (2010) showing that dividends are an efficient corporate governance
mechanism to exercise their monitoring role to limit cost linked with free cashflows, and thus
increase a company's value .They examined four hundred and three organizations which were
listed at Bursa Malaysia for a period from 2002 to 2005.
An interesting result which was provided by Gugler (2003) through studying two hundred and
fourteen non financial Austrian organizations for a period 1991 to 1999,This research showed
that governments own organizations of Australia use dividend as inner management system to
decrease the organization expense and are highly unwilling to cut their dividends. On the other
side, family controlled organizations, on the basis of their highly proactive investment
opportunity, do not view dividends as a mitigating factor in organization’s costs and do not
hesitate to cut the dividend. The research too showed the dividends in Austria are not recognized
as a governance tool for decreasing the cost of the agency and influencing organizational
efficiency. But contradicting with the aforementioned studies, included in their regression
models, Aljifri and Mustafa (2007) include dividends payments as a device (mechanism) of
corporate governance for expense of agencies and performance of organizations .They studied
fifty one organizations in United Arab Emirates and employee a cross sectional regressions
techniques for getting output. The pay-out ratios which were consider to be an inner governance
mechanism showed that it had negatives impacts on performance of organizations. Pan (2006)
and Harford, Mansi, and Maxwell (2005) saw dividend as a mechanism which is adopted by the
weakly governed organizations for reducing the agency costs. However, Michael and Roberts
(2006) is of the view that a constant dividend pay-out is a good governance sign.
52
In the context of agency relations, Ullah, Fida and Khan (2012) have been performed a research
in which they have attempted to identify determinants of corporate dividend strategy .Analysis
was based on random sampling of seventy organizations which were listed at KSE-100 for the
period from 2003 to 2010.A step wise multiple regressions was used for investigate the
relationships-among dividend payouts an ownership variables. The empiric results indicated that
the managing stock and dividends payouts had a adverse relationship, and these are therefore the
alternative means to minimize the problem with the organization. The findings indicate that the
more the organizational dividends are distributed, which would lead to the less cash flows
available to managers with fewer possibilities to expropriate the assets of shareholders. The
greater their shareholding, the greater will be their organizational dividends .In addition,
organizational ownership had an eighteen percent explanator-power, while institutional-
ownership had a twenty-three percent explanatory potential.
The survey methodology was adopted by Dhanani (2005) along with data from secondary non-
financial and financial organizations. The study methods included the top 800 London Stock
Exchange-listed companies. The study was selected to assess empirically the relevancy and
importance in UK organizations of dividend theories and to assess how the size and sector
features of the business are influenced by these theories. The findings demonstrate that UK
executives support a relevance theory of dividend; organizations usually reject the remainder of
the investment payout policy .Khan (2006) investigated the ownership-structure of three hundred
and thirty large listed United Kingdom organizations. The results exhibited negative
relationships between ownership-concentration and dividends. She has further researched the
composition of ownership and describes the positive connection between ownership of insurance
companies and dividend policy. Gugler (2003) also looked into these relations between two
53
hundred fourteen Australian non-financial organizations through the OLS technique from 1991
to 1999. He noted that state-owned organizations execute a dividend smoothing, while families
do not. Moreover, state-owned organizations are highly hesitant in reducing dividends and
family-owned organizations are less hesitant .It was also noted that low-cost organizations,
regardless of who control the organization, optimally dispose the money available.
Many studies have tried to give rational explanations for why organizations are distributing the
dividends and why it is liked by investor. Alen and Michaly (2003) summarized the financial
determinant of the dividends payment for the cognitive agents which include signaling to lessen
the asymmetric informations, taxes, institutional investors, incomplete contracts (agency) or
transaction costs. In the signaling theory, managers use dividend as costly signal for their secret
and private information (Bhattacharya, 1979). The tax arguments propose that organizations
ought to reduce the dividends payment due to higher tax burdens on the individuals.
Organizations may pay-out the dividends in order to attract the institutional investors. Since the
legal restrictions are making dividends appealing to the institutional investor, then distributing
the dividends might be a suitable way to encourage such investments. According to the agency
theory, the continuous distributions of cash out of organizations, disciplines the manager an also
reduces the extent of agency cost (Easterbrook, 1984). Finally, the dividends might be an optimal
way for reducing the transactions cost on shareholder for running the fund. For example,
dividend might be important to the shareholder if it’s expensive for them to finance their
consumptions by selling out share.
According to Ramli (2010), the dividend clientele explanations suggest that some of the
investors are preferring dividend over capital gain. This conjecture is premised on the
observations that certain type of investors are prone to invest in the organizations which are
54
paying dividends. But alternatively, life cycle explanations suggest that distributing the
dividends shows the maturity level of an organization’s life. While these theories are only
describing the paying dividends and features of investors who are receiving it but they do not
give much insights into the reasons that why organizations are paying dividends and why
investors are inclines to them. The Dividend has been deemed to be the reward for shareholders
for their contributions in raising funds for an organization and for bearing the risks. In this sense,
the management of organizations formulates a dividend policy for dividing and distributing the
earnings among share-holders for their investment. The dividends policy of an organization has a
crucial impact on the value of an organization because it needs to sustain a state of equilibrium
between an organization’s growth policy and dividend payout policy. A small mistake could lead
to shareholder’s dissatisfaction as well as could shake the growth of an organization.
Ben-David (2010) added that different behavioral theories are considering managerial biases,
investor’s biases and market inefficiency (investor sentiments) as the key determinants of why
organizations are paying dividends. The catering theory of dividend proposes that organizations
are initiating dividends when investors start valuing the organizations which are paying
dividends more highly. The mental accounting , self-control and bird in hand theories are
motivating dividend payments by stating that investor favors dividend because of the behavioral
biases ,for example, narrow framing, regret avoidance and lack of understanding. There are also
some varied empirical evidences regarding the links between dividend payouts and managerial
biases. Some studies found that overconfident or optimistic managers are less prone towards
payment of dividend while others stated that managers would commit to pay the dividends based
on the private signal. Finally, there are two theories which are suggesting that dividends are the
results of social processes in population of organization and investor .One theory states that
55
among the populations of mature organizations the payment of dividend becomes a social norms.
The second suggests that albeit the dividends payment don’t convey any information about the
future, investors are putting pressures on organizations for the payment of dividends because it is
traditionally use as valuation tools. Albeit behavioral finance might explain’ many aspect of the
dividend-payments but the question of why organizations are paying dividends remain open. The
reviews of literatures favor a strong support for the life cycle theory because many authors favors
that mature organizations with stable cash-flows are trying to distribute dividends. However, this
theory doesn’t explain that why mature organizations are choosing to distribute the dividends
and not go for repurchasing its shares.
There are different theories regarding the dividends which are as follows.
The first one is clientele theory which suggests investors are prone towards dividends payments
due to different reasons because of institutional features, for example, tax differentials,
regulatory requirements or from behavioral choices. Shefrin and Thaler (1988) stated that
investors personnel lifecycle consideration determine the likening for dividend. Older investors
are favoring the dividend paying stocks because it substitutes for regular employment incomes.
The second theory which relates the dividend payouts to an organization is life cycle. Different
studies observed that organizations that pay dividends are trying to be less volatile and more
mature. According to Grullon and Swaminathan (2002), organizations that decreases (increases)
dividends experience a future increase (decline) in their profitability. According to them,
organizations that exhaust their investments opportunity increase the dividends and thus
dividends shows organization’s maturity rather than signaling the future profitability.
56
There are some other theories which are premised on investors psychological biases for
explaining that why investors are prone towards dividends.
The first is Bird in Hand theory, which suggests investors need wealth to consume and have a
cash dividend preference over capital gain. Lintner (1962) and Gordon (1959) first formally put
it forward, but Miler and Modigliani (1961) challenged it theoretically. The seminal paper by
Miler and Modigliani shows that dividends and capitals are alternatives to each other. Investors
can also make dividends from their home by selling the shares if they want to.
The second theory is self Control theory. According to Shefrin and Statman (1984) and Thaler
and Shefrin (1981) who suggested investors are inclined towards dividends for controlling their
selves. Without dividend, the investors might be tempted to sell the stocks’ and use the profits
from the stocks for consumptions and they may sell more stocks than they basically intended. It
explains that dividend is helping the investors to speed consumptions and avoids later regrets
upon over consumptions. Black (1990) supports the observation that investor are prone towards
dividend because they like the scheme of readily-available wealth which try to control them from
consumption out of their capitals.
Mental Accounting is the third theory related to the dividend. Shefrin and Statman, (1984) have
suggested they investor might favor dividend as they may obtain less value from the one large
gains then from a series of little gain (for example, low capital gains and dividends). The
premised its arguments on the prospects theory (Kahnema& Tverky. 1979). According to theory,
public are evaluating income in isolations of their overall wealth, and their utility functions are
concave in the vicinity of gain and are convex in the vicinity of loss. Therefore, when big gains
are divided in o many smalls gain provide lot happiness to the investor and boosts investor’s
57
demand for the dividends. To exhibit the process, assume an organization gains ten percents over
a year. Barberi and Thaler (2003) also provided an example of this idea. If investor has prospect
theory preference, then he/she will derive more utility from this gain if it is divided, for
examples, to a capital gain of seven percent and a dividend of three percent. The same will apply
for the losses. For a person with the prospect theory preference, a loss of ten percent might hurt
less if it is distributed into a three percent gain (dividend) and a thirteen percent loss.
Bouwman (2014) used the same proxy for the optimism and presented evidence consistent with
hypothesis that bigger dividends are distributed by executives who are hopeful about their future
income. She exposed that the markets react move heavily to dividends modifications announced
by optimistic executives when controlling for the income surprises and for the dividends change.
This evidence is in line with the hypotheses that their private signals about their organizations '
future profitability is overestimated by the optimistic director .But in one more study of the
managerial over-confident, Ben-Davids, Graham and Harvey (2013) found no evidence that
over-confident chief financial officer (CFOs) are less prone to pay the dividends. The study
found that managers who are highly confident about their forecast, also implements aggressive
corporate policies which include high leverage and high investment. Deshmukh et al. (2013)
controlled for the selection in announcement of dividends change and found that the markets’.
reaction to the dividends increases by the optimistic Chief Executive Officers are less positive as
compared to the response to the announcement by the less optimistic Chief Executive Officers.
Dividends pay-out by the biased managers could be selfregulating in a senses, if dividend is
enough high due to the optimisms regarding futures earning, than lower than predictable
realization of futures earning may forces prejudiced manager to decrease their dividend.
58
Green et al. (1993) probed the relationships between future earnings of investments, financing
decision and dividends. Their findings exhibited that dividend’s pay-outs level is not completely
decided after an organization’s financing an investment decisions are made. Dividend’ decisions
are gotten along-with financing and investment decision. Their result did not favor the findings
of Miler and Modigliani (1961). Partington, (1983) carried out a study where he found that
organization’s use of target pay-out ratio, organizations motive for paying the dividend and the
extents to which the divided are calculated, are independents of the investment’s policy.
Higgen(1981) exposed directs links among financing and growth need. Fast emerging
organizations needs externals funding .as the working capitals need generally go beyond
incremental cashflow form news sale. Higgens (1972) showed pay-out ratio are negatively co-
related to an organization’s requirements for financing its growth-opportunities. Colins et. al.
(1996), showed negatives but not insignificant relationships among dividends pay-out an
historical sales growth. DSouza (1999), nevertheless, showed positives but not significantly
relation in the case of growths and a negative but not significant relation in the case of market to
book value. Alwi (2009) investigated empirically the effect of dividend as an inner
organizational system which affects the performances of organization. Two hundred
organizations listed at the Indonesian Stocks exchanges overid the periods 2000 to 2006 were
examined by him. It was examined that in period of higher organizational costs which are, when
cash flows are increasing and there is no investment opportunity, dividends declaration are
welcomed by shareholders. Therefore, dividend acts as important governance mechanisms for
reducing agency costs between minority shareholders and majority shareholders within a low or
high concentrated ownership structures which increases the performance of an organization.
59
Kouki and Guizani(2009) carried out a study on Tunisian organization having concentrated
ownership argued that concentrate-ownerships firms distributes more-dividend and showed a
positives relationship among dividends and concentrate ownerships. Ramli (2010) empirically
revealed in studying the Malaysian listed organization at stock exchange where the ownership
structures are more concentrated and as the shares of large share-holder increases, the
organizations pay high dividends because block holders have greater control over the dividend
pay-out policy. According to the study conducted by La Porta et al.,(2000), control share-holders
can efficiently affects the decisions of organizations. Carvahal-da-Selva and Leel (2004) find out
when owner structures are concentrated, there shareholders bourn less risk from diversification.
Some other studies also exhibited negative relationships among dividends policy and
concentrated institutionals ownerships. Gurgler and (2003) investigated that companies with big
owner concentrations are trying to pay less dividend. The presences of huge concentrated
shareholders have an adverse effect on dividend payment and Maury and Pajuste (2002) claim,
that relation among dividends payouts & controlling blockholders is not positive .Renneboog and
Trojanowski (2007) revealed that the presence of strong blockholders or concentrations of large
shareholders weakens the relation between dividend payouts and earnings of organization.
Earnings of a company can be used for measuring firm’s performance (Ouma, 2012).Linter
(1956) argued that the significant determine of dividend-change is net earnings while De-Angelo
al. (1992) said that the present incomes is the serious determinant of dividends decisions. That is
why management is hesitant in decreasing divided payment except in periods in which earning is
reduced (Myers & Franks, 2008). Tradeoff theory along with pecking-order theory was
simultaneously checked by Fama, and French (2002).It was established that dividend payouts of
organizations (profitable) are high while dividend payouts are low when firms have more
60
investments. According to Arnott & Asness (2003) growth of future earnings are high of high
dividend payouts firms as compare to low dividend payouts firms. They concluded that it is
evident from the past that future earnings growth and dividend payout have a positive
relationship and vice versa.
According to Lang and Litzenberger (1989) the value of a firm can be determined through free
cash flow and signaling theory when there is growth opportunity and when there is not .The
asymmetric information between shareholders and management is premised on the Signaling
theory (Amihud and Murgia, 1997).According to DeAngelo et al. (2000) dividend payment gives
a signals to shareholders that the firm has growth opportunities which shows that the
organization has positive net present value projects. So, therefore a positive relationship is
expected between dividend and firm’s value. But according to Iturriaga and Crisóstomo (2010)
when an organization has growth opportunities and at the same time the firm is distributing
dividends as well, would harm the investment projects. Due to which how the payment of
dividends will increase the value of firm when there are investment opportunities. So, the
positives relationship between a firm’s value and dividend is uncertain when there is growth-
opportunity. Free-cash flow theory states that a firm can mitigates fund under the discretionary
control of managers through paying high dividend. Therefore, according to Iturriaga and
Crisóstomo (2010) when a firm distribute its dividends where there is no or few growth
opportunities then it can reduce the misuse of firm’s scarce resources. They further added that in
such cases the value of firm should to be increased. So, therefore a positive relationship is
expected between dividend and firm’s value when there are poorest growth opportunities.
61
H0: There exists no relationship between dividend pay-out and firm’s value conditioned to
growth opportunities?
H2: The relationship between a firm’s value and dividends is uncertain when there are growth
opportunities. But paying dividend has a positive impact on value of an organization when an
organization has few or no growth opportunity.
2.4 Family ownership and growth opportunities
Berle and Means (1932) discussed the connection between the composition of ownership and the
value of the company for the first time. Berle and Means (1932) stated that ―It has been assumed
that, if the individual is protected in the right both to use his property as he sees fit and to receive
the full fruits of its use, his desire for personal gain, for profits, can be relied upon as an effective
incentive to his efficient use of any industrial property he may possess. In the quasi-public
corporation, such an assumption no longer holds. As we have seen, it is no longer the individual
himself who uses his wealth. Those in control of that wealth and therefore in a position to secure
industrial efficiency and produce profits, are no longer, as owners, entitled to the bulk of such
profits. Those who control the destinies of the typical modern corporation own so insignificant a
fraction of the company’s stock that the returns from running the corporation profitably accrue to
them in only a minor degree. The stockholders, on the other hand, to whom the profits of the
corporation go, cannot be motivated by those profits to a more efficient use of the property, since
they have surrendered all dispositions of it to those in control of the enterprise‖ (see Abbas et al.,
2013).
Demsetz and Lehn (1985) challenged the argument of Berle and Mean. They enumerated that
there is no relationships between ownerships structures and accounting profits. From their results
no evidence was found between ownership and control separation. Hill and Snell (1989)
62
conducted a study which was meant to expose effect of ownerships structures on productivity of
an organization. The results revealed that a firm’s stance towards diversification and investment
strategy are influenced through ownership structures which results on productivity of firm. Their
study was different from the previous studies as they have taken productivity into account
instead of profitability. They said that productivity is less perplexed measure of efficiency as
compare to profitability.
Hasan and But (2009) attempted to expose the relationships among capital structure, corporate
governance and ownerships .They selected 58 organizations which were non finance and were
listed on KSE for the periods 2002-2005.The results revealed that capital structure can be
determined in terms of board size of director, ownership structure and managerial holdings.
Another research carried out on organizations which were in non-financial and listed on the KSE
from 2008-2010 periods by Shah et al. (2012).In this research ownerships composition was
presented in terms of Concentrated Ownerships and Managerial ownerships. Tobin’s Q was use
for performance of organization. The results showed a significant negative relationships between
firm performance and Managerial Ownership, while an insignificant relation was established
between organizational performances and Ownerships Concentration. It also added that in
Pakistani context the agency problem raises due to high managerial shareholdings. Due to which
the performance of organization is affected.
Abbas et al. (2013) explored relationships between ownerships structure and organizational value
in terms large shareholdings. They measured the firm performance in term off ROE and ROA
.The outcomes indicated significant-positive relationships between both value of organization
and large shareholdings that shows that organizational performances are influenced through large
shareholders .According to Kuzntsov and Muravyev (2001), concentrated-ownership becomes a
63
cost when large-shareholders are in a position to influence the decisions which result in
maximization of their own benefits and deprive minority shareholders of their deserved income.
Decrease in growth opportunities and low market liquidity due to higher costs of capital are
some bad consequences of concentrated ownership (Fama and Jensen, 1983).Ownership
concentration is high in countries where companies are publically traded (Facio & Lang
,2002).The study conducted by Cheema et al.(2003) in Pakistan and Yeh (2003) in Taiwan
founded firm’s shares are mostly in the hand of largest shareholders.
Based on Berle and Mean’s claim, Hassen (2008) suggested that if corporate officers are
involved in promoting their self interest at expense of equity holders then there is a remedy to it.
He suggested that shareholders encouragement for active participation is the key to its remedy.
This active participation would rise in the form of nominating and electing the directors through
indulgence in the selection process of officers who runs the reign of the company. But on the
other hand Jensen and Mecklling (1976) argued that these agencies problem could be mitigate
through making managers shareholder as well. Through this the interests of both manager and
shareholder will align. They further added that separation of control and ownership is not a good
choice because of monitoring cost which reduces the value of a firm and may cause managers to
involve in activities which are detrimental to firm’s performance. However, maintain separation
between ownership and control are in greatest interests of organization’s value as this brings
efficiency regarding decision making and risk bearing function. Due to this dispersed ownership
is better because the gains from efficiency are greater than agency costs Fama & Jensen
1983).According to Feinberg (1975) organizations where control and ownership are combined in
that case there are chances that they may made an exchange of profits and other benefits where
64
they prefer other benefits over profits for example on jobs no financial consumptions (Demsetez,
1983) and preferring current consumptions over future consumptions(Fama and Jensen, 1985).
According to Javid and Iqbal (2008) corporate assets can be used by managers for their own
benefits in place of maximize the assets of shareholder when ownership is too diffused. So,
therefore the remedy of this problem lies in making managers shareholders as well (Jensen and
Meckling, 1976). Due to this, its moral hazard problem will be resolved and interest of both
managers and shareholders will be aligned (Himelberg et., al. 1999).Stalz (1988) argued that
higher managers ownerships can also decrease the value of a firm. Stulz findings were also
supported by Hermallin and Weisbch (1991) and Morcks et al. (1988) by arguingthey low
management ownership leads to a high value of companies, and a decrease in company value is
caused when management ownership increases.
But the Stewardship theory states that family firms which are closely held and outside
representation or influence is also less might exhibit focus on non financial objectives and
organizational serving culture. Family firms for ensuring its firm control over firm may make
hard control and ownership stakes for outside members (Nyman & Silbert- son, 1978).Similarly
shares will also be limited to those kinship members whose interests are similar with the family
agendas and they are not only interested in the financial performance (Howorth
&Westhead,2006).The autonomy of controlling shareholders and private dealings of shares are
the detrimental features of the family firms (La Porta et al., 1999) which had bad effect on the
performances of organization which may ultimately retard the performance of family firms.
Agency problem is created due to honest incompetence because of restricting the pool of
shareholders ( Chrisman, Chua, & Litz, 2004).Nevertheless, survival and development of the
business are key factors which compels the family firms to offer ordinary shares to outsiders
65
e.g. informal investors and financial institution but these share are not offered from the
controlling family-group who owns the businesses (Meshra and McConaghy, 1999).
According to Westhead and Howorth (2006), the directions of firm in multigenerational family
firms are shaped by family owners. It is because of shifting the business’s ownership to the
subsequently kinship generations that is the prime objective of family owners (Chrisman, Chu,
and Sharma. 2003).They further added that the same organizational serving-culture and focus on
no financial-objectives might be shown by the multi generation family firms which may have
less entrepreneurial skills as compared to first generation due to which firm performance will be
badly affected .According to Hendry (2002),in family firms it’s very difficult for outsiders to
have an access to the key managerial positions for example to the post of Chief Executive
Officer or membership in management or board. Positions in management and board size may
only be increased if the family firms want to provide employment-opportunities to members of
dominant-kinship groups who owns majorities share. The family members may lack the quality
and experience of managerial skills which are required by a growing, competitive and complex
firm (Casson, 1982).He further added that these obstacles may be fulfilled by investing-in
training in order to widen the competencies end skills of the family-members. Similarly, it’s also
suitable for family organizations which lack the required managerial skills to hire non-family
professional managers for securing organizational development. Outside professionals may
enhance firm performance by proving expert opinions and specialist skills which the family firm
may not posses.
According to Dyer (2006), when owners and directors are siblings, the costs of the organization
is decreased in family relationships. For instance, owners that might have their siblings, children,
sisters and any other close relatives functioning as the agents need not bear the costs of
66
monitoring their agents while owners of non-family companies have to incur costs to monitor
their agents .Similarly ,in family-owned organizations, the top management team is more
cohesive comparable with no family organization while families organizations has strong
confidence, common objectives and shared values(Ensley & Pearson,2005 ).McConaughy (2000)
conducted a study regarding CEOs family-owned organizations and no family organizations,
and compared their compensation. He concluded that family owned firms have to pay high to
non family CEOs in order to get what families CEOs would do. Gomez- Mejia, Makri and
Larraza-Kintana (2003) also confirmed the same results where professional CEOs were paid
significantly high as compared to family CEOs. Families are controlling their related mangers
through normative-controls (shared values) which will in turn cause fewer-costs than outside
managers who are controlled through high financial incentives in order to get comparable
performance (Dyer, 2006).It is cleared from the aforementioned studies that in family controlled
firms the agency costs are reduced which enhance the performances of an organization.
Albeit there are perceptions that family firms have reduced organizational cost because
alignment of goals of manager and owners but still there are other perspectives which highlight
those family firms are breeding grounds for conflicts (Kaye, 1991; Lansberg, 1999).There may
be competing values and goals in family owned firms which may arise from family dynamics
and complex conflicts due to families psycho-social history (Dyer&Hilburt- Davis, 2003).For
example, the differences in views and perspectives regarding roles and responsibilities, risk and
compensation and similarly distribution of ownership within a family compel members of the
family to compete with one another and may make the organization a battle ground. When
ownership of family owned firms is dispersed then it creates a wedge; connecting the interest of
controlling family-members who leads a family and other family-members (Schulzi,Lubatkiin &
67
Deno 2003).All the member of families are not equally contributing to performance of the firms.
Some are contributing a lot while others are free riders and some are fighting for their own
interest. Due to this fact family firms may have significant agency costs.
Another factor which may be accounts for high agency cost is Altruism which makes
accountability and monitoring of family members difficult who works in the family owned
organizations. According to Schulze, Dino, Lubatkin and Buchholtz (2001), such altruism leads a
firm to poor performance. They studied 1376 firms and noted down that firms which have a
formal governance system against altruism perform better than those firms which are without
such formal system. In another study Gomez- Mejia et al. (2001) studied Spanish family
organizations and found that Spanish firms shows hesitation to fire out family CEO as compared
to non family CEO. But when family CEOs were replaced by outside CEOs the firms performed
better that those firms which had family owned CEOs. It was due to the reason that family
owners due to altruism were unable to discipline and monitor family owned CEOs .It causes
family firms to wait too long to make a change in the leadership until the firm performance fall
badly. As compared to family owned firms, a nonfamily firm feels no hesitation in monitoring of
CEOs and replaces them whenever the performance of the firm deemed unacceptable.
Resource based view also criticize the family firms performance (Sirmon & Hitt, 2003).It is
suggested by resources base viewed that firm’s asset are non-substitutable, inimitable, rare and
valuable which can help in the creation of competitive advantages (Barney, 1991).According to
Dyer (2006), the question arises that are families able to bring unique assets to the firms with
these assets which will help in the creation of competitive advantage? He further described three
types of assets or capitals which are linked with family firm’s performance. The first one is
human capital. The second one is social capital and the last one is physical/financial capital.
68
There are some arguments which supports that family can bring competitive advantage with
these capitals while other arguments opposes and are of the observation that families
organizations are unable to bring competitive advantage with these assets. Due the the small
team of skill full employees the families firms might not be talented for handling process
efficiently and effectively until and unless recruits professionals from outside the family. But
hiring outsiders for performing the key operations of the family business would be very difficult
for family firms because they are reluctant to the integration of outside managers (
Dyer,1989).But if the nepotism prevails in the family organization the family firms may place
family members on the key positions which will affect the performance of the firm badly. Thus
family relations would stop family members to hire best professionals managers in order to run
the organization effectively which shows a competitive disadvantage on the part of human
capital in family firms.
Kim, Kim and Lee (2008) conducted a study regarding allocation of slack resources due to which
principal –principal conflict may arise because of difference in preferences. They stated that in
the presences of slack resources in the organization the agency theory is most pronounced which
can be used for different kind of purports without affecting survival of the firm. Agency theorists
argued that it’s a source of agency problem which inhibits risk taking by the organization, breeds
inefficiencies and hurts performance of the organization (Jensen, 1989).On the other side
organizational slacks may inhibit managers of the organization from risky strategic initiatives by
promoting their own private agendas at the cost of organization (Cyert and March 1963). In fact
organizational resources provides organizations with a safety net and it can be used to explore
new opportunities and new solutions which leads to greater risk taking and investments in
Research and Developments(Greve,2003).
69
The study conducted by Kim, Kim and Lee (2008) was intended to examine the moderating
impact of different types of owner on the relationship between Research and Development
investments and financial slacks. The scope and boundaries of agency theory was extended by
them through including the interest of different principals. Because different shareholders have
different interests regarding Research and Development investments (Kochhar and David
1996).Therefore, organizational slacks affects Research and Development investments
differently because of its dependence on the type of investor. For example outside investors may
have different interests than family owned investors. The conflict of interest because of
principal-principal preference may result in different level of Research and Development
investments. According to Dharwadkar et al. (2000),the organizations in the emerging economies
are more inclined to principal-principal goals incongruence due to this conflict of interest
difference arise in the performance of organizations. Therefore the same also applies for the
allocation of slack resources due to the differences in views.
Choia, Zahrab, Yoshikawac and Han (2015) conducted a study for examining that whether the
impact of family’s ownership on Research and Development investments varies depending on
business group membership and growth opportunities. They used data from Korean companies
for ten years from 1998 -2007.It revealed that, there is a negatives relations between Research d
Development investments and family ownership but this relationship became positive when
growth opportunities were present. However, the moderating effect was different between family
business groups and independent family organizations. The positive influence that growth
opportunity had on promoting Research and Development investment was diminished for
affiliate of family business group. The findings implied that family owner invests more in
70
Research and &Developments when family control goals are threatened by loss of growth
potential.
Julio-de -Castro, Berrone, Cruzand Luis (2017) compared the performances of non family and
family and family organizations along with its market-value. They enumerated that family-
owned organizations outperforms the nonfamily owned organizations. Their study provide an
interesting result that family ownership positively impact organizational value but when
concentrations of family-ownership raises above a specific levels then decrease in organizational
value get started. This is because of expropriation of minority shareholders. Moreover, it was
also observed that albeit higher concentration of ownership negatively impacts organizations, but
still performances of family companies was superior to the nonfamily organizations. Maury and
Pajuste (2005) carried out a study on Western Europe non financial organizations which include
a sample of 1672 organizations in order to find out that whether controlled firms and families
own organizations outperform the no-families controlling shareholders. It revealed the families
organizations have high performances as compare to other type of owners controlled
organizations. Value of Tobin’s show that when organizations are under family-control then the
values of firms raised by about seven percent in comparison to non-family organizations. When
Return on Assets was looked then family owned organizations has about sixteen percent higher-
profitability as compatible to the non-family organizations.
In order to develop the optimal concentration of families, Feng-Li and Tsangyo (2010)
conducted a study. Among eighteen Taiwan sectors, they researched 242 organizations. Between
1997 and 2006, these organizations were listed. To achieve the optimal levels of family
concentrations where the company's value would be greatest, a threshold regression test was
conducted .The firm-value as determined through Tobin s Q. Three levels of ownership
71
concentration were determined for the relationships value firm. The level was .07 percent, 31.7
percent and 33.6 percent. The findings stated that the value of Tobin Q reduces by 257.7 percent
at the stage when ownership concentrations are below 0.07 percent.
A study carried out by Murtaza et al. (2020) focuses on determining the role of concentration of
ownership of Pakistani firms in the chemical sector. The finding shows that both concentration
of ownerships and firms value are positively correlated .Shah, Xiao and Quresh (2019) are of
the view that the structure of ownership is an important element and plays an important role in
corporate growth and performance. Hans and Nuaghton (2001) carried out a research on Korean
organization through classifying family-ownership into three categories which were pure-family
ownerships, owner- control disparity an family-ownerships. Data of 3054 organizations were
used which were ranging from the year 2000 to 2005. They discovered that family (pure) and
family ownership improved the company's efficiency and values, while owner control disparities
did not have insignificant effects on the organizational value and efficiency. Gursoy and
Aydogan (2002) investigated Turkish organizations where family’s organizations are highly
concentrated. The results depicted that higher family’s ownership concentration is associated
with higher P/E ratio; but accounting performance is lower. The family ownership in comparison
to group owned organizations had lower P/E ratio and therefore risk a lower performance. Where
is the government-owned organizations had high risks an high market’ performances, but had
low accounting-income.
It was stated by Kohli (2018) that executive remunerations are affected by the type of
ownerships which has an indirect impact over the value of an organization (Shingade and
Rastogi,2019). Similarly the a relationship between top management compensation and
ownership structure was studied by Saravanan et.al. (2017).For examining association between
72
founding family ownerships and organizational performance, Anderson and Reeb (2003)
analyzed the big publicly-traded United States organizations. It confirmed that family
organizations performed all most the same like non family organizations. They incorporated both
Tobin-Q, ROA as performances measure. Results of Returns-on-Asset’s regressions showed
family-organizations were significantly most profitable as compare to t nonfamily organizations.
Overall, the results were contrary to the assumptions that shareholders (minority) are adversely
impacted by the ownership of the founding families. The results have also shown that family
ownerships are efficient and effective type of an organization.
Zulfiqar et al.(2019) analyzed the relationship between structure of ownership and financial
performance of firms .Three variables were incorporated by the study which were the type of
firms type of family firms and ownership concentration .It was depicted by the results that non
family firms performed better than family organizations .According to Hasan and Butt (2009),
conflicts among shareholders (minority and controlling) are the heart of literature of corporate
governances. Corporate governance works as a shield in protecting the minority-shareholders
from expropriations by manager or the rulings shareholder (Javid & Iqbal,2010). Corporate
governance, according to Javed and Iqball (2010), deals the relationships among controlling
shareholders, boards of director, management, minority shareholder and others type of stake-
holders. The East-Asian economic downfall attracted grave consideration to the significance of
corporate governance in the emerging countries. Code of Corporate Governance which was
issued by SECP on the year 2002 for strengthening the regulatory-mechanism and also it’s
enforcements. The introduction of this code was a most important work in reforms of corporate
governance in Pakistan. It takes into account many recommendations which are similar with
world top practice. Main fields of enforcement concern board-of-director reforms in order to
73
hold them to all shareholders responsible. The second main area of enforcement include the
better disclosure which include improved and quality internal and external audits for the
organizations which are listed at the Pakistan stocks exchange.
Cheema, Bari and Siddique (2003) examined the concentrated control in Pakistan and added that
it is the defining feature of corporate governance in Pakistan which has some repercussions on
the development of capital market and corporate sector .The first consequence is the opaquenes
in usage of public-money, which can cause excessive privates benefits seeking. The second
consequence of concentrated control is about the trade of shares. Family controllers are very
restrictive regarding offering the company shares because of increasing cost of takeover and
protection of family control in order to not lose the company control. The third consequence is
about the declaration of dividends. Family controllers are reluctant to declare dividend and
prefers to reallocates those earnings in order to obtain personnel benefit. The fourth consequence
of concentrated control is that family based controllers try to oppose reforms because it dilutes
their control and increase disclosure requirements which affect ownership structure.
Ni,Huang ,Cheng and Huang (2020) explored the impact of role of relatives hiring by the owners
and its effects upon the value of an organization. The results depicted that there must be a
balance between board and structure of ownerships for improving the the value of an
organization. Ownership structure is one of the different mechanisms through which a firm is
affected (Jensen, 2000).In literature ownership structure has studied from three dimensions
which include ownerships concentrations (Demsitz and Lehm, 1985) ,owners identity (Pederson
& Thomson, 1997) and insider ownership (McConnell and Servaes, 1990).According to Francis
et al. (2005) and Miller et al.( 2007) when companies where concentrated ownership is high,
agency-theory suggested that there resources of companies are used by the managers f personnel
74
benefits at cost of minority shareholder. Therefore, controlling shareholder who has majority of
shares will use their voting power for getting greater incentives for themselves (Arosa et al.2010)
and in case of family owned firms this situation can cause high exacerbation because these
benefits then remain with controlling family where as these benefits are distributed among many
shareholders (Villalonga and Amit, 2006).So in this way family controlling-shareholder can
simply approve their benefit and do exploitation o minority shareholders by considering the
enterprise as private band or family employment service and also by assigning family members
the top management positions or by approving large dividend payouts (Shlifer & Vishny, 1997;
Demsetz, 1983).In such cases agency cost rise in the form of dividend and other extra perks or
family management team’s entrenchment (Arosa et al.2010 ).Due to this entrenchment
controlling family shareholders start expropriation which harm the rights of minority
shareholders and firm’s profitability (Francis et al., 2005).
La-Porte et al. (1999) argued that conflicts among shareholders (minority and majority) are
because of concentration of ownership. When companies are effectively controlled by block
holders then they start framing policies which result in exploitation of shareholders (minority)
(Shlefer and Vishney, 1997). Such blockholders gain remuneration at the expenses of minority
shareholder ( Claessens et al., 1999).So, from this we come to know that when there is least
concentrated ownership it results in positive relationship between organization’s value and
concentrated ownership due to monitoring hypothesis( Arosa et al.,2010 ).She further added that
the relationship between organizational performance and concentrated ownership become
negative when there is concentrated ownership due to expropriation hypothesis.
There is amalgamation of results regarding the impact of concentrated ownership on
organization’s value. Some studies (King and Santor, 2007) support a positive relationships
75
between concentrated ownerships and organization value while others (Shliefer and Vishny,
1986) reveals a negative relations between ownerships concentration and firm’s performance.
According to King and Santor (2007) increased ownership by blockholders or insiders causes an
increase in organizational performance due to three reasons. First, when insiders have large
shares in the company then it leads to better performance because through it the monetary
incentives of shareholders and managers are aligned. Due to which ,according to Jensen and
Mecklling, 1976, Principal-agent conflict vanishes because mangers are now also majority
shareholders .Second, when controlling shareholders ,according to Shlefer and Vishney (1986),
are not indulge in the affairs of management, they are still capable of controlling and monitoring
the managers which again leads to better firm performance. The third reason of positive
relationship between organization’s performance and concentrated-ownership is that family
owned companies have a foresight and long term intensions instead of short-term intensions
regarding the investments due to which they may make good investment decisions (James,
1999).
On the other hand Ownership concentration can have a negative impact on the value of a firm.
Block holders may engage in operations that boost their own profits which is detrimental to the
value of firm like consumption of perquisites (Morck et al. 2005).For example family owned
controlling shareholders may compensate themselves excessively or they may appoint their
family member on top management position instead of an external better qualified person(king
and senator, 2007).According to Morck et al. (2005) family owned controlling shareholders may
forego profitable mergers and expansions strategies due to excessive risk aversion. Therefore, an
effective board in family firms is required which potentially includes both independent directors
and family directors (Anderson et al., 2003). He further added that Excessive family
76
representation on the board relative to Independent directors increases the likelihood of the
family expropriating wealth. Too little family-representation relative to independent-directors
potentially reduces managerial monitoring and hinders the board's effectiveness. Thus, family
board representation moderated by the influence of Independent-directors can provide benefits to
the firm. Family board representation that goes unchecked, however, increases conflicts between
family shareholders and outside shareholders over the distribution of firm wealth (Anderson et
al., 2003). According to Abbas et al. (2013) firm performance is significantly and positively
affected by large shareholders but the direction of this relationship reverses when block holding
exceeds fifty percents. The rationale behind this may be extractions of private benefits by block
holders for themselves. Therefore, we theorize a curvilinear relation (an inverted U shape)
between family ownership and firm’s value. At low levels of family concentration, we anticipate
a positive effect on firm performance. As family concentration continues to increase, we expect
to observe a negative effect on firm performance. According to Iturriaga and Crisóstomo (2010),
the expropriation of minority shareholders by dominant shareholders is more. So, we can expect
that chances of minority shareholders expropriation by family firms (Javid and Iqbal, 2008)
would be more in case of few or no growth opportunities because of free cash flows.
H0: There exists no relationship between family ownership concentration and firm’s value?
H3: There is a non-linear relationship between a firm’s value and family ownership
concentration. This relationship is positive initially and becomes negative when there is few or
no growth opportunity.
77
CHAPTER # 3
RESEARCH METHODOLOGY
3.1 Chapter Introduction
This chapter is about the methodology of the study which shows the criteria of sample selection
from a given population. Data sources along with nature of firms are also mentioned. It includes
the time period as well for which the data has been collected. Furthermore, the Empirical Model
is given which shows the dependent, independent and control variables of the study. How these
variables are Operational zed, also comes under the umbrella of this chapter. This chapter also
exhibits the moderating role of growth opportunity e.g. how growth opportunity moderate the
relationships between leverage, dividend Payout, Family Ownership and Firm’s Value. It also
shows that why growth opportunity has been measured through a different way. Similarly, the
data nature of this study is panel so; a brief insight about panel data has also been explained. It
also shows the assumptions of Pooled OLS Regression and why pooled OLS regression has not
used for the interpretation of results. The Hausman Test has also run in order to show that
whether to use Random Effect Model or Fixed Effect Model .Additionally, Conceptual
Framework of the study has also been provided which shows that how growth opportunity works
as a moderator and moderates the relationship between explanatory variables and dependent
variable.
3.2 Empirical Model
The empirical model of this study is as follows.
SMBA=α+β1 (leverage)+β2(dividend payout)+β3(family ownership concentration)+β4(family
ownership concentration square)+β5(leverage) *Growth opportunities+β6(dividend
78
payout)*Growth opportunities +β7(family ownership concentration)*Growth
opportunities+β8(family ownership concentration sqaure)*Growth opportunities +β9(Control
Variables)+μ
3.3 Panel Regression Model
SMBAit= β0+β1(LEVE) it+ β2 (DPR) it + β3 (FOC) it+ β4 (FOCS) ²
it +β5(LEVE) it*GOit+ β6 (DPR)
it*GOit+ β7(FOC) it*GOit+ β8(FOCS) ²
it*GOit+β9 (OCVS)it+ ηi + ηt+ εit
3.3.1 Model Specification
According to Allen (1997), Model specification refers to the determinations of which
independent variables need be included in the model or excluded from the regression equation.
The specification of regression models need to be premised primarily on theoretical
considerations instead of empirical or methodological ones. In the current study a multiple
regression model has been applied that show causal relationships between dependent variable
and independent variables. Specifications of the aforementioned model are as follows.
β0 = Intercept term
β = coefficient of independent variable
SMBA= Sectorial market to book asset ratio
LEVE = Leverage
DPR = Dividend Pay-out Ratio
FOC = Family Ownership Concentration
(FOC) ² =Square of Family Ownership Concentration
OCVS = Other Control Variables (Firm size, Profitability)
ηᵢ = Firms fixed -effect
79
ηt =Time effect
ε = Error term
iis used for firm and t is used for time.
Panel data methodology has been used through which we can control unobservable heterogeneity
and fixed effects for firm’s characteristics that remain constant over period of time(Arellano
2003) which is denoted by fixed effect term, ηᵢ,. This fixed effect term is unobservable and
becomes the part of random component in the estimated model. The current study also controls
the effects of macroeconomics variables through the time effect. The random error term is for
controlling both the errors in the measurement of the variables and also the omissions of various
relevant explanatory variables.
Leverage, family ownership or dividends could be affected through the value of an organization
so for that purpose it becomes endogenous variables as enumerated by Demsetz and Villalonga
(2001).So in order to control for the potential endogeneity, in this study Generalized Method of
Moment (GMM) has been applied. The Generalized Method of Moments gives an efficient
estimation through controlling for both the endogeneity and unobservable heterogeneity
(Blundell and Bond 1998). The validity of the Generalized Method of Moments (GMM)
estimation depends on two conditions basically: one is the validity of variables which are used as
instruments, and the second is the lack of second order serial correlations among the residuals.
Therefore, this study incorporates the Sargan test which is a statistical test carried out for the
testing of over-identifying restrictions in the statistical model and the Arellano–Bond test for the
second-order Correlations. Furthermore, as noted by Barajas, Chami and Yousefi (2013), a rule
of thumb for avoiding the over-identification of the instruments is that, the number of
instruments be less than or equal to number of the groups in the regression.
80
3.4 Research Design
3.4.1 Data and Sample Selection
The population size of the current study comprise of non financial firms which are listed at
Pakistan Stock Exchange. The total numbers of non-financial firms listed at Pakistan Stock
Exchange are 378 as per State Bank of Pakistan financial statement analysis report 2016.
Financial firms and firms with missing information during the study period are not the part of the
study (Gugler, 2001).The reason of not including financial firms like banks, insurance firms,
leasing companies etc is their different accounting standards (Khan, Kaleem and Nazir,2012).
Only those organizations are the part of final sample which fulfills the following criterion.
Firms must be remained in business for the whole study period.
Those firms that remained listed from 2005 to 2016.
Should not have merged due to any reason because then it will not capture the real
purpose of the study of the firms under consideration.
The firms that have leverage in their capital structure in the study period.
Family firms (defined in the introduction part) are included because there are chances of
expropriation of minority shareholders.
Those firms which market capitalization are above the average on Pakistan Stock
Exchange.
On the basis of the above mentioned criteria, this study employs annual panel data of a sample of
93 firms which are listed at Pakistan stock exchange during the year 2016.The numbers of firms
without growth opportunity are 65 while firms with growth opportunity are 28.The sample
consists of twelve sectors which include Textile ,Food ,Chemical and Pharmaceutical, Mineral
Products, Non Metallic Product, Motor Vehicle and Autoparts, Fuel & Energy, Information
81
Communication & Transports, Coal & Refined Petroleum Product, Papers& Paperboard Product,
Electricity Machinery &Apparatus, and service Sectors. The details of selected firms are
exhibited at Annexure-I. Majority of the firms are from the Textile sector because the Textile
sector is capital intensive and builds up cash. Secondly, it lay in the cyclical-industries so they
need to maintain the extra cash in their reserves to ride-up in the cyclical downturns. Through
keeping extra cash in reserves makes this study more appealing for studying the conflict of
interest between majority shareholders (family) and minority shareholders. Data sources include
the official website of Pakistan stock exchange, annual reports from company’s websites and
financial statements analysis reports of State Bank of Pakistan.
Contribution of each Sector towards the selected sample is as under.
Table 3.1: Sectors Contribution
Sector Name Percentage
Textile 22%
Food Sector 15%
Chemicals, Chemical Products & Pharmaceuticals 11%
Manufacturing 3%
Non Metallic Minerals Products 13%
Motor-Vehicles, Trailer&Autoparts 9%
Fuel & Energy 11%
Information, Communication & Transport 4%
Coal & Refined Petroleum Products 6%
Paper, Paperboard & Products 4%
Electrical Machinery & Apparatus 5%
Services Activities 7%
Total 100%
82
3.4.2 Dependent Variable
The main reason of this paper is measuring and identifying growth opportunity by giving a close
relationships between growth opportunity and value of firm .In past studies different kind of
measures have been used for measuring growth opportunity e.g. Price to earnings ratio, increase
in total sales, profitability and Market to Book Asset Ratios (MBA) is worth mentioning (The
details are given in table 3.1). According to Adam and Goyal (2008), investment opportunities
can be best captured through Market to Book Asset ratio due to its highest information content.
So therefore, we have taken into account a version of MBA ratio which is Sectorial Market to
Book Asset (SMBA).The reason of Sectorial Market to Book Asset is that past studies (King and
Santor, 2008) have underlined some Sectorial issues which have a significant impact on growth
opportunities .For example, different sectors have different risks and some sectors are dealing in
tangible assets while others in non-tangibles and some other factors too. So therefore, we use
Sector Adjusted Market to Book Asset Ratio for measuring growth opportunities which is the
main variable of our study. We have calculated Sectorial Adjusted Markets to Book Asset
(SMBA) by first calculating markets to book asset ratio which is equal tothe ratio of the market
value of a firm's assets to the book value of assets. Then calculate the average or mean value of
each sector. After calculating the mean value, then subtracted that mean value from the already
calculated market to book asset ratio for each specific company with specific year. So, on the
basis of this criteria, firms which have positive value are considered as growth opportunity firms
while firms which have negative value are considered as firms without growth opportunities.
83
The following table shows the measurement of Growth Opportunity along with year and name of
Researchers e.g. what kind of proxies were used by the previous studies for the measurement of
Growth Opportunity.
Table 3.2: Measurement of Growth Opportunity in Context of Past Studies
S.No Researchers Year Measurement
1 Titman and Wessels 1988 Ratio of R&D expenses by sale revenues
2 Collins and Kothari 1989 Ratio of the MV of equity to the BV of equity
3 Chung and Charoenwong 1991 The earning to prices ratio (EPR)
4 Wald 1999 Sales Growth
5 Goyal, Lehn, and Racic 2001 The ratio of R&D expenditure to the BV of assets at
yearends
6 Bhaduri 2002 The ratio of capital expenditure to the BV of asset at
year’s end
7 Adam and Goyal 2004 The ratio of capital expenditure over the net BV of
plant property and equipment (PPE)
8 Chen 2004 Growth in real assets
9 Mahakud 2006 The ratio of the MV of an organization's assets to the
BV of its assets (MBA)*
10 Norvaisiene and Stankeviciene 2007 Growth in total assets
11 Farooq, Ahmed, Saleem 2015 Tobin’s Q*(defined as the ratio of the MV of assets
over the replacements value of asset)
*Perfect and Wiles (1994) show that Tobin’s q and the MBA ratio are highly correlated (the correlation coefficient
is about 0.96).
84
3.4.3 Independent Variables
The explanatory or independent variables are leverage, dividend pay-out ratio and ownerships
structure. Debt is calculated in term of financial leverage ratio. There are two methods for
calculating leverage ratio. One method of calculating leverage ratio is dividing BV of debtsby
total asset. The second method of calculating leverage ratio is dividing total debt over equity
which is also called debt to equity ratio. In this paper debt to equity ratio has been used for
calculating leverage ratio. For high growth firms there is negative relationships between leverage
and corporate values while for low growth firm’s leverage and corporate value is positively
correlated (McConnell & Servaes, 1995). A number of studies have indicated positive relations
between capital structures and organization’s value (Roden & Lewellen, 1995; Brger and Patti,
2006) while other have found a negative relation between capital structure and firm performance
(Chakraborty, 2010; Huang and Song, 2006).
Dividend pay-out ratio is calculated through total dividends over shareholder’s equity. The value
of a firm can be determined through free cash flow and signaling theory when there is growth
opportunity and when there is not (Lang and Litzenberger, 1989). According to DeAngelo et al.
(2000) dividend payment gives a signals to shareholders that the firm has growth opportunities
which shows that the firm has positive net present value projects. So therefore, a positive
relationship is expected between dividends and firm’s value. But according to Iturriaga and
Crisóstomo (2010) the relationship between paying dividend and firm’s value is uncertain in case
of growth opportunities. They further added that the relationship between paying dividend and
firm’s value is positive when there are no or few growth opportunities.
This study follows Blondel, Rowell and Heyden (2002) for determining whether an organization
is family or non family owned. A family firm according to the methodology used by the Blondel
85
et al. (2002) is an organization where one or several families or individuals are the ultimate
owners and represents the largest block of shares. The block holder is defined as any director,
individual, family, foreign investor, and financial institution or associated company which has 10
percent or more shareholding. The idea behind the 10 percent of shares is that the passage of
special resolutions under the Pakistan Companies ordinance of 1984, as a result of which
alterations in an organization’s activities can be made only through the 75 percent majority vote
of shareholders in the favor of such resolution. Only the 10 percent class of shareholders has the
ability to block the member’s special resolution that is necessary to make important changes. The
informations about an organization’s ownership structure can be obtained from the
organization’s annual reports which are required by the Company Ordinance, 1984 in the form
34 and Code of Corporate Governance under clause XIX (i).
Based on the aforementioned definition, the family ownership is measured through number of
shares owned by the family/blockholders divided by total number of shares. Similarly ,the Non
family owned organizations are those firms in which no family, sets of families, individual or set
of individuals can be recognized as the ultimate owners possessing the largest shareholding block
Corstjens, Heyden and Maxwell (2004). The definition of family ownership of this study is
stricter than the definition which was used by Anderson and Reeb (2003). They defined a firm as
family owned if the founding family members own shares in the organization or the founding
family members are included in the board.
One particularity of Pakistani firms is their complex chain of ownerships. According to Javid and
Iqbal (2008), the control in Pakistani firms is attained through complex pyramid-structure, cross
shareholdings, interlock directorships, dual class voting shares and or voting pacts that allows the
final owners to sustain control, while owning small fractions of the ownership. Pyramids
86
structures are a specific form of inter-firm shareholding arrangements in which organization-A
holds a stake in organization-B, which holds a stake in organization-C. The unique feature of
pyramid arrangement is that organization-A attempts to exercise its control over organization-C
while minimizing its financial investments in organization-C, either indirectly or directly.
Crossholdings means when firm-X directly or indirectly control its own-stock. Inter-lock
directorship means that when an organization’s employees sit on other organization’s board, and
that organization’s employees sit on the first organization’s board. These employees are usually
Chief Executives Officers or other person who have a high position in the management of their
respective organization.
According to Javid and Iqbal (2008), closely held firms (family) in most developing countries
including Pakistan control the economics landscape. Here the chief problem is not of conflict
between manager and shareholders, but rather the expropriation’ of minority shareholders by
majority/controlling shareholders (family) where all the costs are beard by the minority
shareholders. Therefore, this study also intends to capture any non-linear effect of family
ownership-concentration which has been measured through squares of family ownership-
concentration. According to Abbas et al. (2013) firm performance is significantly and positively
affected by large shareholders but the direction of this relationship reverses when block holding
goes beyond 50 percent. Concentrated ownership becomes a cost when large shareholders are in
a position to influence the decisions which result in maximization of their own benefits and
deprive minority shareholders of their deserved income (Kuznetsov and Muravyev, 2001).
According to Ituriaga and Crisóstomo (2010), there is a positive relationships between firm value
and ownership concentration due to close monitoring of manager and negative relationship due
to expropriation effect.
87
The study has also incorporated two firm’s level control variable which are Profitability and
Size. Log of market capitalization has been used for measuring Size of firm instead of total
assets because total assets is not a good measure of a firm’s size (Blease, Kaen and Etebari,
2010), and the second reason is problem of multicolinerity with return on assets. So, that’s why
market capitalization has been taken as a proxy for the measurement of Size. The second control
variable is Profitability which is measured through Return on Assets (ROA).
The sample of this study has been divided into two sub groups e.g. firms with growth
opportunities and firms without growth opportunities for analyzing the impact of growth
opportunities. The distribution criteria is that firms which have a positive Sectorial Market to
Book Asset value , have been considered that they have growth opportunities in the future while
those which have a negative Sectorial Market to Book Asset value , have been considered that
they have no or poor growth opportunities in the future .
The following table shows the measurement of Independent Variables.
Table 3.3: Measurement of Independent Variables
S.No Variables Measurement of Variables
1 Leverage Book Value of Long term Debt /BV of all Assets
2 Dividend Pay-out Ratio Total Dividends/Shareholders Equity
3 Family Ownership Concentration Number of Shares Owned by Family/Total Shares
4 Square of Family Ownership
Concentration
(Number of Shares Owned by Family/Total
Shares)2
5 Firm size Log of Market Capitalization
6 Profitability Return on Assets
88
3.5 Conceptual Framework
Moderator
Independent Variables
Dependent Variable
Source: Author’s developed
3.6 Theoretical Perspective of the Study
Capital structure of a company is composed of debt and equity that how much debt and what
portion of equity financing have been use for financing a project. Different theories were
developed with the passage of time and they proposed alternative capital structures for a firm.
The effect of capital structure on value of a firm was first introduced by Modigliani and Miller
(1958).The most recognized theory in this context was Static trade-off theory of Modigliani and
Miller (1963) which explains the capital structure formulation process. According to Statics trade
Growth
Opportunities
Leverage
Dividend
Payout
Firm Value
Family
Ownership
89
of theory, optimal capital structure can be formulated through a trade-off between debt and
equity where the cost and benefits of both debt and equity are analyzed. According to Kims
(1978) insolvency is the main expenditure of debt while the benefit includes tax deductibility of
interest. Jensen and Mecklling (1976) and Myers (1977) included agency cost as one of the cost
associated with debt. Myers (1977) argued that when too much debt is used then it affects
manager and they work not in greatest interests of shareholders by ignoring projects which have
positives NPV. This phenomenon was label as underinvestment problem of the debt financing.
That is, organizations which have development prospects, debts affect the value of firms
negatively. While on the other hand it was proposed by Jensem (1986) that organizations that
have excess free cash then positive NPV projects. In such cases presence of debts positively
influence the value of organization .The reason because the managers will have to payouts funds
to debts providers due to which managers will be unable to do the misuse of cash resources.
However, recently studies are more focusing on picking order theory as compare to tradeoff
theory (Mazur, 2007).No targeted capital structures id assumed by Pecking order theory. It
enumerates that organization’s management has more informations regarding organization than
others and have a set of preference while financing a project. The firm first use internal finance
because it is an easy access source. When internal resources are not sufficient the firm goes for
debt financing due to taxes deduction of interests .Last resort of financing a project is through
equity financing.
After Modigliani and Miler’s (1958) seminal work, many other studies were carried out in the
context of dividend policy and capital structures when market is imperfect. The theoretical
principle underlying the organization's dividend policy could clarify either in terms of
informations asymmetry or tax-adjusted theory. The informations asymmetries cover various
90
elements; include the signaling model, the costs of organization and the hypotheses of free cash
flows. Akerlof (1970) identified signaling impact as particular and unique signaling equilibriums
in that potential employers are signaled by work seekers for their quality. Although , this
situation is used in the labor market, but it has been used by researcher to make economic
choices. The signaling-theory suggests that corporation dividends policy is use as source of
placing the qualities messages crossways, have least expenses than the others alternative. It
shows usage of dividend as signaling imply the other substitute method of signaling aren’t the
perfect substitute (see Rodrigez, 1992). The Agency-theory seek to describe the corporation
capitals structures as an outcome of attempt for reduce expenditures attached to separations of
control and ownerships. The organizational cost is lowered in organizations which have higher
managerial- ownership stake, because of the reason that it has good alignments to managerial
end shareholders control (Jensen and Mecklling, 1976), and organizations which have big blocks
holders who are placed at superior position to check the managers activity (Shlefer & Vishney
1986). A possible transport of assets forms the bond-holders to stock-holders is an additional
agency-issue attached with the information’s asymmetry. The possible share-holders and bond-
holders conflicts can be reduced through the covenant, governing the claim priorities. According
to Fama & Jensen (1983), conflicts could b bypassed through huge dividends payments to the
stock-holders. Debt-covenant to ease the divide imbursement is useful for stopping bond-
holder’s assets transfer to the shareholder (Johns and Kaley, 1982). In others ways the dividends
policies could affect the organizational cost through increasing the monitor by the capital
markets. With the free cashflows hypotheses, Jensen (1986) asserted that the fund remained after
funding all the projects with positives net presents values causes conflict of interests among
shareholder and manager. Debt, interests’ payments end Dividends payments decreases the frees
91
cashflow accessible to the manager for investing in marginal NPV project and managers perk
consumptions.
The signaling explanation and market timings theories, as discussed earlier, are of the view that
organizations is expected to initiate debts instead of equities once it is undervalue due to high
informations cost associated with equity offering e.g. .in form of the expected dilution. The
pecking order model is even of an extreme view by suggesting that the information cost related
with the risky securities are so much high that most of the organizations would not issue equity
until their debt capacity is completely exhausted. Both the signaling and market timing theories
are suggesting that an organization’s financing decisions are influenced by the management that
whether they perceive the organization as overvalued or undervalued. According to Barclay and
smith (2005), the pecking order model is at more extreme which states that there is no target
capital structure for an organization and the leverage ratio of an organization will be determined
through the difference between investment requirement over time and operating cash flows.
Therefore, the pecking theory forecasts the organizations with persistent higher earnings and
moderate funding requirement tend for having low leverage ratio. It is mainly because of the
reason that outside capital is not needed by these organizations. Organizations with Low Profits
and those with high financing requirement will have high leverage ratio because of manager’s
resistance to issue the equity. According to Driffield et al. (2006), High leverage and high
dividends are somewhat complementary strategies which are driven by similar consideration and
common factors. They have suggested that organizations select rational package of finance
policy e.g. the small and higher growths organizations are trying low leverage and not
complicated capitals structure but also have low dividends pay-outs and considerable stock based
perks and compensations for the senior executive. On the other hand, large and mature
92
organizations are trying to have more complicated capital structure and broad series of debts
priority, high leverage, less incentive compensations e.g. great usage of earning base bonus then
stocks base compensations plan(smith and watts,1992), higher dividends and more long term
debts. Therefore, dividend, compensation policies and corporate financings are driven through
same basic considerations, for example, an organization’s investment opportunity and to a less
extent by its size.
A tax-adjusted model assumes investors require high anticipated returns on dividend-paying
stocks and safeguard them. The impact of theory of tax-adjusted is the partition of investor in
dividends taxes clienteles. Modiglani (1982) asserted changes in portfolio compositions are
accountable for the cliental impacts. They concluded as taxes liabilities decrease (increase), the
dividends payments increases (decrease) at the same time as earning reinvestments decreases
(increase).Taxes-adjust model too suppose investor increase after taxes revenue. Individuals’
investor chooses the quantity of private and organizational leverage as well as whether to obtain
organizational distribution as a dividend or capitals gains, according to Farrar and Selwyn
(1967). Auerbach (1979) has created a model that maximizes shareholders ' capital. Auerbac
clarified if is a difference in dividends taxes or capital gain then maximization of assets no longer
means maximization of organizational markets values. The theory of tax adjustment is
objectionable in a sense as it is inconsistent with cognitive behaviors. Dividends payout may b
seen as corporate socio-economic repercussions. Frankfuter and Lanes (1992) disclosed that
informations asymmetry among shareholders an executives leads to the payment of dividends to
enhance the inclination towards equity issuance. According to Michael (1979), when
determining dividend pay-out rates, systematic relationships among dividends policies and
industries types indicate that executives are influenced by competitive organizations executive
93
behavior. Managers may boost or pays dividend to make happy buyers, if the realize the
shareholder want the dividend. Frankfuter and Lanes (1992) argued dividend payment is partly
traditional, partly a way to disperse the worry of shareholders. Dividends payment to shareholder
must serves as reminder regarding connection between proprietor and manager, and thus helps to
increase organization's stability.
Similarly ,the family involvement’s effects on dividends policy with some level of level of
disperse ownership in closely held organization was discussed by González et al. (2014).Their
main argument was related to demand of minority shareholders for demand which increases the
likelihood of dividends payment and prevention of misuse of assets by insiders. They found that
in such agency conflicts the type of family involvements have a great impact .They found four
things. First , no significant impacts were found regarding family involvement in managements
in explaining that dividends policy will be used as a means for decreasing the agency-conflicts. It
shows that family Chief Executives Officers neither worsen-nor-alleviate the agency problems
which exists among minority shareholder and majority shareholders .Second, involvement of
family in ownership increases the supervision on the chief Executive Officers which decreases
the chances of opportunistic behavior which try to create shared- benefits of controls for the
minority-shareholders. Moreover, such benefit increases other agency-costs which is created by
the concentration of ownership. Consistent with this idea they found that family involvement in
ownerships had an important and negative impact on the dividends policy of an organization.
Third, they originate that dividend policy is negatively affected by family involvement in the
control through pyramidal structures. Albeit pyramids structures which are used as a controlling
enhance mechanisms might let family get private benefits of pecuniary and non-pecuniary
nature, contestability among minority shareholders and majority shareholders within pyramids
94
structures might decrease the agency problem, counter balancing the negative effect. The
shareholders (minority) in the closely help organizations are usually very sophisticate- investor
e.g. prosperous families, international investors, large private organizations, equity and pension
funds etc .Finally, they bring into being that Family involvement in control by disproportionate
family representations in board-of-directors increase likelihood and amount of dividends
payments considerably. Such type of involvement could cause the adverse effect which is
correlated with pure-control improving mechanisms (Villallonga and Amit, 2009); hence, the
minority shareholders are trying to limit the Chief Executive Officer approach for using cash-
flows which are free in order to avoid misuse of funds or wealth expropriation.
Family involvement in control is happened when different kind of control enhancing mechanism
are used by families which enables the families to increase its voting power which exceeds its
cash flows right. These structure includes disproportionate board representation, pyramids,
multiple share classes, voting agreements and cross holdings etc (Villalonga and Amit, 2009).
Many studies (Sacristán-Navarro and Gómez-Ansón, 2007) have noted that such mechanisms are
used by family organizations .Pyramid structure allows the shareholders to control an
organization through one or more intermediates organizations which they don’t own fully
because Pyramid structures are organized which helps to put into effect the controlling-power
which exceed cash-flows rights are common in family organizations (Almeida and Wolfanzon,
2006). It allows family to get pecuniary and non-pecuniary private benefit e.g. appointment of
family member to the managerial position, high compensation, empire building, related- party
transactions, recognition as successful entrepreneurs, social status and societal power (Bjuggren
and Palmberg, 2010). Many studies which are summarize by Morck, Yeung and Wolfenzon,
(2005) show the problems of governance within pyramid business groups. If the pyramid
95
increases the conflicts among shareholders (majority and minority)as enumerated by Bebchuks,
Kraakma, and Triantus (2000), the shareholders (minority) need to demand for additional
dividend in order to decreases assets expropriations.
It is argued by Villallonga and Amit (2009) that pyramids may serve aims other than just to have
control enhancement, so therefore, its impact on the value is not always negative e,g. the
privately held intermediate organizations may be used as investments vehicle for the
sophisticate-investor like pensions fund, institutional investors, private equity funds. A
monitoring role is played by such investors regarding the founding family and who are enough
vigilant to prevent the tunneling (Almeida and Wolfenzon, 2006). The other shareholders ,who
have large number of shares, in pyramids may monitor the managers and moderate the influence
of the family and reduce the expropriation of wealth by them (Maury & Pajuste, 2005).The
pyramidal family structures are common in Spain where potential extraction of private benefits
can be counter balanced by presence of an additional significant shareholder(Sacristáns-Navarro,
et. al., 2011).The potential benefits related to family board representation include better
management supervision, less managerial myopia, long-term’ perspective or long investment-
horizon etc (Sciascias & Mazzola, 2008).The representation of family can also produce shared
advantages and may reduce the organizational conflict with the shareholders (minority) through
developing longs term relationship with capital providers, supplier , customers (Andersons,
Mansi, & Reeb. 2003).However, a pure control enhancing mechanism can be affected badly
through family disproportionate-representations e.g. when the family member’s percentage on
board exceeds the cash flow rights(James, 1999).
Green et al. (1993) examined the theories regarding dividend payments and probed the
relationships between future earnings of investments, financing decision and dividends. Their
96
findings exhibited that dividend’s pay-outs level is not completely decided after an
organization’s financing an investment decisions are made. Dividend’ decisions are gotten along-
with financing and investment decision. Their result did not favor the findings of Miler and
Modigliani (1961). Partington, (1983) carried out a study where he found that organization’s use
of target pay-out ratio, organizations motive for paying the dividend and the extents to which the
divided are calculated, are independents of the investment’s policy. Higgen(1981) exposed
directs links among financing and growth need. Fast emerging organizations needs externals
funding, as the working capitals need generally go beyond incremental cashflow form news sale.
Higgens (1972) showed pay-out ratio are negatively co-related to an organization’s requirements
for financing its growth-opportunities. Colins et. al. (1996), showed negatives but not
insignificant relationships-among dividends pay-out an historical sales growth. DSouza (1999),
nevertheless, showed positives but not significantly relation in the case of growths and a negative
but not significant relation in the case of market to book value. Alwi (2009) investigated
empirically the effect of dividend as an inner organizational system which affects the
performances of organization. Two hundred organizations listed at the Indonesian Stocks
exchanges overid the periods 2000 to 2006 were examined by him. It was examined that in
period of higher organizational costs which are, when cash flows are increasing and there is no
investment opportunity, dividends declaration are welcomed by shareholders. Therefore,
dividend acts as important governance mechanisms for reducing agency costs between minority
shareholders and majority shareholders within a low or high concentrated ownership structures
which increases the performance of an organization.
Ben-David (2010) added that different behavioral theories are considering managerial biases,
investor’s biases and market inefficiency (investor sentiments) as the key determinants of why
97
organizations are paying dividends. The catering theory of dividend proposes that organizations
are initiating dividends when investors start valuing the organizations which are paying
dividends more highly. The mental accounting , self-control and bird in hand theories are
motivating dividend payments by stating that investor favors dividend because of the behavioral
biases ,for example, narrow framing, regret avoidance and lack of understanding. There are also
some varied empirical evidences regarding the links between dividend payouts and managerial
biases. Some studies found that overconfident or optimistic managers are less prone towards
payment of dividend while others stated that managers would commit to pay the dividends based
on the private signal. Finally, there are two theories which are suggesting dividend is the results
of socio process in populations of organization an investor .One theory states that among the
populations of mature organizations the payment of dividend becomes a social norms. The
second suggests that albeit the dividends payment don’t convey any information about the future,
investors are putting pressures on organizations for the payment of dividends because it is
traditionally use as valuation tools. Albeit behavioral finance might explain’ many aspect of the
dividend-payments but the question of why organizations are paying dividends remain open. The
reviews of literatures favor a strong supports or the life cycles theory because a lot of authors
favors that matures organizations with stables cash flow are trying to distributing dividend.
However, this theory doesn’t explain that why mature organizations are choosing to distribute
the dividend and not go for repurchasing its shares.
The discussion on the relationships between ownership-structure and organization’s value was
first explored by Berle and Means (1932). Berle and Mean’s (1932) argument was challenged by
Demsetz and Lehm (1985).The enumerated that no relationships .among ownerships structure an
accounting profits exist. From their results no evidence was found between ownership and
98
control separation. Hill and Snell (1989) conducted a study which was meant expose the effect of
ownership-structure on productivity of a firm. Results revealed that a firm’s stance towards
diversification and investment strategy is influence by ownership-structure which results in
productivity of firm. Their study was different from the previous studies as they have taken
productivity into account instead of profitability. They said that productivity is less perplexed
measure of efficiency as compare to profitability .Based on Berle and Mean’s claim, Hassen
(2008) suggested that if corporate officers are involved in promoting their self interest at expense
of equity holders then there is a remedy to it. He suggested that shareholders encouragement for
active participation is the key to its remedy. This active participation would rise in the form of
nominating and electing the directors through indulgence in the selection process of officers who
runs the reign of the company. But on the other hand Jensen and Mecklling (1976) argued that
these agencies problem could be mitigation through making managers shareholder as well.
Through this the interests of both manager and shareholder will align. They further added that
separations of controls and ownerships aren’t a good choice because of monitoring cost which
reduces the value of a firm and may cause managers to involve in activities which are
detrimental to firm’s performance. However, maintain separation between ownership and control
are in greatest interests of organization’s value as this brings efficiency regarding decision
making and risk bearing function. Due to this dispersed ownership is better because the gains
from efficiency are greater than agency costs Fama & Jensen 1983).According to Feinberg
(1975) organizations where control and ownership are combined in that case there are chances
that they may made an exchange of profits and other benefits where they prefer other benefits
over profits for example on jobs no financial consumptions (Demsetez, 1983) and preferring
current consumptions over future consumptions (Fama and Jensen, 1985).
99
But the Stewardship theory states that family firms which are closely held and outside
representation or influence is also less might exhibit focuses on non financial objective and
organizational service cultures. Families organizations for ensuring its firm control over firm
may make hard control and ownership stakes for outside members (Nyman & Silbert- son,
1978).Similarly shares will also be limited to those kinship members whose interests are similar
with the family agendas and they are not only interested in the financial performance (Howorth
&Westhead,2006).The autonomy of controlling shareholders and private dealings of shares are
the detrimental features of the families organizations (La Porta et al., 1999) that had bad effect
on the performances of organization which may ultimately retard the performances of families
organizations. Agency problem is created due to honest incompetence because of restricting the
pool of shareholders (Chrisman, Chua, & Litz, 2004).Nevertheless, survival and development of
the business are key factors which compels the family firms to offer ordinary shares to outsiders
e.g. informal investors and financial institution but these share are not offered from the
controlling family groups who own-businesses (Meshra and McConaghy, 1999).According to
Dyer (2006), when owners and directors are siblings, the costs of the organization is decreased in
family relationships. For instance, owners that might have their siblings, children, sisters and any
other close relatives functioning as the agents need not bear the costs of monitoring their agents
while owners of non-family companies have to incur costs to monitor their agents. Similarly, in
family-owned organisations, the top management team is more cohesive comparable with no
family organization while families organizations has strong confidence, common objectives and
shared values(Ensley & Pearson,2005 ).McConaughy (2000) conducted a study regarding CEOs
family-owned organizations and no family organizations, and compared their compensation. He
concluded that family owned firms have to pay high to non family CEOs in order to get what
100
families CEOs would do. Gomez- Mejia, Makri and Larraza-Kintana (2003) also confirmed the
same results where professional CEOs were paid significantly high as compared to family CEOs.
Families are controlling their related mangers through normative-controls (shared values) which
will in turn cause fewer-costs than outside managers who are controlled through high financial
incentives in order to get comparable performance (Dyer, 2006).It is cleared from the
aforementioned studies that in family controlled firms the agency costs are reduced which
enhance the performances of an organization.
Although there are perceptions that family firms have reduced organizational cost because
alignment of goals of manager and owners but still there are other perspectives which highlight
those family firms are breeding grounds for conflicts (Kaye, 1991; Lansberg, 1999).There may
be competing values and goals in family owned firms which may arise from family dynamics
and complex conflicts due to families psycho-social history (Dyer&Hilburt- Davis, 2003).For
example, the differences in views and perspectives regarding roles and responsibilities, risk and
compensation and similarly distribution of ownership within a family compel members of the
family to compete with one another and may make the organization a battle ground. When
ownership of family owned firms is dispersed then it creates a wedge; connecting the interest of
controlling family-members who leads a family and other family-members (Schulzi,Lubatkiin &
Deno 2003).All the member of families are not equally contributing to performance of the firms.
Some are contributing a lot while others are free riders and some are fighting for their own
interest. Due to this fact family firms may have significant agency costs.
An additional factor which may be accounts for high agency cost is Altruism which makes
accountability and monitoring of family members difficult who works in the family owned
organizations. According to Schulze, Dino, Lubatkin and Buchholtz (2001), such altruism leads a
101
firm to poor performance. They studied 1376 firms and noted down that firms which have a
formal governance system against altruism perform better than those firms which are without
such formal system. In another study Gomez- Mejia et al. (2001) studied Spanish family
organizations and found that Spanish firms shows hesitation to fire out family CEO as compared
to non family CEO. But when family CEOs were replaced by outside CEOs the firms performed
better that those firms which had family owned CEOs. It was due to the reason that family
owners due to altruism were unable to discipline and monitor family owned CEOs .It causes
family firms to wait too long to make a change in the leadership until the firm performance fall
badly. As compared to family owned firms, a nonfamily firm feels no hesitation in monitoring of
CEOs and replaces them whenever the performance of the firm deemed unacceptable.
Resource based view also criticize the family firms performance (Sirmon & Hitt, 2003).It is
suggested by resources base viewed that firm’s asset are non-substitutable, inimitable, rare and
valuable which can help in the creation of competitive advantages (Barney, 1991).According to
Dyer (2006), the question arises that are families able to bring unique assets to the firms with
these assets which will help in the creation of competitive advantage? He further described three
types of assets or capitals which are linked with family firm’s performance. The first one is
human capital. The second one is social capital and the last one is physical/financial capital.
There are some arguments which supports that family can bring competitive advantage with
these capitals while other arguments opposes and are of the observation that families
organizations are unable to bring competitive advantage with these assets. Due the the small
team of skill full employees the families firms might not be talented for handling process
efficiently and effectively until and unless recruits professionals from outside the family. But
hiring outsiders for performing the key operations of the family business would be very difficult
102
for family firms because they are reluctant to the integration of outside managers (
Dyer,1989).But if the nepotism prevails in the family organization the family firms may place
family members on the key positions which will affect the performance of the firm badly. Thus
family relations would stop family members to hire best professionals managers in order to run
the organization effectively which shows a competitive disadvantage on the part of human
capital in family firms.
It was asserted by Shleifer and Vishny (1997) and La-Porta et al. (1999), that there is a dispute
among shareholders (minority and majority) due to concentration of ownership .When
companies are effectively controlled by block holders then they start framing policies which
cause expropriations of shareholder(minority) .Such blockholders gain remuneration at the costs
of minorities shareholder ( Claesens et al., 1999).So, when there is least concentrated ownership
it results in positives relations between firm’s value and concentrated ownership due to
monitoring hypothesis ( Arosa et al.,2013 ).She further added that the relationship between
organization’s performance and concentrated ownerships become negative when there is
concentrated ownership due to expropriation hypothesis. According to Ituriaga and Crisóstomo
(2010), there is positive relationships between organization value an ownerships concentration
due to close monitoring of manager and negative relationship due to expropriation effect.
According to Iturriaga and Crisóstomo (2010) when there are new projects then the exploitation
of minorities shareholder by dominant shareholder is more. So, when there are more growth
opportunities then chances of minority shareholders expropriation by dominant shareholders
would be more. (Iturriaga and Crisóstomo,2010).
103
3.7 Empirical Methods
Panel data are the repeated observations of same cross sections, basically of firms or individuals
which are carried out for several time periods. Repeated data and longitudinal data are also the
alternative terms used for panel data. According to Kennedy (2008) these are observations of the
same units which are for several different time periods in longitudinal data. Panel data may have
time effect, individuals effects or both that can be examined through random effect model and/or
fixed effects models. Panel data is basically short term oriented, meaning a large cross sections is
studied for a short span of time rather than studying a large cross sections for a long time period.
According to Baltagi (2001) panel data gives high informative data, minimal colinearity amongst
variables, high variability, more efficiency and high degree of freedom. When panel data is well
organized then panel data models are appealing because it deals heterogeneity problems
efficiently and also examine random and/or fixed effects. But, processing of panel data isn’t as
easy as it might sound. The problems of panel data basically come from modeling process, panel
data themselves and presentation and interpretation of results (Park, 2011).
The main benefit of using panel data is accuracy in estimations. It increases precision in
estimations .This is because of the reason that several cross sections data are pooled for several
time period for each individual .But ,for valid statistical inference there is a great need of
controlling correlation of regression models error which may occur over time for given
individuals .When Pooled OLS regression is used it normally overstate the precisions gain which
leads to underestimate standards-error and t-statistic (Cameron& Trivedi, 2009).Panel data also
result in consistent estimation by using fixed effect models that allow for capturing unobserved
individual heterogeneities which might be correlated with regress or .Such unobserved
104
heterogeneities cause omitted variable biases which might be ameliorated through instrumental
variable method by using only single cross section. But practically it is hard to get suitable
instruments.
OLS have five core assumptions (See Greene, 2008; Kennedy, 2008).
1. Linearity states that dependent variable is formulated as linear function of the set of
independent variables and error (disturbance) term.
2. Exogeneity says that expected value of disturbance is zero or disturbance is not correlated
with any regressors.
3. Disturbance has the same variance (homoskedasticity) and is not related with one another
(non-autocorrelation).
4. The observation on the independent variables is not stochastic but fixed in a repeated sample
without measurement errors.
5. Full rank assumption states that there is no perfect linear relationship among independent
variables e.g. nomulticolinerity.
If in longitudinal data, the individual effect is not zero then heterogeneity may affect assumption
2 and 3.In such cases disturbance may not have same variance and may be different across
individuals (heteroskedasticity) and may be related with each other which will arise problem of
autocorrelation .So therefore ,OLS is not a best unbiased linear estimator .While on the other
hand, fixed effect model analyzes individual differences in intercept and assumes same slopes
and constant variance for each individual (Park, 2011). Random effect model assumes by stating
that regresses and individual effects (heterogeneity) are not correlated. Random effect models
also estimate error variance specific to group or times.
105
The current study implies Hausman test (1978).The purpose of using Hausman test in this study
is to determine that whet hers to employ the fixed or random effect model. If null hypothesis
e.g.no correlation between individual effect and others regressor are not rejected then random
effect model is preferred over fixed effect model. On the other hand, if the results are significant
after running Hausman test for fixed and random effect models then fixed effect model issued.
The decision is based on the value of Chi-Square statistics. If the value of Chi-Square is
significant then fixed effect model is used but if the value of Chi-Square is insignificant then
Random effect model is preferred .When we run the Hausman test, the value of Chi-Square was
significant which is depicted in the Regression results table. So, fixed-effect model in the current
study has been used for result’s interpretation.
106
CHAPTER # 4
RESULTS AND INTERPRETATION
4.1 Chapter Introduction
The results and interpretation part include descriptive statistics, matrix correlation, and
regression of performance of organizations. The regression for firm performance is estimated
under two conditions. The first condition is when there are growth opportunities then what would
be the impact of leverage, dividends and family ownership concentration on the firm’s
performance. While the second time regression has estimated for firms with no investment or
growth opportunities that when there is no growth opportunity then what would be the impact of
leverage, dividend and family ownership structure on the performance of a firm. The study has
also captured the impact of leverage, family ownership structure and dividends on firm’s
performance when sample is not divided into two sub-groups e.g. firm’s which have investment/
growth opportunities and firms which have no or few investment/ growth opportunities.
Furthermore, Comparison of Mean test has also been carried out in order to find that whether
there exists significant impact among variables based on growth opportunity. For the purpose of
conducting Comparison of Mean test two proxies have been taken which is Market to Book
Value ratio and Sector Adjusted Market to Book Value ratio. Based on these two proxies, almost
all explanatory variables are showing a significant impact on the performance of firms. Some
other tests like Generalize Method of Moments (GMM) has also been conducted in order to find
out that there exist the problem of endogeneity among variables or not .Similarly, Variance
Inflation Factor (VIF) test for multicolinerity has also been carried out in the current study for
detecting possibility of multicolinerity among the explanatory variables.
107
Table 4.1: Descriptive Statistics
Variables Observations Mean Std. Dev. Min Max
SMBA 930 -1.3 10 -28.1 175.1
LEVE 930 2.2 19.1 -292.3 331.4
DPR 930 0.05 0.1 -0.5 2.5
FOC 930 0.51 0.2 0.1 0.93
FOCS 930 0.31 0.2 0.01 0.86
ROA 930 7.4 16 -99.2 205.2
LCAP 930 7.3 2.1 0.3 13.8
Notes: observation,Mean, standard deviations, minimum and maximum values for main variables. Sector adjusted
market to book asset (SMBA) is the proxy for the presence of growth opportunities. LEVE is leverage, calculated as
debt over equity; DPR is dividend pay-outs ratio which is calculated as total dividend over shareholder’s equity; FOC is
family ownership concentration which is voting capital in hand of the family shareholders; FOCS is square of family
ownership concentration; ROA is return on assets which is a proxy for the profitability; and LCAP is log of market
capitalizations, a proxy used for the firm size.
The above table illustrate the descriptive statistics of dependent variable i.e. SMBA (Sector
adjusted market to book asset) which is a measure for organization performance and others
independent variableand controlled variables. The independent variable are
Lev(leverage),DPR(dividend Pay-out ratio) ,FOC(family ownership-concentration) and
FOCS(family ownership-concentration square).The control variables are two which are ROA
(Returns on asset) which is a measure for profitability and LCAP (log of Market capitalization)
,a measure for firm size.
The results clearly depicts that average organizations under consideration show bad performance
as the value of SMBA is negative(-1.35) which is a proxy for firm performance. According to
Morcks et al. (1988), when the value of Tobin’s Q (a measure for firms performances), is high it
108
shows the probability that organization will issues more shares in coming years for increasing its
revenue and asset values of the organization. The only difference of the current study with that of
Morck et al.’s study is that they have measured the Tobin’s Q in ratios form while we have first
calculated the MBA ratio and then subtracted the average value of the each sectors from the
relevant companies’ MBA ratio which results in SMBA. After calculating the SMBA, we set the
criteria that firms which have positive SMBA will have more growth opportunities as compared
to negative SMBA’s firms which have poor growth opportunities (Lang, Stulz and Ofek, 1996).
So, that’s why the value of SMBA is not in ratio form otherwise value of MBA ratio is always
positive.
The mean value of leverage is 2.27 which mean that firms mostly depend on debt as compare to
using its internal sources of finance for financing a project. It also partly support the pecking
order theory that organizations has first inclination for using retain earnings(internal sources of
finance) and if retained earnings aren’t enough then go for debt financing when there are positive
NPV projects . The average value of Dividend is 0.05 which shows that the paying tendency of
firms under consideration is small. The average value of ownership is 0.51 which depicts that on
average 51 percent of shares are held by family shareholders due to which they have a
controlling impact on the performance of the organization.
109
Table 4.2: Matrix of Correlation
1 2 3 4 5
Leverage 1
Dividend
Payout Ratio -0.015 1
Family
Ownership -0.032 0.096 1
Return on
Assets -0.022 0.407 0.118 1
Market
Capitalization -0.06 0.354 0.24 0.42 1
Notes: 1 is for leverage, calculated as debt over equity; 2 is for dividend pay-out ratio, calculated as total dividends over
shareholder’s equity; 3 is for family ownership which is voting capital in the hands of the family shareholders; 4 is for return
on assets which is a proxy for profitability; and 5 is formarket capitalization, a proxy used for the firm size.
The Pearson correlation matrix shows the correlation among explanatory variables. The co-
relation among variables are slightly high in two case e.g. first between Return on asset and
Dividend pay-out ratio(0.407) and second time between Market Capitalization and Return on
assets (0.42).But in both cases the correlation among variables are not that much high which
could cause a serious problem of multicolinerity. Besides the two aforementioned cases, the
results of Pearson correlation matrix exhibit no high correlation among variables which shows
that there is no problem of multicolinerity. In order to further confirm that there exist problem of
multicolinerity or not, the current study has also incorporated variance inflation factor (VIF) test.
110
The results of VIF test are as follows.
Table 4.3: Results of VIF Test
Variables VIF 1/VIF
Leverage 1 0.996
Dividend Payout Ratio 1.26 0.793
Family Ownership 1.06 0.941
Return on Assets 1.34 0.747
Market Capitalization 1.34 0.748
Mean VIF 1.2
One of the most significant problems in the application of a multiple regression analysis has the
possibility of collinearity among the independent variables .Colinearity is a statistical condition
in which there is close to near perfect linear relationships among various independent variables
in a specific regression model. One of the methods of measuring the collinearity uses the
variance inflation factor (VIF) test for each of variables under consideration. In this method, if
the value of VIF is greater than 10, then there is high correlation between inputs variable
(Marquart, 1980). In the current study, VIF for all independent variables are less than 10 as
shown in the above table which means that there is no reason to suspect any sort of collinearity
among the variables.
111
Table 4.4: Pooled OLS
Variables Full sample Presence of
growth
opportunities
Absence of
growth
opportunities
SMBA SMBA SMBA
LEVE 0.19** 0.22* 0.07***
(0.09) (0.12) (0.006)
DPR 1.003 2.70 -3.36
(1.88) (2.13) (2.55)
FOC 0.34 -25.78 14.51**
(7.64) (20.01) (4.89)
FOCS 0.51 36.56 -18.19**
(8.89) (23.37) (4.98)
ROA -0.005 -0.26** 0.042**
(0.02) (0.12) (0.01)
LCAP 0.84*** 2.21*** 0.09
(0.20) (0.72) (0.14)
Constant -8.32*** -11.48** -6.15***
(1.40) (3.80) (1.67)
Observations 930 279 651
R-squared 0.16 0.30 0.08
Robust standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1 Notes: The table presents sample which is divided by sector adjusted market to book asset (SMBA), defined as the difference
between the firm’s market to book asset ratio and median of the sector. The table reports result for the full sample, sub-group of
companies with most growth opportunities and for sub-groups of firms which are without profitable investments projects. The
dependent variable is SMBA. LEVE is leverage, calculated as debt over equity; DPR is dividend pay-outs ratio, calculated as
total dividends over shareholder’s equity; FOC is family ownership concentration which is voting capital in the hands of the
family shareholder; FOCS is square of family ownership concentration;ROA is returns on asset which is a proxy for profitability;
and LCAP is log of market capitalization ,a proxy used for the firm size.
The pooled OLS results show that leverage has a significant and positive impact on the
dependent variable which is sector adjusted market to book asset (SMBA) in full sample.
However, the study also reveals the positive impact of leverage on SMBA in both cases e.g.
when there is growth opportunity and when there is no growth opportunity. The results for
dividend are insignificant. Family ownership-concentration shows a significant and positive
impact on SMBA when there is no growth opportunity. But the relationship between family
112
ownership concentration and SMBA is insignificant in case of full sample and when there is
growth opportunity. Return on assets and market capitalization also shows a significant impact
on the value of the firms. However, due to the reasons mentioned in empirical methods of
methodology, the pooled OLS is least favorable when the real model is fixed effect model. From
the table it is also evident that the value of R-square is low but according to Draper (1984), the
value of R-square is misleading in a data set where there are replicate data points. Healy (1984)
also commented that R-square is an unsatisfactory measure of OLS regression relationships
while Willet and Singer (1988) stated that heavy reliance on R-square statistics could lead to
overly optimistic interpretations of results. Similarly, Knaub (2007) is of the view that R-square
is not highly informative in panel data and more focus need to be made on the individual
significance of variables and overall significance of the models. Furthermore, in the current
study VCE (Robust) has been applied which accounts for the problem of autocorrelations and
heteroskedasticity (Mileva, 2007).
Table 4.5: Moderation Regression
Variables
β
Coefficient
Significance
(p-value)
R-
square
R-square
Change
Step 1st
Leverage 0.889 0.003
Dividend Payout 0.073 0.053 63%
Family Ownership concentration 1.875 0.004
Step 2nd
15%
Leverage 0.795 0.005
Dividend Payout 0.12 0.041
Family Ownership concentration 1.72 0.002
Leverage*GOP 0.241 0.021 48%
Dividend Payout*GOP -0.111 0
Family Ownership
concentration*GOP 0.275 0.0485
113
In the above table it has been examined that whether the growth opportunity plays a role as
moderator or not between leverage, dividend payout, family ownership and firm’s value.For
analyzing the impact of growth opportunity as a moderator, Andrew method of moderation has
been carried out. For finding the impact of growth opportunity, first it is needed to check the
impact of independent variables over the dependent variable. In the second step, the impact of
moderator is checked over the dependent variable and in the third step a combined impact of
both independent variables and moderator are checked over the dependent variable where
interaction terms are created for fulfilling the stated purpose. From the results, it is cleared that
all the interacting terms have a significant impact over the dependent variable which shows that
growth opportunity plays its role as a moderator.
Table 4.6: Comparison of Means Test
Groups SMBA
MBA
Mean P-value Mean P-value
SMBA
With growth opportunities 3.7166 0.000
-1.1653 0.0154
Without growth opportunities -3.5634 -4.8602
MBA
With growth opportunities 5.604 0.0000
2.46175 0.0249
Without growth opportunities 0.85813 -0.7619
LEVE
With growth opportunities 5.08871 0.0029
2.95977 0.0000
Without growth opportunities 1.0309 -11.073
DPR
With growth opportunities 0.09628 0.0000
0.05681 0.0007
Without growth opportunities 0.03451 -0.014
FOC
114
With growth opportunities 0.52283 0.0127
0.5049 0.0155
Without growth opportunities 0.50289 0.58696
ROA
With growth opportunities 13.498 0.0000
-1.5096 0.0001
Without growth opportunities 4.77794 7.89671
LCAP
With growth opportunities 8.50324 0.0000
7.42474 0.0000
Without growth opportunities 6.79295 5.17359
Notes: Sector adjusted market to book asset ratio (SMBA) and market to book asset ratio (MBA) are the proxies for the
availability of growth opportunity. LEVE is leverage which is calculated through debt to equity ratio total; DPR is dividend
payout ratio calculated through total dividend over shareholders equity; FOC is family ownership concentration which is voting
capital in the hands of the family shareholder; ROA is returns on asset which is a proxy for profitability; and LCAP is log of
market capitalization, a proxy used for the firm size. The Mean value of each groups are shown in the table, as well as the p-value
for the t-test of the different mean values hypothesis.
Before demonstrating the output of regression analysis, the study incorporates comparisons of
mean tests between both subs-sample (organizations with growth opportunity and organizations
with few or no growth opportunity) according to the criteria based on MBA ratio and SMBA
ratio. As the Table exhibits that there exist statistically significant difference in the leverage,
dividend policy, and the family ownerships concentrations across the firms which are
conditioned to growth opportunity.
It is clear from the results that growth opportunity play an essential role in relationships between
leverage, dividend payouts ratio, family ownerships and organization’s future value creation
process which suggests that the growth opportunity crucially affect the influence of the financial
and family ownerships structure on the value and performance of a firm.
115
Table 4.7: Regression results of MBA Ratio
Full
Sample
Full
Sample
Growth
Opportunity
Growth
Opportunity
No Growth
Opportunity
No Growth
Opportunity
Fixed Random Fixed Random Fixed Random
VARIABLES MBA MBA MBA MBA MBA MBA
LEVE 0.202* 0.194* 0.245* 0.243 0.0354*** 0.0344***
(0.111) (0.112) (0.147) (0.148) (0.000398) (0.000819)
DPR 2.031* 2.096 1.137 1.044 -2.065 9.028***
(1.214) (1.402) (0.804) (0.792) (5.100) (0.244)
FOC 7.700 -6.577 8.321 -9.612 -18.07*** -6.600**
(15.71) (9.514) (16.36) (17.67) (2.750) (2.957)
FOCS -3.326 11.76 -3.171 17.81 15.13*** 5.219**
(13.41) (10.88) (15.26) (20.21) (2.129) (2.302)
ROA -0.0114 -0.0312 -0.0326* -0.0457* 0.000252 -0.00178
(0.0121) (0.0205) (0.0175) (0.0264) (0.000967) (0.00111)
MA 2.012** 1.018*** 2.185** 1.809*** -0.462*** -0.0327
(0.834) (0.349) (0.874) (0.670) (0.0947) (0.0332)
Constant -15.79** -5.755** -17.53** -11.33** 6.912*** 1.823**
(6.299) (2.316) (7.004) (4.565) (0.407) (0.925)
Observations 930 930 884 884 46 46
R-squared 0.206 0.270 0.952
Number of comp 93 93 92 92 11 11
Robust standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1
Table 4.7 shows the regression output which depicts a close relationship between dependents
variable (MBA ratio) and independents variables which are leverage, dividend payout ratio,
family ownership, profitability and firms size. The regression result regarding MBA ratio has
been divided into full sample and sub-sample e.g. when there is growth opportunity what is the
impact of independents variable on the dependent variable and when there is few or no growth
opportunity then how explanatory variables are affecting the dependent variable. After running
the Hausman test for Fixed and Random effect model, the value of chi square is significant due
to which results interpretation is based on the fixed effect model. As the results depict, the
leverage shows a significant and positive impact on the dependent variable in all cases e.g. in full
116
sample as well as in sub-samples. It shows that if there are growth opportunities or not, taking
debt will influence the value of an organization positively. Similarly, the dividend payout ratio
shows a positive impact on the value of firms in full sample while an insignificant impact in the
case of sub-samples. Furthermore, family ownership and firm’s value is significantly and
positively associated in the case of no growth opportunity while shows an insignificant
relationship in the case of full sample and when there are growth opportunities. The same goes
for the square of family ownership concentration which is for detecting reverse impact of family
ownership concentration.
Albeit the aforementioned results are based on the MBA ratio which is a measure of firm
performance but we are more interested in the results of SMBA which is a version of MBA ratio.
The regression output of SMBA ratio are shown below but before going to interpret those
results, the results of Generalize Methods of Moment(GMM) model are important which are
explained as follows.
Table 4.8: Results of GMM Model
Dynamic Panel-data estimation,one step system GMM
Group Variable : Company
No. of Groups = 93
SMBA Coef. Std.Err. Z P>|Z|
SMBA L1. -0.16 0.26 -0.6154 0.517
LEVE 0.5 0.43 1.16279 0.249
DPR -170 153 -1.1111 0.267
FOC 102 99 1.0303 0.301
ROA 2.86 2.59 1.10425 0.27
LMC 2.68 13.02 0.20584 0.837
_Cons -86.03 106.85 -0.8051 0.421
Instruments for first differences equation
L2. (SMBA LEVE DPR FOC) collapsed
Arellano-Bond test for AR(1) in first differences: z = -0.91 Pr>z = 0.361
117
Arellano-Bond test for AR(2) in first differences: z = -1.24 Pr>z = 0.214
Sargan test of overid.restriction: chi2 (2) = 0.95 Prob > chi2 =0.621
The table 4.8 shows the output of Generalize Method of Moments (GMM). The Generalized
Methods of Moment gives an efficient estimation through controlling for both the endogeneity
and unobservable heterogeneity (Blundell and Bond, 1998). The validity of the Generalized
Methods of Moments (GMM) estimation premised on two condition basically: one is the validity
of variables which are used as instruments, and the second is the lack of second order serial
correlations among the residuals. In the current study, GMM model has been carried out through
Stata. By default the Stata reports 3 additional tests which are Sargan test, Auto-Regressive, AR
(1) and Auto-Regressive, AR (2) tests.
The null hypothesis of Sargan test is that the instruments as a groups are exogenous. So,
therefore, a higher p-value of Sargan statistics is preferable. Similarly, the Arellano – Bond tests
for the autocorrelations which have a null hypothesis of no autocorrelation, and is applied for the
differenced residuals. The Arellano – Bond test for Auto-Regressive (1) process in the first
differences usually rejects null hypothesis but it doesn’t happen always. Therefore, the test for
Auto-Regressive (2) in first difference is more important for detecting the autocorrelation. That’s
why; a second lag is required because it is not correlated with current error terms while the first
lag is. Generally, one can use a second or deeper lags in order to find good instruments but using
deeper lags may reduce the sample size. Furthermore, it is also worth mentioning that in both
cases e.g. Sargan test and AR (1) and AR (2) a higher p-value is preferable in order to accept the
null-hypothesis.
From the table 4.8, it is cleared P-value for AR (1) and AR (2) is 0.361 and 0.214, respectively.
It shows that both the values are greater than 0.05 which indicates the rejection of alternate
118
hypothesis and acceptance of null hypothesis. Similarly, the value of Chi2 for the Sargan test of
over-identification of restriction is also greater than 0.05 which shows the acceptance of null
hypothesis of no autocorrelation in residuals. Due to the small numbers of groups, a large
number of instruments may cause the Sargan test to be weak. Therefore, the rule of thumb is to
restrict the number of instruments less or equal to the numbers of groups (Mileva, 2007). The
Stata warns about this at the top of output table.
Table 4.9: Regression results of SMBA
Full sample Full sample Growth
opportuniti
es
Growth
opportunities
Without
Growth
opportunities
Without
Growth
opportunities
Fixed Random Fixed Random Fixed Random
VARIABLES SMBA SMBA SMBA SMBA SMBA SMBA
LEVE 0.20* 0.19* 0.29** 0.28** 0.036*** 0.036***
(0.11) (0.11) (0.13) (0.14) (0.002) (0.002)
DPR 2.04* 1.49 1.74 1.22 3.41*** 3.38***
(1.22) (1.10) (1.23) (1.03) (1.14) (1.14)
FOC 7.05 2.96 74.4 21.6 -7.30* -6.04
(15.9) (10.2) (69.7) (62.8) (4.16) (4.15)
FOCS -2.62 -1.81 -54.0 5.32 6.47* 4.83
(13.7) (10.4) (71.6) (66.2) (3.55) (3.64)
ROA -0.01 -0.01 -0.06* -0.07** -0.004 -0.004
(0.01) (0.01) (0.03) (0.03) (0.003) (0.003)
LCAP 2.01** 1.15*** 4.03** 3.40** 0.46*** 0.43***
(0.83) (0.39) (1.72) (1.42) (0.07) (0.07)
Constant -19.31*** -11.21*** -52.58** -36.50* -5.13*** -4.42***
(6.25) (3.27) (24.0) (18.78) (1.20) (1.26)
Observations 930 930 283 283 647 647
R-squared
Chow Test
(F-statistics P-value)
0.598
0.000
0.28
Hausman test
Prob>chi 2
0.011 0.008
Robust standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1 Notes:The table presents sample which is divided by sector adjusted market to book asset (SMBA), defined as the difference
between the firm’s market to book asset ratio and median of the sector. The table reports result for the full sample, sub-group of
companies with most growth opportunities and for sub-groups of firms which are without profitable investments projects. The
119
dependent variable is SMBA. LEVE is leverage, calculated as debt over equity; DPR is dividend pay-outs ratio, calculated as
total dividends over shareholder’s equity; FOC is family ownership concentration which is voting capital in the hands of the
family shareholder; FOCS is square of family ownership concentration; ROA is returns on asset which is a proxy for
profitability; and LCAP is log of market capitalization, a proxy used for the firm size.
The study shows the regression results of firm performance under two situations. First regression
is run for all firms where no distribution of firms has made between firms with growth
opportunities and firms without growth opportunities. The second time Sample is split in two sub
groups e.g. firms with growth opportunities and firms without growth opportunities and run
regression for both group of firms which have growth opportunities and firms which haven’t. In
the current study chow test has been used which is applied for deciding whether to use pooled
model or panel model. The null hypothesis is about invisible individual effects which states that
invisible individual effects are not present in model and also error terms are only comprise of the
residual error term. The alternate hypothesis is based on the presence of individual effects. As
the results shows that the P-value for the F-statistic is significant, so alternate hypothesis is
accepted and hull hypothesis is rejected. Furthermore, it is tested that whether these individual
effect are correlated with the model explanatory factors or not. In this regard, the Hausman test is
used. This test is premised on the presence or absence of relationships between the estimated
regression errors and model independent variables. If such relationships exist, then model has a
fixed effect and if it isn’t, then model has a random effect. As the results of Hausman test are
significant so, Fixed effect model is preferred over Random effect model.
4.2 Leverage and Firm Performance
The result indicates that leverage have a significant impact on firms performances in all cases
e.g. when there is full sample and when the sample is divided into two sub-groups on the basis of
growth opportunities .Though the results of full sample are also significant but we are more
120
interested in finding its impact in presence or absence of growth opportunities as it’s the premise
of our hypotheses. From results it is clear that when there are growth opportunities then leverage
has a significant and positive impact on firm’s performance. It denies the rational of
underinvestment problem mentioned by Myers in 1977.
Results also indicate that debt has a significant and positive impact on the performance of an
organization when there are poor or no growth opportunities. It may be due to overinvestment
problem (Jensen, 1986). When organizations have more internally generated cash flows than
positive net present value projects then the managers may invest them in a negative net present
value projects because they are rewarded for expanding the scale of a firm. The other reasons
may include that they may use this free cash for fulfilling their private benefits. So therefore,
when firms have taken debt and there are no growth-opportunities as well than debt can have a
positive impact on performance of a firm. Because the managers will have to first fulfill the
obligations of debt providers due to which managers will not be in a position to invest it in a
negative net present value projects or make misuse of funds.
4.2.1 Relevance and Contradiction with Previous Literature
Pandya (2018) explored the relationships between leverage and Market Value Added which is a
measure for the value creation. It is a cumulative measures of the corporate performance. Firms’
performance (Market Values Added) was measured through taking the differences of BV of
equity and market values of equity. Following Ordinary Least Square method, uni-variate and
multiple linear regressions had applied to examine the relation between independents and
dependents variables. It was established that, when analyzed uni-variately; all the three measure
of financial leverage which were debts ratio, debts to equity ratio and interest cover was
121
significantly correlated to the markets value added. But on the other side, when used jointly in
the multiple regressions, only the interest cover was found statistically significant.
Adetunji, Akinyemi and Rasheed (2016) tried to explore the relationships between financial
leverage and organization’s value. The OLS statistic all techniques were applied for the data
investigation and testing of hypothesis. It was observed that high leverage ratios have a negative
impact on the value of an organization which makes low profits, therefore, the investors will
receive no or little earning. Investor’s faith in both companies and capital market will be shaken
due to which market-value of organization’s share will fall the same way as its value. This study
has, however constructed both positives and negative relationships between financial leverage
and firm’s value.
Fosu, Danso, Ahmad and Coffie (2016) found that leverage is not positively linked with the
firms’ value, and also found that the marginal effects of the leverage is low for the informations
asymmetries firm in the presence of growth opportunities which were measures through sale
growth rate of the firm. They also employed two steps GMM for the potential possibility of
endogeneity between the organization’s value and leverage.
4.3 Dividend and Firm Performance
It is clear from the results that dividend has an insignificant impact on the value of a firm in full
sample. But it doesn’t mean that dividend is not again factor regarding firm performance. When
we divide firms on the basis of growth opportunities it becomes clear that when there are poor or
no growth opportunities then dividend has significant and positive impact on the performances of
a firm. It means that when there is no growth opportunity then paying dividend is in best interest
of the shareholders and also causes an increase in the value of firm. According to Free cash flow
122
theory, when a firm pays high dividends it mitigates the misuse of fund under discretionary
managerial-control. So therefore, firms which have no growth opportunities or few growth
opportunities can reduce the misuse of corporate scarce resources and paying dividends can
increase the value of a firm.
On the other hand, the results of dividend payments are insignificant when there are growth
opportunities which also support our second hypothesis. According to Iturriaga and Crisóstomo
(2010), when a firm has growth opportunities and still it pays dividends then how it can affect
the value of a firm positively, is uncertain. Because new investments requires more funds and
when a firm pays the generated cash flows through paying dividends then it may face problems
regarding raising funds in the future.
4.3.1 Relevance and Contradiction with Previous Literature
Budagaga (2017) looked at the connection between dividend payments and the value of Istanbul
Stock Exchange listed organization. The research was conducted according to the Ohlson
valuation model and applied the residual income approach. The fixed effect was implemented on
panel data by testing multiple statistical techniques. The output showed a significant and positive
relationships between the dividend payments and value of firms. On the other side Jakata and
Nyamugnre (2015) enumerated that dividends policy which was measured through dividend
yield, does not affect the stock price and has insignificant influence on the value of an
organization.
Nguyen, Bui and Do (2019) applied fixed effect model after thorough checking of endogeneity,
causality problems and multicolinerity of the dataset. They used both dividend payout ratio and
dividend yield collectively and checked its impact on the share price volatility which indirectly
123
affect the value of an organization. They found statistically significant and negative impact of
both variable on the share price volatility which also causing a decrease in the value of an
organization. They also enumerated that most of the big organizations are trying to stabilize their
growth rates, so for that purpose that are paying high dividends instead of reinvesting in new
projects. Similarly, Khan et al. (2016) examined the impact of dividend payout ratio on firm
performance through using OLS technique. They found significant and negative impact of
dividend payout on the firm performance which was measured through return on equity.
4.4 Family Ownership and Firm Performance
The results also indicate that concentrated family ownerships has not a significant impact on
organization’s performance in full sample .But the impact of family ownership becomes
significant when there are few or no growth opportunities. In the case of no growth
opportunities, family ownership concentration affects the value of firm significantly and
negatively, as the result reveals. When
the family ownership structure is not very entrenched then it has a negative impact on the
performance of a firm but when it becomes highly entrenched then reverse impact on firm
performance gets started as the results indicate. The results also show that when family
ownership is highly entrenched then expropriation of minority shareholders doesn’t occur as
depicted in the regression output.
4.4.1 Relevance and Contradiction with Previous Literature
Castro, Aguilera and Crespí-Cladera (2016) explored the influences of the family ownership on
firm’s performance in term of noncompliance (a dependents variable which was used for the
organization performances).The noncompliance was operationalzed through economic outcomes
which was measure by ROA and Tobin Q. The output showed an inverted U-shaped influence of
124
the family ownerships on organizational performances. The results also showed that when
organizations have excess cash, then it increases the chances for the opportunistic behaviors by
family owner in which the family utility maximization prevails over the shareholder’s value
maximization. Similarly the codes compliance entails strengthening the protections of the right
of minority shareholder and mitigating severity of agency problems. They also exhibited that
when there are few investment opportunities and plenty of cash, then, family shareholders will be
less prone to complies with the practices of corporate governance which will unfavorably affect
the organizations performance. Zattoni, Gnan and Huse (2015) tried to investigate the
relationship between family ownership and firm value but they found this relationship through
incorporating the mediating role of board process which includes use of knowledge & skills,
effort norms and cognitive conflicts, and board tasks which includes control and strategy. They
applied structural equation model and found that (a) family involvements in business has a
positive impact on the effort norms and use of knowledge & skills, and a negative one on the
cognitive conflicts (b) board processes had a positive influence on the board task performance
and (c) board strategy tasks performance were positively influencing the firm’s financial
performance while board control tasks had no significant impact.
Yeh and Liao (2018) tried to explore the relationships between family organizations and
organization’s value on terms of Tax burden. The results revealed positives impact on
organization’s value as a result of reduction in that axes burden of the controlling families. It
provided an insight into the effect of tax policy changes on the controlling structures of family
organizations and the subsequent benefits on firm’s value.
Nekhilia, Nagatib, Chtiouic and Rebolledo (2017)investigated the moderating roles of the family
involvements in the relationships among CSR reporting’s and firm’s market values .They
125
showed family organizations report less information on their CSR duties as compared to non
family organizations .Market based financial performance was used for the organizational value
that was measure thorough Tobin .The findings showed positive relations between CSR and
firms value for the family organizations and negative relationship for the non family
organizations. Similarly, Zraiq and Fadzil (2018) attempted and examined the associations
among ownerships structures and organizational performances of the Jordanian organizations.
OLS regression had been applied to test the relationships among independent variables (foreign
firms) and dependent variable (Family firms).The results showed significant and positive
relationships between ownership structure e.g. family and foreign and firm performance.
126
CHAPTER # 5
Conclusion, Recommendations and Limitations
5.1 Chapter Introduction
This chapter is about Conclusion, Recommendations and Limitations of the current study. In the
conclusion part, the relationship among variables has been enumerated which are conditioned to
presence and absence of growth opportunities premised on relevant theories. This chapter also
presents the summary of all hypothesis of the study and also shows the acceptance and rejection
of hypothesis based on the results. Besides this, recommendations for different stakeholders;
Government, Security and Exchange Commission of Pakistan, Academicians, Managers etc are
also described .Similarly, implementation of different strategies for the protection of minority
shareholders has also been discussed in order to minimize the expropriation of them which will
improve the structure and performance of corporate sector. Furthermore ,in the last a brief insight
about the Limitations of the study has been provided in order to show that which type of firms
are not included and what are the other constraints which this study is confronting.
5.2 Conclusion
The importance and role of leverage and dividend can be understood from the fact that still it is a
debatable topic since Modigliani and Miller’s (1958) irrelevancy proposition. Discussing the
value of firms without leverage and dividend policy is incomplete. Besides dividend and
leverage, ownership structure is also worth mentioning in this regard. Keeping the importance
and key role of leverage, dividend and family ownership structure, this study examines the
impact of these variables on the value of firms in context of Pakistan. This study has taken into
127
account 93 firms which are listed at Pakistan Stock-Exchange for the period ranging from 2005
to 2016.
The first finding of this study reveals that debt has a significant and positive impact on
performance of a firm .In context of Pakistan, debt shows a significant and positive impact on
firm’s performance in both cases e.g. when there are growth opportunities and when there are
few or no growth opportunities. The results partly endorse the first hypothesis and partly doesn’t.
It exhibits that in case of Pakistan under-investment problem doesn’t exist when there are growth
opportunities. It shows that the management is always working in the best interest of all
stakeholders rather than giving more priority to only family shareholders. It may be because of
the reason that as family owners are the main shareholders or blockholders of the organization so
they keep an eye on operations of management and control them through different mechanisms
e.g. issuing debt or giving performance based bonuses etc. The second most important reason
may be that the key positions of the management are also held by the family members so they are
interested in the prosperity and perpetuity of their organizations.
The positive impact of debt on the value of firm in case of poor growth opportunities may be due
to over-investment problem. Over-investment problem arises when firms have more internally
generated cash flows as compared to profitable projects then managers have incentives to invest
it in projects which are leading towards bad performance or they may use it for their private
benefits. According to Jensen (1986), when firms have more free cash than positive net present
value projects, in such cases presence of debt positively affects the value of a firm .The reason is,
because the managers will have to pay out funds to debt providers due to which managers will be
unable to do a misuse of cash resources. If debt was not taken in such cases then the free-cash
may be used in negative net-present value’s investment opportunities. The overinvestment
128
problem can be mitigated through payout excess funds in order to service debt if debt is taken by
the firm. The overinvestment problem basically arises because of separation between
management and equity ownership. This problem can be reduced through making managers
shareholders as well due to which the interest of both shareholders and managers will align. So,
the positive impact of debt on firms performance (when there are growth opportunities) is not in-
line with the first part of hypothesis (H1a) while the second part (H1b) of our first hypothesis is
according to the results. Hence, first hypothesis is partly accepted and partly rejected.
The results of this study support our second hypothesis which is about positive relationships
between dividend and firm’s value, is uncertain when there are growth opportunities. While in
case of no or few growth-opportunities the relationship between paying dividends and firm’s
value is positive. Dividend policy also plays a very crucial role in the value of a firm. On one
side, paying dividend doesn’t let the shareholders to claim against the management and its
functioning while on the other side it makes managers disciplinary. This statement needs a little
elaboration. When a firm is paying dividends then shareholders are satisfied in a scene that their
investments are earning something for them. There are individuals as well as institutions which
are wholly dependent upon the dividend payments of their concerned companies. So when the
company is not paying dividends then it gives them a chance to raise their grudges in the form of
complaints against the management. The idea behind the disciplinary role of dividends lies in
free-cash flow theory. When a firm is paying dividends when there is no growth opportunities
then it decrease the level of funds under discretionary control of management. Due to which they
are unable to employ the funds in a negative present value projects and also decreases the
avenues of misuse of scarce resources of a corporation.
129
The findings of this study also partly support our third hypothesis which is about the impact of
family ownership concentration on the value of a firm. When family ownership concentration is
not at extreme then it causes a negative impact on the value of an organization. It might be
because of conflict of interest due to diffused ownership structure because different members of
the family or shareholders have different set of priorities. All shareholders are seldom on one
page. According to Berle and Means (1932), when ownership structure is dispersed and everyone
is a minority shareholder then such case may lead to bad performance because of managers
discretionary powers. Managers may pursue their own interest at the expense of shareholders.
When ownership concentration goes beyond a critical threshold level it starts a positive impact
on the performance of a firm. It may be because of the reason that in Pakistan firms are mostly
held by family blockholders and they are the majority share-holders and are not involved in the
expropriation of the minority-shareholders because they also want the prosperity of minority
shareholders as well. This indirectly and positively affects the performance of organization due
to least agency costs.
According to Dyer (2006), agency costs are reduced in familial relationships when owners and
managers are relatives e.g. owners who may have their brothers, sons, daughters or other family
member working as their agents, do not need to incur cost of monitoring their agents. But in non
family firms owners have to incur the cost of monitoring their agents. Similarly the top
management team is more cohesive in family owned firms as compared to non family firms
(Ensley & Pearson,2005) because family have high trust, common objectives and shared values.
The alignment effect provides that the founding family organizations are less prone to engage in
opportunistic behavior because it could damage the family’s wealth, reputation, and long term
organization performance. Similarly Andersona, Mansib and Reeb (2003) are also of the view
130
that family organizations are interested in long term survival of the business and reputation of
family or organization. Casson (1999) and Chami (1999) proposed that founding families
perceives their organization as an asset to bequeath it to family members or descendents rather
than as the wealth to consume during their lifetime. Specifically, the interests of family lies in
passing the organization as a going concern to her heirs rather than just passing its wealth.
Survival of organization is thus an important concern for family, suggesting that relative to other
large shareholders they are more likely to maximize the organization value.
Table 5.1: Summary of Hypothesis Acceptance and Rejection
Null and Alternative Hypothesis Status
H1a Leverage and firm’s value are negatively co-related when there are growth opportunities. Rejected
H1b Leverage and firm’s value are positively co-related when there are no growth
opportunities. Accepted
H2 The relationship between a firm’s value and dividends is uncertain when there are growth
opportunities. But paying dividend has a positive impact on firm’s value when a firm has
few or no growth opportunity. Accepted
H3
There is a non-linear relationship between a firm’s value and family ownership
concentration. This relationship is positive initially and becomes negative when there is
few or no growth opportunity.
Partially
Accepted
5.3 Future Recommendations
The role of ownership structure in the performance of organizations is undeniable .In Pakistan
concentrated family ownership is the dominated ownerships structure which is mostly composed
of closely held members .The shareholders who have bulk of shares mostly hold the
organizations and control the overall operations of the organization. According to Ibrahim
131
(2006), the legal system of Pakistan is alike the Anglos American models (ownerships and
controls are separated e.g. Berle & Means model), but in reality ownership structure is not
dispersed as it is in the case of Anglo-American structure .This difference is also ignored by the
Corporate Governance Code (2002) and gets advantages through United Kingdom and South
Africans reforms initiative. The concentrated ownerships structures governance disputes might
not be ameliorated through Governance mechanisms which are framed for markets with
dispersed ownership structures. If East Asian reform steps are taken into account then the effect
of regulatory response will be more powerful. For example, Regulatory assessment of family
ownership structures on South Korean, Hong Kong and Japan's capital markets may provide
insights into comparable governance problems resulting from a focused family ownership
framework, which may be useful in framing better alternatives.
A minimum threshold for seeking a remedy from Court, under the Companies Ordinance, 1984,
against oppression and mismanagement require that at least 20 % of the shareholder can lodge
complaints while Share holder having at least 10 % but less than 20 % of firm’s shares can
submit an application to Security and Exchanges Commission of Pakistan to employ an inspector
for investigating the organization’s affair. Both the Company Ordinance, 1984 and Corporate
Governance Codes (2002) do not acknowledges shareholder that have less than 10 percents of
the origination’s share e.g. minorities shareholder, there are no equivalent provisions present for
them. The Minority shareholders could impose its claim in the civil- case through charging for
tortuous losses. Claimants are routinely seeking interims and the managers. Interim relief is
invariably granted till final adjudication of the matter which causes a hindrance in an
organization’s business. Therefore, to give minorities’ shareholder with an efficient and
effective’s remedies while decreasing the intervention of the organization’s business affairs, an
132
internal grievances and redresses mechanisms ought to be consider for the listed organizations of
Pakistan. The Security and Exchange Commission of Pakistan should institute a ―grievance and
redress committee‖ which will composed of executives and independents director, and will
frame a list of suitable grievances.
In addition, SECP can also extend quasi-judicial function of stocks exchanges through giving the
shareholder (minority) appellate remedied before frontlines regulators and after that to the
Security and Exchange Commission of Pakistan. Similarly, to formulate report and disclosures
highly authentic, the Security and Exchange Commission of Pakistan need to give courage the
shareholders (especially minority) to report any non-compliance openly to an audit committee
and concerned stock exchanges. Pakistan’s Legislature also needs to provide Legal protections to
whistleblowers which would helps in establishing an extra monitoring-system over controlling
majorities (Family owned firms).
Financial reform and institutionals developments have positives effect on the dividends
payments of organization as evident from the Reform of 1990’s in financial sectors. According
to the annual report of Karachi Stock Exchange (2008), the ratio of dividend paying
organizations has been decreased to forty percent in 2007 while it was forty six percent in 2005.
Monetary authorities are advised to concentrate on policies to further liberalize Pakistan's
economic industries. Moreover, as leverage has a negative relationship as the results indicate, it
is recommended that regulatory institutions need to develop approaches to make capital markets
highly effectives and readily approachable in order to make it easier to move from debt to equity
market. These will improve the organizations ' leverage positions and allow them to pay high
dividend.
133
To enhance and develop Pakistan's financial markets, various financial market shareholders are
required to work together to create policies to depress profit retention. This goal can be
accomplished if Pakistan's Securities and Exchange Commission (SECP) sets minimum dividend
payout ratio requirements to promote dividend payments. Additionally, Government of Pakistan
is required to frame a tax incentive policy for firms which are paying dividend regularly which
will persuade other organization too to pay dividends. Similarly, foreign investors must given
high legal’s protection and incentive, in order to freely and without any hesitation invest in these
listed organizations of Pakistan.
The better performance of an organization also depends upon Independent Non-Executives
Director, because Independents Non-Executives Director are catering the interest of all
shareholders without any influence and pressure from controlling shareholders. In developed-
countries handsomer remuneration are been paid to Independent Non-Executive Directors, so
they are highly motivated towards their organizations, but the core problem in Pakistan is most
of organizations are family-owned and majority of the share are held by one persons. So, they are
not in favor of hiring INEDs, because their personnel interests could be suffered. Therefore, most
of the time these Independent Non-Executive Directors in Pakistan organizations are hired on
relations basis just to fulfill the criteria. So, how it’s possible that they would work without the
influence of controlling shareholders (family).Similarly, very minimal salary is paid to them and
their salaries are also dependent on number of meetings attended by them. These main hurdles
need a suitable policy at SECP level which needs to be followed in letter and spirit.
The current study has been carried out in finding the impact of leverage, dividend payouts and
family ownership concentration on the value of a firm. It is suggested that further studies need to
be carried out in context of determining impact of managerial and institutional ownership
134
structure on firm’s performance conditioned to growth opportunities. However, these
recommendations are only suggested for carrying out further studies in the context of Pakistan.
Furthermore, comparative analysis of various South Asian countries needs to be carried out for
finding its impact in different economies.
5.4 Limitations of the Study
1. Financial firms like banks, insurance firms, leasing companies are excluded from the
study.
2. In non-financial firms, firms with missing information during the study period i.e.
2005 to 2016 are also not the part of the study.
3. Only those firms are selected which are capital intensive, have highest market
capitalization and are listed at Pakistan stock exchange.
4. As there is no authentic database for the collection of dividend’s data, so, the data is
taken from Financial Statement Analysis (FSA) reports of state Bank of Pakistan.
135
References
Abbas, A., Naqvi, H. A., & Mirza, H. H. (2013). Impact of Large Ownership on Firm
Performance: A Case of non Financial Listed Companies of Pakistan. World Applied
Sciences Journal, 21(4), 1141-1152.
Abdullah, F., Shah, A., & Khan, S. U. (2012). Firm performance and the nature of agency
problems in insiders-controlled firms: Evidence from Pakistan. The Pakistan
Development Review, 2(2), 161-182.
Abor, J. (2005). Small Business Reliance on Bank Financing in Ghana. Emerging Markets
Finance and Trade, 43( 4), 93–102.
Adam, T.R., & Goyal,V.K. (2008).The investment opportunity set and its proxy
variables.Journal of Financial Research, 31(1), 41-63.
Adetunji, A., Akinyemi, I., & Rasheed, K. (2016). Financial leverage and firms' value: a study of
selected firms in Nigeria.European Journal of Research and Reflection in Management
Sciences, 4(1), 14-32.
Afza, T., & Mirza, H. H. (2010). Ownership Structure and Cash Flows As Determinants of
Corporate. International Business Research , 3 (3), 210-221.
Agnblad, Jonas, Erik, B., Peter.,& Helena, S. (2001).Ownership and Control in Sweden: Strong
Owners, Weak Minorities, and Social Control. Oxford: Oxford University Press.
Aharony, J., & Dotan, A. (1994). Regular dividend announcements and future unexpected
earnings: An empirical analysis. Financial Review, 29(2), 125–151.
Aivazian, V., Booth, l., Cleary, S. (2003). Do emerging market firms follow different dividend
policies from US firms?Journal of Finance Research,26(3),371- 387.
Akbar,M.,& Baig, M.A.(2010) .Reaction of Stock Prices to Dividend Announcements and
Market Efficiency in Pakistan. The Lahore Journal of Economics, 15( 1), 103-125.
Ali, A., Chen, T. Y., & Radhakrishnan, S. (2015). Corporate disclosures by family firms. Journal
of Accounting and Economics, 44(2), 238-286.
136
Ali, A., Shah, A., & Jan, F. A. (2015). Leverage, Ownership Structure and Firm Performance:
Evidence from Karachi Stock Exchange. Journal Of Management Info, 6(1), 1-19.
Alii, K.L., Khan, A.Q., & Ramirez, G.G. (1993).Determinants of corporate dividend policy: A
factorial analysis.Financial Review, 28(2), 523-47.
Aljifri, K., & Hussainey, K. (2007). The determinants of forward-looking information in annual
reports of UAE companies. Managerial Auditing Journal, 22(9), 881-894.
Al-Kuwari, D. (2009).Determinants of the Dividend Policy in Emerging Stock Exchanges: The
Case of GCC Countries. Global Economy & Finance Journal,2(2),38-63.
Allen, F.(1997). Financial markets, intermediaries, and inter temporal smoothing. Journal of
Political Economy, 15 (3), 523-545.
Allen, F., and Michaely,R. (2002).Payout Policy. Handbook of Economics of Finance. North-
Holland: Amsterdam.
Al-Malkawi, H. A. N. (2007). Determinants of Dividend Policy in Jordan, An application of
Tobit Model. Journal of Economic and Administrative Sciences, Vol. 23, No. 2, 44-70.
Al-Malkawi, H.A.N., & Pillai, R. (2013).Corporate governance and firm performance: evidence
from UAE. International Journal of Applied Social Sciences, 2(1), 37-42.
Almeida, H., & Daniel Wolfenzon,D. (2003a). A Theory of Pyramidal Ownership and Family
Business Groups. Working paper .
Al-Najjar, B. (2010). Corporate governance and institutional ownership: evidence from Jordan.
Corporate Governance, 10 (2), 176-190.
Al-Najjar, D. (2017).The impact of external financing on firm value and a corporate governance
index: SME evidence. Journal of Small Business and Enterprise Development, 24(2),
411-423.
Altman, E.(1984), A further empirical investigation of the bankruptcy cost question, Journal of
Finance 39(5), 1067-1090.
137
Amidu, M. (2007). How does dividend policy affect performance of the firm on Ghana stock
Exchange. Investment Management and Financial Innovations, 4(2), 104 – 112.
Amidu, M., & Abor, J. (2006).Determinants of dividend payout ratios in Ghana.The Journal of
Risk Finance,7(2), 136-145.
Amjed, S (2010). Impact of Financial Structure on Firm’s Performance. A study of Pakistan’s
Chemical Sector. staff working paper. Department of Commerce, Allama Iqbal Open
University.
Anderson, R. C. & Reeb, D. M. (2004). Board composition: Influence in S&P 500 Firms.
Administrative Science Quarterly, 49(2), 209–237.
Anderson, R. C., Mansib, S. A., & Reeb, D. M. (2003). Founding family ownership and the
agency cost of debt. Journal of Financial Economics, 68(2), 263-285.
Anderson, R., & Reeb, D.M. (2003). Founding Family Ownership and Firm Performance,
Evidence from the S&P 500. The Journal of Finance, 58(3), 1301-1328.
Anil, K., & Sujata. (2008). Determinants of dividend payout ratio-A study of Indian Information
Technology Sector, International Research Journal of Finance and Economics, 15(2),
63-71.
Arellano, M. (2003). Panel Data Econometrics. Oxford: Oxford University Press.
Arnott, D. R., & Asness, S. C. (2003). Surprise higher dividends is higher earnings growth.
Financial Analyst Journal, 1(2),70 – 87.
Arosa, B., Iturralde, T., & Maseda, A. (2010). Ownership structure and firm performance in non-
listed firms: Evidence from Spain. Journal of Family Business Strategy, 1(2), 88-96.
Auerbach,A.J.(1979). A Brief Note on a Non—Existent Theorem About the Optimality of
Uniform Taxation. Economics Letters, 3, 149-52.
Ayub, M. (2005). Corporate Governance and Dividend Policy, Pakistan Economic and Social
Review 1 XLIII (2005): 115-128.
138
Bae, K.H., Jun-Koo K., & Jin, W. (2011).Employee Treatment and Firm Leverage: A Test of the
Stakeholder Theory of Capital Structure. Journal of Financial Economics, 100 (1), 130–
53.
Baker, H. K. & Powell, G. E. (1999). How corporate managers view dividend policy? Quarterly
Journal of Business and Economics, 38 (2), 17-27.
Baker, H.K. and Powell, G.E. (1999), ―How corporate managers view dividend
policy‖,Quarterly
Baltagi, B. H. (2001). Econometric Analysis of Panel Data. Wiley, John & Sons.
Baños-Caballero, S., García-Teruel, P.J., & Martínez-Solano, P. (2014).Working capital
management, corporate performance, and financial constraints.Journal of Business
Research, 67( 3),332-338.
Barajas, A., Chami,R., & Yousefi., S.R.(2013).The Finance and Growth Nexus Re-examined: Do
All Countries Benefit Equally? Journal of Political Economy, 105 (3), 523-545.
Barberis, N., & Thaler,R.(2003). A Survey of Behavioral Finance, Handbook of the Economics of
Finance, National Bureau of Economic Research.
Barbosa, N., & Louri, H. (2002). On the determinants of multinationals’ ownership preferences:
Evidence from Greece and Portugal, International Journal of Industrial Economics,
20(4), 1837-1863.
Barca, Fabrizio,& Marco, Becht.(2001). The Control of Corporate Europe. Oxford: Oxford
University Press.
Barclay, M. J., & Smith, C. W. (2005). The Capital Structure Puzzle: The Evidence Revisited,
Journal of Financial Economics ,61(1), 26-47.
Barney, J. (1991). Firm resources and sustained competitive advantage. Journal of Management,
17 (1), 99–120.
Baxter, N. (1967). Leverage, risk of rum and the cost of capital. Journal of Finance, 22(3), 395-
403.
139
Bebchuk, L.,Kraakman,R., & Triantis,G. (2000). Stock pyramids, cross-ownership, and dual
class equity: the creation and agency costs of separating control from cash flow rights.
Concentrated Corporate Ownership. University of Chicago Press, Chicago.
Becker-Blease, J.R., Kaen, F.R., Etebari, A., & Baumann, H. (2010). Employees, firm size and
profitability in US manufacturing industries, Investment Management and Financial
Innovations, Journal of Basic and Applied Scientific Research, 7(2), 7-23.
Belghitar, Y., & Khan, J. (2013). Governance mechanisms, investment opportunity set and
SMEs cash holdings. Small Business Economics, 40(1), 59-72.
Benartzi, S, Roni, M.,& Richard, T.(1997), Do changes in dividends signal the future or the past?
Journal of Finance,52(4), 1007-1034.
Ben-David, I. (2010). Dividend policy decisions in Behavioral Finance. Hoboken: Wiley.
Ben-David, I., Graham, J.R, & Campbell R. Harvey.,C.R. (2013). Managerial Miscalibration.
Quarterly Journal of Economics, 12(4),1547–84.
Ben-Naceur, S. B., & Goaied, M. (2001).The determinants of the Tunisian deposit bank’s
performance, Applied Financial Economics, 11(2), 317-19.
Ben-Naceur, S., Goaied, M., & Belanes, A. (2006). On the Determinants and Dynamics of
Dividend Policy. International Review of Finance, 6(1), 1-23.
Berger, A., & E. Bonaccorsi di Patti. (2006). Capital structure and firm performance: a new
approach to testing agency theory and an application to the banking industry. Journal of
Banking and Finance, 30(4), 1065-102.
Berle, A. A., & Means, G. C. (1932). The modern corporation and private property. New York:
Harcourt, Brace and World.
Bernstein, P.L. (1996).Dividends: the puzzle. Journal of Applied Corporate Finance, 9(1), 4-15.
Bhaduri, S. (2002).Determinants of Capital Structure Choice: A Study of the Indian Corporate
Sector. Applied Financial Economics,16(3), 655-665.
140
Bhardwaj.,A. (2012). Inter-Industry Differences in Capital Structure: The Evidence from India
.Journal of Economics, Finance and Management,2( 4), 28-34.
Bhattacharya, S. (1979). Imperfect Information, Dividend Policy, and The Bird In the Hand
Fallacy.BellJournal of Economics, 10(1), 259-270.
Birley,S.,Ng,D.,& Godfrey,A.(1999).The family and the business. Long Range Planning,
Journal of Banking and Finance ,32 (6), 598-608.
Bjuggren, P.O., & Palmberg, J. (2009). A contractual perspective of the firm with an application
to the maritime industry. The modern firm, corporate governance and investment.
Cheltenham, UK: Edward Elgar.
Black, F. (1976). The Dividend Puzzle, Journal of Portfolio Management, 2(1), 5-8.
Blinder,A. S.& L. J. Maccini,L.J. (1991).The Resurgence of Inventory Research: What Have We
Learned?. Journal of Economic Survey, 5(2), 291-328.
Blondel, C., Rowell, N., & Van-der-Heyden, L. (2002). Prevalence of patrimonial firms on Paris
Stock Exchange: analysis of the top 250 companies in 1993 and 1998. Working paper,
Fontainebleau, France.
Blundell, R.,& Bond,S. (1998). Initial Conditions and Moment Restrictions in Dynamic Panel
Data Models.Journal of Econometrics, 87(1), 115–143.
Bontis, N. (1996). There’s a Price on your Head: Managing Intellectual Capital Strategically.
International Journal of Technology Management, 18(3), 433- 462.
Boubaker, S.(2007). On the relationship between ownership control structure and debt financing:
New evidence from France. Journal of Banking and Finance , 5(2), 139-154.
Bouwman, C. (2014). Managerial Optimism and Earnings Smoothing. Journal of Applied
Corporate Finance, 4(1), 283-303.
Bradbury, M.(1992). Voluntary Disclosure of Financial Segment Data: New Zealand Evidence.
Accounting and Finance,1(1),15–26.
141
Bradley, M., Jarrell, G.A., & Kim, E.H.(1984). On the existence of an optimal capital structure.
Journal of Finance, 39(4), 899-917.
Brealey R. & Myers, S. (2005) .Principles of Corporate Finance (8th edition): London:
McGraw-Hill.
Brealey, R. A., Myers, S. C., & Allen, F. (2017). Principles of Corporate Finance, New York:
Harcourt, Brace and World.
Brickley, J. A. (1983). Shareholder wealth, information signaling and the specially designated
dividend: An empirical study. Journal of Financial Economics, 3(1),187–209.
Brown, S. & Caylor, D. (2004). Corporate Governance and Firm Performance,European
Financial Management, 10(2), 151-170.
Budagaga, A. (2017). Dividend Payment and its Impact on the Value of Firms Listed on Istanbul
Stock Exchange: A Residual Income Approach. International Journal of Economics and
Financial Issues, 7(2), 370–376.
Caby, J. (1996). Empirical investigation of the relationship between intellectual capital and
firms’ market value and financial performance. Journal of Financial Economics, 1(2),
49-56.
Cameron, A. C., & Trivedi,P.k.(2009). Microeconometrics Using Stata. TX: Stata Press.
Carvalhal-Da-Silva, A., & Leal, R.P.C. ( 2004). Corporate Governance, Market Valuation and
Dividend Policy in Brazil.Frontiers in Financial Economics, 1(1), 1-16.
Casson, M. (1982). The entrepreneur: An economic theory. Oxford: Martin Robertson.
Casson, M., (1999). The economics of the family firm. Scandinavian Economic History Review
47(1), 263-285.
Castro, L.R.K , Ruth V., Aguilera, R.V., & Rafel C.(2016). Family Firms and Compliance:
Reconciling the Conflicting Predictions within the Socioemotional Wealth Perspective,
Family Business Review, 2(1),1–23.
142
Chakraborty, I. (2010). Capital structure in an emerging stock market: The Case of India.
Research in International Business and Finance,24(2), 295-314.
Chakraborty,I. (2016). Effects of Ownership Structure on Capital Structure of Indian Listed
Firms: Role of Business Groups vis-a-vis Stand-Alone Firms. European Financial
Management, 10(2), 151-170.
Chami, R. (1999). What's Different About Family Business? Journal of Business Research.2 (2),
41-52.
Charles W. L. Hill, (1989). Effects of Ownership Structure and Control on Corporate
Productivity, Journal of Academy of Management, 32(1), 25-46.
Cheema, A., Bari, F., & Saddique, O. (2003). Corporate Governance in Pakistan: Ownership,
Control and the Law, Lahore University of Management Sciences, Lahore.
Chen, M.C., Cheng, S.J., & Hwang, Y. (2005).An empirical investigation of the relationship
between intellectual capital and firms’ market value and financial performance. Journal
of Intellectual Capital, 6(2), 159-176.
Chen, R., & K. A. Wong.(2004). The Determinants of Financial Health of Asian Insurance
Companies. Journal of Risk and Insurance, 71(3), 469–499.
Chen, Z., Cheung, Y.L, Stouraitis, A., & Wong, A. W.S. (2005). Ownership concentration, firm
performance, and dividend policy in Hong Kong. Pacific-Basin Finance
Journal,13(4),431-449.
Cheng, M. C., & Tzeng, Z. C. (2011). The effect of leverage on firm value and how the firm
financial quality influences on this effect. World Journal of Management, 3(2), 30-53.
Cho, M.H. (1998). Ownership Structure, Investment, and the Corporate Value: An Empirical
Analysis.Journal of Financial Economics, 47( 1), 103–121.
Choi, Y. R., Zahra, S. A., Yoshikawa, T., & Han, B. H. (2015). Family ownership and R&D
investment: The role of growth opportunities and business group membership. Journal of
Business Research, 68(5), 1053–1061.
143
Chrisman, J. J., Chua J. H., & Litz, R.A. (2004). Comparing the agency costs of family and non-
family firms: Conceptual issues and exploratory evidence. Entrepreneurship Theory and
Practice, 28(4), 335– 354.
Chrisman, J. J., Chua, J. H., & Sharma, P. (2003). Current trends and future directions in family
business management studies: Toward a theory of the family firm. International Journal
of Business and Management, 23(4), 19-39.
Chung, K., & Charoenwong, C.(1991). Investment options, assets in place, and the risk of stocks.
Financial Management, 20(1), 21-33.
Claessens, S., Djankov, S., & Lang, L. (2000).The Separation of Ownership and Control in East
Asian Corporations. Journal of Financial Economics, 58(2), 81-112.
Coles, J., Daniel, N., & Naveen, L., (2006). Managerial incentives and risk-taking. Journal of
Financial Economics, 4(3), 431-468.
Collins, D.W., & Kothari, S.P. (1989). An analysis of inter temporal and cross-sectional
determinants of earnings response coefficients. Journal of Accounting and Economics,
11(2), 143-181.
Cordeiro, L. (2009). Managerial Overconfidence and Dividend Policy. Working paper: London
Business School.
Corstjens, M., Heyden, L.V., & Maxwell, K. (2004).The Performance of French Family Firms,
Insead Working Paper.
Cuervo, A. (2002) ―Corporate Governance Mechanisms: A Plea for Less Code of Good
Governance and More Market Control.‖ Corporate Governance: An International
Review, 10 (2), 84–93.
Cyert, R. M., & March, J. G. (1963). A behavioral theory of the firm. Englewood Cliffs, NJ:
Prentice Hall.
D’Souza, J. (1999).Agency cost, market risk, investment opportunities and dividend policy – an
international perspective. Managerial Finance,25(6),35-43.
144
DeAngelo, H., & Masulis, R.(1980).Optimal capital structure under corporate and personal
taxation.Journal of Financial Economics, 8(1), 3-29.
DeAngelo, H., DeAngelo, L., & Skinner, D. J. (2000). Corporate payout policy ; Foundations
and Trends in Finance. Boston, MA: Now Publishers.
Deloof, M., & Jeger,M. (1996). Trade Credit. Product Quality, and Intra group Trade: Some
European Evidence. Financial Management,25(3), 945-968.
Demsetz, H., & Villalonga,B. (2001). Ownership Structure and Corporate Performance.Journal
of Corporate Finance, 7(3), 209–233.
Demsetz, H., &Lehn, K., (1985). The structure of corporate ownership: Causes and
consequences. Journal of Political Economy, 93(4),1155–1177.
Deshmukh, S., Goel, A.M., & Howe, K.M. (2013). CEO Overconfidence and Dividend Policy.
Journal of Financial Intermediation, 22(3),440–63.
Dhanani, A. (2006). Corporate Dividend Policy: The Views of British Financial Managers.
Journal of Business Finance & Accounting, 8(2), 105-122.
Diamond, D.(1991).Monitoring and Reputation: the Choice Between Bank Loan and Directly
Placed Debt. Joumal of Political Economy, 4(4), 689-721.
Din, S. U., & Javid, A. Y. (2011). Impact of managerial ownership on financial policies and the
firm’s performance: evidence Pakistani manufacturing firms. Journal of Financial
Economics, 32(3), 263–292.
Draper, N.R. (1984). The Box-Wetz criterion versus R2. Journal of the Royal Statistical Society ,
147, 100–103.
Driffield, N., Mickiewicz,T., and Temouri, Y. (2016). Ownership control of foreign affiliates: a
property rights theory perspective.Journal of World Business, 1(5), 965–976.
Dyck, A., & L. Zingales, (2004). Private benefits of control: An international comparison.
Journal of Finance, 59(2),537-600.
145
Dyer, W. G. (2006). Examining the "family effect" on firm performance. Family Business
Review, 19(2),253–273.
Easterbrook, F.H. (1984).Two agency-cost explanations of dividends. The American Economic
Review, 74(3), 650-659.
Ebaid, E. I. (2009).The impact of capital-structure choice on firm performance: empirical
evidence from Egypt. The Journal of Risk Finance, 10(5),477-487.
Eckbo, B.E., & Verma,S. (1994). Managerial Shareownership, Voting Power, and Cash
Dividend Policy.Journal of Corporate Finance, 1(1), 33-62.
Edvinsson, L., & Malone, M. (1997). Intellectual capital. New York: Harper Business.
Ellul, A. (2008). Control motivations and capital structure decisions. European Financial
Management, 10(2), 151-170.
Emery, D. R., & Finnerty, J. D. (1997). ―Corporate Financial Management‖. Financial
Management, 37(4), 673-694.
Emery, G.W. (1984). A Pure Financial Explanation for Trade Credit. Journal of Financial and
Quantitative Analysis 19 (3), 271-285.
Ensley, M.D., & Pearson, A.W. (2005). An exploratory comparison of the behavioral dynamics
of top management teams in family and nonfamily new ventures cohesion, conflict,
potency and Dividend, and Compensation Policies. Journal of Financial Economics,
32(3), 263–292.
Faccio, M., Lang, L. (2002). ― The ultimate ownership of Western European corporations. ‖
Journal of Financial Economics, 65(1), 365– 395.
Fama, E.F, & French, K.R.( 2002). Testing Tradeoff and Pecking Order Predictions about
Dividends and Debt. Review of Financial Studies, 15(1), 1-33.
Fama, E.F, & Jensen, M.C.(1983b). Separation of ownership and control. Journal of Law and
Economics, 26(1), 301– 325.
146
Fama, E.F, & Jensen, M.C.(1985). Organization forms and investment decision. Journal of
Financial Eeconomics ,14(2), 101-119.
Fama, F.(1980). Agency problems and the theory of the firm, Journal of Political Economics,
88(1), 288–307.
Fan, J.P.H., Wong, T.J.,& Zhang, T. (2007). Politically connected CEOs, corporate governance,
and post-IPO performance of China’s newly partially privatized firms. Journal of
Financial Economics ,84(3), 330-357.
Farooq, S., Ahmed, S., & Saleem, K. (2015). Overinvestment, growth opportunities and firm
performance: evidence from Singapore stock market. Corporate Ownership & Control,
12(4), 454-467.
Farrar, D., & Selwyn, L. (1967).Taxes, corporate financial policy and return to investors.
National Tax journal,5(4), 444-454.
Farrukh, K., Irshad, S., Shams Khakwani, M., Ishaque, S., & Ansari, N. (2017).Impact of
dividend policy on shareholders wealth and firm performance in Pakistan. Cogent
Business & Management, 4(1), 1-11.
Faulkender, M., & Wang,R.(2006). Corporate financial policy and the value of cash. The
Journal of Finance 61( 4), 1957-1990.
Fazzari, S.R., Hubbard, G., &Petersen,B. (1988). Financing constraints and corporate
investment, Brooking Papers on Economic Activity, 1(3), 141-195.
Feinberg, R.M. (1975). Profit maximization vs. utility maximization. Southern Economic
Journal ,42(2), 130-134.
Feng,L., & Tsangyao, C.( 2010).Does Family Ownership Affect Firm Value in Taiwan? A Panel
Threshold Regression Analysis. International Research Journal of Finance and
Economics, 4(2),45-53.
Florackis, C & Ozkan, A.(2004).Agency costs and corporate governance mechanisms: Evidence
for UK firms. Managerial Auditing Journal, 10(4), 23-34.
147
Foong, S.S., Zakaria, N.B. & Tan, H.B. (2007).Firm Performance and Dividend Related Factors:
The Case of Malaysia. Labuan Bulletin of International Business & Finance, 5(1), 97-
111.
Fosu, S., Danso, A., Ahmad, W., & Coffie, W., (2016). Information Asymmetry, Leverage and
Firm Value: Do Crisis and Growth Matter? International Review of Financial Analysis,
46(1), 140-150.
Francis, J., Schipper, K., & Vincent, L. (2005). Earnings and Dividend Informativeness when
Cash Flow Rights Are Separated from Voting Rights. Journal of accounting and
economics, 39(3), 329-360.
Frankfurter, G.M., & Lane, W.R. (1992). The rationality of dividends. International Review of
Financial Analysis 1(2), 115–130.
Friend, I. and Hasbrouck, J.( 1988).Determinants of Capital Structure.Research in Finance, 7(1),
1-19.
Friend, I., & Lang, L.H.P.( 1988).An Empirical Test of the Impact of Managerial Self interest on
Corporate Capital Structure.Journal of Finance, 47(2), 271-281.
Gashi, G., & Ramadani, V. (2013). Family businesses in Republic of Kosovo: Some general
issues. Entrepreneurship in the Balkans: Diversity, support and prospects. New York:
Springer.
Gaver, J.J., & Gaver, K.M. (1993). Additional Evidence on the Association Between the
Investment Opportunity Set and Corporate Financing, Dividend, and Compensation
Policies.Journal of Accounting and Economics, 16(3), 125-160.
Ghalandari,K.(2013). The Effect of Service Quality on Customer Perceived Value and Customer
Satisfaction as Factors Influencing Creation of Word of Mouth Communications in Iran.
Journal of Basic and Applied Scientific Research,3(4), 305-312.
Glen, J. D., Karmokolias, Y., Miller, R.R., & Shah, S.(1995).Dividend policy and behavior in
emerging markets: To pay or not to pay. Journal of Business, 75(1), 387-424.
148
Gomez-Mejia, L. R., Larraza-Kintana, M., & Makri, M. (2003). The determinants of executive
compensation in family-controlled publicly traded corporations.Academy of Management
Journal, 44(2), 226–237.
Gonzalez, M., Guzman, A., Pombo, C., & Trujillo, M.A. (2014), Family Involvement and
Dividend Policy in Closely Held Firms, Family Business Review, 27 (4), 365-385.
Gordon, M. (1961). The Investment, Financing, and Valuation of the Corporation. Review of
Economics and Statistics,2(1),15-23.
Gordon, M. (1962). The savings, investment and valuation of a corporation, Review of
Economics and Statistics, 2(2), 37-51.
Gordon, M. (1963). Optimal investment and financing policy. Journal of Finance, 18(2), 264-72.
Goyal, V.K., Lehn, K., & Racic, S.( 2002). Growth opportunities and corporate debt policy: the
case of the U.S. defense industry, Journal of Financial Economics, 64(1), 35-59.
Graff, J.De.V. (1950). Inome effect and theory of the firm. Review of the Economic Studies,
1(1), 79-86.
Green, P., Pogue, M., & Watson, I. (1993).Dividend policy and its relationship to investment and
financing policies: empirical evidence using Irish data. Journal of Banking and Finance
,14,(2),69-83.
Greene, W.H. (2008). Econometric Analysis, 6th ed. Upper Saddle River, NJ: Prentice Hall.
Greve, H.R. (2003). A behavioral theory of R&D expenditures and innovations: evidence from
shipbuilding. Academy of Management Journal, 46, 685–702.
Grossman, S.,& Oliver, Hart. (1982). Corporate financial structure and managerial
incentives;The economics of information and uncertainty. University of Chicago Press,
Chicago.
Grullon, R.M., & Swaminathan. (2002). Are Dividend Changes a Sign of Firm Maturity?
Journal ofBusiness,75(3), 387-424.
149
Gugler, K, (2001). Corporate governance, dividend payout policy, and the interrelation between
dividends, R&D, and capital investment. Journal of Banking & Finance, 27 (2), 1297–
1321.
Gugler, K., & Yurtoglu, B. (2003).Corporate governance and dividend pay-out policy in
Germany. European Economic Review, 47(2), 731–758.
GUL, F. A. (1999).Audit Prices, Product Differentiation and Economic Equilibrium. Auditing: A
Journal of Practice and Theory, 18 (1), 90–100.
Gurbuz, A.O., Aybars, A. & Kutlu, O. (2010).Corporate governance and financial performance
with a perspective on institutional ownership: empirical evidence from Turkey. Joumal of
Political Economy ,8(2), 22-37.
Gursoy, G., & Aydogan, K. (2002). Equity ownership structure, risk taking and performance.
Emerging Market. Finance. 38(6), 6-25.
Haat, M. H. C., Rahman, R. A., & Mahenthiran, S. (2008). Corporate governance, transparency
and performance of Malaysian companies. Managerial Auditing Journal, 23(8), 744-778.
Han,A.,& Naughton, T. (2008). The Impact of Family Ownership on Firm Value and Earnings
Quality: Evidence from Korea. Family Business Review, 13(2), 121-131.
Harford, J., Mansi,S. & Maxwell,W. (2008). Corporate Governance and Firm Cash Holdings.
Journal of Financial Economics, 87(3), 535-555.
Hasan, A., & Butt, S.A. (2009). Impact of Ownership Structure and Corporate Governance on
Capital Structure of Pakistani Listed Companies. International Journal of Business and
Management, 4(2), 50-57.
Hassen, R. (1983). The modern corporation and private property: A reappraisal. Journal of Law
and Economics ,26(2), 273-289.
Hausman, J. A.( 1978). Specification Tests in Econometrics. Econometrica, 46(6),1251- 1271.
Healy, M. J. R. (1984). The use of R2 as a measure of goodness of fit. Journal of the Royal
Statistical Society , 147, 608-609.
150
Hendry, J. (2002). The principal’s other problems: Honest incompetence and the specification of
objectives. Academy of Management Review, 27(2), 98-113.
Hermalin, B.E., & Weisback, M. S. (1991). The effect of board composition and direct
incentives on corporate performance. Financial Management, 20(2), 101-12.
Higgins, R.C. (1972).The corporate dividend-saving decision. Journal of Financial and
Quantitative Analysis, 7(2),1527-1541.
Higgins, R.C. (1981).Sustainable growth under inflation. Financial Management, 10(1),36-40.
Hill, C.W. & Snell, S. (1989). The effects of ownership structure and control on corporate
productivity. Academy of Management Journal, 32(1), 25-46.
Himmelberg, C., Hubbard, R.G., & Palia., D. (1999). Understanding the determinants of
managerial ownership and the link between ownership and performance. Journal of
Financial Economics, 53(2), 353-384.
Hirshleifer, J. (1966). Investment decision under uncertainty: Applications of the state preference
approach. The Quarterly Journal of Economics, 80, 2, 252.
Holderness, C., Kroszner, R., and Sheehan, D. (1999). Were the good old days that good?
Evolution of managerial stock ownership and corporate governance since the great
depression. Journal of Finance, 54, 435-469.
Holderness, C.G., & Dennis, P. S. (1988). The Role of Majority Shareholders in Publicly Held
Corporations.Journal of Financial Economics, 20(3),317-346.
Hossain, M., Prevost, A. K., & Rao, R. P. (2001). Corporate governance in New Zealand: The
effect of the 1993 Companies Act on the relation between board composition and firm
performance. Pacific-Basin Finance Journal, 9(2), 119-145.
Howorth, C., & Westhead, P. (2006). Information asymmetry in management buyouts of family
firms. Journal of Business Venturing, 19(4), 509–534.
Huang, S., & Song.F. (2006). The determinants of capital structure: evidence from China. China
Economic Review, 17(1), 14-36.
151
Hutchinson, M., & Gul, A.F.(2004).Investment opportunity set, Corporate Governance Practices
and Firm Performance. Journal of Corporate Finance, 10(3), 595-614.
Ibrahim, A.A. (2006) Corporate governance in Pakistan: Analysis of current challenges and
recommendations for future reforms. Washington University Global Studies, Law
Review, 5(2), 323-332.
Imran, K. (2011). Determinants of dividend payout policy: A case of Pakistan engineering
sector. The Romanian Economic Journal, 4(1),47–60
Iturriaga, F. J. L., & Crisóstomo, V. L. (2010). Do leverage, dividend payout, and ownership
concentration influence firms' value creation? An analysis of Brazilian firms. Emerging
Markets Finance and Trade, 46(3), 80-94.
Jakata, O., & Nyamugure, P. (2015). The Effect of Dividend Policy on Stock price: Empirical
Evidence from the Zimbabwe Stock Exchange. International Journal Science and
Research. 4(10), 674-683.
James, H. (1999). ―Owner as Manager, Extended horizons and the family firm. ‖ International
Journal of the Economics of Business ,6(2), 41-56.
Javid, A. Y., & Iqbal, R. (2008). Ownership concentration, corporate governance and firm
performance: Evidence from Pakistan. The Pakistan Development Review,4(3), 643-659.
Javid, A. Y., & Iqbal, R. (2010). Corporate governance in Pakistan: Corporate valuation,
ownership and financing .Working Paper, Islamabad: Pakistan Institute of Development
Economics.
Jensen, C. M., & W. H. Meckling, W.H.(1976). Theory of Firm: Managerial Behavior, agency
cost and Capital structure.Journal of Financial Economics, 3, 305-360.
Jensen, M. C. (1986). Agency costs of free cash flow, corporate finance, and takeovers. The
American Economic Review, 76( 2), 323–329.
Jensen, M. C., & Meckling,W. H. (1976). Theory of the firm: Managerial behavior, agency costs
and ownership structure. Journal of financial economics, 3(4), 305– 360.
152
Jensen, M.C. (2002). Value Maximization, Stakeholder Theory, and the corporate objection
function. Journal of Finance, 12(2), 235-256.
Jensen, M.C., (1986). Agency costs of free cash flow, corporate finance and takeovers. American
Economic. Review., 76(1), 323-329.
Jensen, M.C., William, H., & Meckling (1978). Can the Corporation Survive?.Journal of
Finance, 39(2), 575-592.
John, K. & J. Williams (1985). Dividends, Dilution, and Taxes: A Signaling Equilibrium. The
Journal of Finance, 40(6), 1053-1070.
John, K., & Kalay, A. (1982).Costly contracting and optimal payout constraints.Journal of
Finance.37(3), 457-470.
John, K., & Williams, J. (1985). Dividends, Dilution and Taxes: A Signaling Equilibrium.
Journal of Finance, 40(4), 1053-1070.
Journal of Business and Economics, Vol. 38 No. 2, pp. 17-35
Julio-de -Castro, Berrone,P. Cruz,C.,& Luis,R.(2017). The Bind that Ties: Socioemotional
Wealth Preservation in Family Firms. Academy of Management Journal, 5(1), 685–702.
Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk.
Econometrica, 47(2), 263-291.
Kaleem, A., & Salahuddin, C. (2006). Impact of dividend announcement on common stock
prices at Lahore Stock Exchange (Pakistan). South Asian Journal of Management, 13(2),
210-221.
Kaplan, R. S., & Norton, D. (2004). The strategy map: Guide to aligning intangible assets.
Strategy and Leadership, 32(5), 10–17.
Karadeniz, E., Kandir, S.Y., Balcilar, M., & Onal, Y.B. (2009).Determinants of capital structure:
evidence from Turkish lodging companies.International Journal of Contemporary
HospitalityManagement, 21( 5), 594-609.
153
Kaye, K.(1996).When the family business is a sickness. Family Business Review, 9(4), 347–368.
Kennedy P. (2008). A Guide to Econometrics. Malden, MA: Blackwell.
Khan, A. (2014). How Does Stock Prices Respond to Various Macroeconomic Factors? A Case
Study of Pakistan. Journal of Management Information, 4(1), 75-95.
Khan, A. G. (2012). The relationship of capital structure decisions with firm performance: A
study of the engineering sector of Pakistan. International Journal of Accounting and
Financial Reporting, 2(1), Pages-245.
Khan, A., Kaleem, A., & Nazir, M. S. (2012). Impact of financial leverage on agency cost of
free cash flow: Evidence from the manufacturing sector of Pakistan. Journal of Basic
and Applied Scientific Research, 7(2), 6694-6700.
Khan, M.N., Nadeem, B., Islam, F.,Salman,M., & Gill ,S. (2016). Impact of Dividend Policy on
Firm Performance: An Empirical Evidence From Pakistan Stock Exchange.American
Journal of Economics, Finance and Managemen, 2( 4), 28-34.
Kieschnick, R.L., Laplante, M., & Moussawi, R. (2009). Working Capital Management, Access
to Financing, and Firm Value. European Financial Management, 10(2), 151-170.
Kim, E.H. (1978). A mean-variance theory of optimal capital structure and corporate debt
capacity. Journal of Finance, 33(1), 45-64.
Kim, H., & Lee, P. (2008). Ownership structure and the relationship between financial slack and
R&D investments. Journal of Business Research, 19(3), 404-418.
King, M.R., & Santor, E. (2008). Family values: Ownership structure, performance and capital
structure of Canadian firms. Journal of Banking and Finance, 32(4), 2423-2432.
Knaub, J. (2007). Encyclopedia of Measurement and Statistics, American Statistical Association.
Kouki, M., & Guizani, M. (2009). Corporate Governance and dividend policy in Poland. Warsaw
School of Economics, World Economy Research Institute, Poland.
Kraus, A., & Litzenberger, R.(1973). A state-preference model of optimal financial
154
leverage.Journal of Finance, 28(4), 911-922.
Kumar, J. (2006). Corporate Governance and Dividend Policy in India, Journal of Emerging
Market Finance,5( 5), 15-58.
Kuznetsov P, Muravyev A. (2001). Ownership structure and firm performance in Russia: The
case of blue chips of the stock market. Working paper, Economics Education and
Research Consortium.
Lang, L.H.P., & Litzenberger. R.H. (1989). Dividend Announcements: Cash Flow Signaling
Versus Free Cash Flow Hypothesis. Journal of Financial Economics, 24(1), 181–191.
Lang, L.H.P., Ofek, E., & Stulz, R.M.( 1996). Leverage, Investment, and Firm Growth.Journal
of Financial Economics, 40( 1), 3–29.
Lansberg, I. (1999). Succeeding generations: Realizing the dream of families in business.
Boston, MA: Harvard Business School Press.
La-Porta, R.F, López-de-Silanes, F. S., Shleifer, A., & Vishny, R. (2000). Investor protection and
corporate governance. Journal of Financial Economics, 58(1), 3-27.
La-Porta, R.F, López-de-Silanes, F. S., Shleifer, A., & Vishny, R. (1997). Legal Determinants of
External Finance. Journal of Finance ,52(3), 1131–1150.
Li, K., & Zhao, X. (2008).Asymmetric information and dividend policy. Financial Management,
37(4), 673-694.
Lintner, J. (1956). Distribution of Incomes of Corporations among Dividends, Retained Earnings
and Taxes,Amencan Economic Review, 97-113.
Long, M.S., & Malitz,E.B.( 1985). Investment patterns and financial leverage, Corporate capital
structures in the United States , Chicago, University of Chicago Press.
Lonkani,R. (2013). Selectivity and Market Timing Performance in a Developing Country’s Fund
Industry: Thai Equity Funds Case. Journal of Applied Finance & Banking, 3( 2), 89-108.
155
López-Gracia ,J., López-Iturriaga, F.J., &Rodríguez-Sanz, J.A.(2015).The Two Faces of Debt or
the Two Faces of Dividends? Growth Opportunities and Firm Value in China.Journal of
Basic and Applied Scientific Research, 7(1), 8-24.
Mahakud, J. (2006).Testing the pecking order theory of capital structure: evidence from Indian
corporate sector. The ICFAI Journal of Applied Finance,12(1),16- 26.
Malik, M. & Maqsood, M. (2015). Impact of Changes in Dividend Policy on Firm’s Value: A
Case Study of Cement Sector of Pakistan. Journal of Basic Sciences and Applied
Research,1(4), 41-52.
Malitz,L.B., & Ravid,S.A. (1993).Trade Credit, Quality Guarantees, and Product Marketability.
Fmancial Management, 22(4), 117-127.
Malmendier, U., Tate, G., (2005). CEO overconfidence and corporate investment. Journal of
Finance 60(4), 2661–2700.
Mansur, H., & Tangl, A. (2018). The Effect of Corporate Governance on the Financial
Performance of Listed Companies in Amman Stock Exchange, Jordan. Journal of
Advanced Management Science, 6(2), 97-102.
Margaritis, D., & Psillaki, M. (2010). Capital structure, equity ownership and firm
performance. Journal of Banking & Finance, 34(3), 621-632.
Marquardt, D. W. (1980). Comment: You should standardize the predictor variables in your
regression models. Journal of the American Statistical Association, 75(1), 87-91.
Maseda,A., Iturralde,T., Aparicio,G.,Boulkeroua,L.,& Cooper,S.(2018). Family board
ownership, generational involvement and performance in family SMEs. A test of the S-
shaped hypothesis. European Journal of Management and Business Economics., 7(2),
370–376.
Mason, S. P., & Merton, R. C. (1985). The role of contingent claims analysis in corporate
finance. Recent Advances in Corporate Finance, 1(1), 7–54.
Masulis, R., & Trueman, B. (1988). Corporate Investment and Dividend Decisions Under
156
Differential Personal Taxation. Journal of Financial and Quantitative Analysis. 23(3),
369-385.
Maury, B., & Pajuste, A. (2002). Controlling shareholders, agency problems and dividend policy
in Finland. Journal of Business Economics, 5(1), 15–45.
Maury, B., & Pajuste,A. (2005).Multiple Large Shareholders and Firm Value. Journal of Banking and
Finance, 29(4), 1813–1834.
Mazur, K. (2007).The determinants of capital structure choice: evidence from Polish companies.
International Advances in Economic Research, 13(2), 495-514.
McConaughy, D. L. (2000). Family CEO vs. nonfamily CEOs in the family controlled firm: An
examination of the level and sensitivity of pay to performance. Family Business Review,
13(2), 121–131.
McConnell, J.J., & H. Servaes. (1995). Equity Ownership and the Two Faces of Debt. Journal of
Financial Economics, 39(1), 131–157.
McConnell, J.J., & Servaes, H. (1990). ―Additional evidence in equity ownership and corporate
value. ‖Journal of Financial Economic, 27(3), 595-612.
Megginson, W.L. (1997). Corporate finance theory. Addison-Wesley.
Memon, F., Bhutto, N.A., & Abbas, G. (2012). Capital Structure and Firm Performance: A Case
of Textile Sector of Pakistan. Asian Journal of Business and Management Sciences, 1 (9),
09-15.
Michealy, R., & Roberts, M.R. (2006).The dividend policies of Private Firms: Insights into
Smoothing, Agency Costs, and Information Asymmetry, working paper.
Michel, A.J. (1979).Industry influence on dividend policy.Financial Management, 8(1), 22-26.
Mikkelson, W., & Partch, M.(2005). Do persistent large cash reserves hinder performance?
Journal of Financial and Quantitative Analysis, 38(2), 275-294.
Mileva, E. (2007). Using Arellano – Bond Dynamic Panel GMM Estimators in Stata.
157
Miller, M. & Modigliani,F. (1961). Dividend Policy, Growth, and the Valuation of Shares.
Journal of Business, 10(2), 411-433.
Miller, M., & Rock, K. (1985). Dividend Policy Under Asymmetric Information. Journal of
Finance 40(6),1031-1051.
Mirza, H. H., & Azfa, T. (2010). Ownership structure and cash flows as determinants of
corporate dividend policy in Pakistan. International Business Research, 3(3), 210-221.
Mishra, C. S., & McConaughy, D. L. (1999). Founding family control and capital structure: The
risk of loss of control and the aversion to debt. Entrepreneurship Theory and Practice,
23(4), 53–64.
Mitton, T.( 2004). Corporate governance and dividend policy in emerging markets. Emerging
Markets Review, 5(2), 409–426.
Modigliani, F., & Miller,M. (1958). The cost of capital, corporate finance and the theory of
investment. American Economic Review, 48(2), 261-97.
Modigliani, F., & Miller,M. (1963). Corporate income taxes and the cost of capital: a correction.
American Economic Review, 53, 443-53.
Morck, R., Shleifer A., & Vishny, R. (1988). Management ownership and market valuation: An
empirical analysis. Journal of Financial Economics 20(1), 293-315.
Morck, R., Wolfenzon, D. and Yeung, B. (2005) .Corporate governance, economic
entrenchment, and growth, Journal of Economic Literature, 43(2), 657–722.
Morgado, Artur., & Pindado, Julio. (2003). The underinvestment and overinvestment
hypotheses: An analysis using panel data. European Financial Management,9(2),163-
177.
Munter, P. & Kren, L. (1995). The Impact of Uncertainty and Monitoring by the Board of
Directors on Incentive System Design.Managerial Auditing Journal, 10(4), 23-34.
158
Myers S. C., & Majluf, N. S. (1984). Corporate financing and investment decisions when firms
have information that investors do not have.Journal of Financial Economics 13(1), 187-
221.
Myers S.C. (1977).The Determinants of Corporate Borrowing, Journal of Financial Economics,
5(2), 147-175.
Myers, M. & Frank. B. (2004). The Determinants of Corporate Dividend Policy, Academy of
Accounting and Financial Studies Journal,8(3), 17-28.
Myers, S.C. (1984). The capital structure puzzle. Journal of Finance, 39(2), 575-592.
Nekhili, M., Nagati, H., Chtioui, T., & Rebolledo, C. (2017).Corporate social responsibility
disclosure and market value: Family versus nonfamily firms. Journal of Business
Research.2 (2), 41–52.
Nguyen, D.T., Bui, M.H.,& Do, D.H.(2017). The Relationship Of Dividend Policy and Share
Price Volatility: A Case in Vietnam. Annals of Economics and Finance, 20(1), 123–136.
Nielsen, A.(2006). Corportae governance, leverage and dividend policy. European Financial
Management, 10(2), 151-170.
Norvaisiene, R., & Stankeviciene, J. (2007). The interaction of internal determinants and
decisions on capital structure at the Baltic listed companies. Economics of Engineering
Decisions, 2(52), 7–17.
Nourvash, I., & Yazdani,S.(2010). Study of effect of financial leverage on investment for firms
listed in Tehran Securities Exchange. Journal of Financial Economics, 2(1), 35-48.
Nyman, S., & Silbertson, A. (1978). The ownership and control of industry. Oxford Economic
Papers, 30, 82–99.
Ogden, J. P., Jen, F. C., Philip, F., & O’Connor, P. F. (2003). Advanced Corporate Finance-
Policies and Strategies. United States of America: Pearson Education Inc.
Ouma, O.P. (2012). The relationship between dividend pay-out and firm performance: A study
of listed companies in Kenya. European Scientific Journal, 8(9), 199-215.
159
Pandya, B. (2018). Impact of Financial Leverage on Market Value Added: Empirical Evidence
from India. Journal of Entrepreneurship,Business and Economics, 4(2), 40–58.
Park, H. M. (2011). Practical guides to panel data modeling: a step-by-step analysis using stata.
Public Management and Policy Analysis Program, Graduate School of International
Relations, International University of Japan.
Partington, G.H. (1983).Why firms use payout target: a comparative study of dividend policies.
Paper presented at AAANZ Conference, Brisbane.
Pedersen, T., & Thomsen, S. (1997). European patterns of corporate ownership: A twelve-
country study. Journal of International Business Studies, 28(3), 759-778.
Pérez-González, Francisco. (2003).Inherited control and firm performance. Working paper,
Columbia University.
Petersen, M. A., & Rajan,R.G. (1997).Trade Credit: Some Theories and Evidence. Review of
Financial Studies,10(3),661-692.
Pinkowitz, L., Stulz, R., & Williamson, R. (2006). Does the Contribution of Corporate Cash
Holdings and Dividends to Firm Value Depend on Governance? A Cross-country
Analysis. Journal of Finance, 17 (2), 101–125.
Rajan, R. & L., Zingales. (1995). What do we know about capital structure? Some evidence from
international data. The Journal of Finance, 50(4), 1421-60.
Ramcharran, H. (2001). An Empirical Model of Dividend Policy in Emerging Equity Markets.
Emerging Markets Quarterly, 5(1), 39-49.
Ramli, N.M. (2010). Ownership Structure and Dividend Policy: Evidence from Malaysian
Companies. International Review of Business Research Papers,6(1), 170-180.
Rappaport, A. (1986). The affordable dividend approach to equity valuation.Financial Analysts
Journal,2(1),52-58.
Rappaport, A. (1998). Creating Shareholder Value: A Guide for Managers and Investors. New
York: Simon and Schuster.
160
Renneboog, L., & Trojanowski, G. (2007). Control structures and payout policy. Managerial
Finance, 33(2), 43-64.
Roden, D. & Lewellen, W. (1995). Corporate capital structure decisions: evidence from
leveraged buyouts. Financial Management, 24(1), 76-87.
Ross, S. (1977).The determination of financial structure: The incentive-signaling
approach.Journal of Economics, 8(1), 23-40.
Rozeff, M. S. (1982). Growth Beta and agency costs as Determinants of Dividend Payout
ratio,Journal of Financial Research, 249-259.
Rustagi, R. P. (2001). Financial Management. Galgotia Publishing Company.
Sacristan-Navarro, M., Gomez-Anson, S., & Cabeza-Garcia, L. (2011). Family Ownership and
Control, the Presence of Other Large Shareholders, and Firm Performance: Further
Evidence. Family Business Review, 24(1), 71-93.
Safieddine, A.,& Titman,S. (1999).Leverage and Corporate Performance: Evidence from
Unsuccessful Takeovers. Journal of Finance, 54(3),547-580.
Schiff, M., & Lieber,Z.(1974). A Model for the Integration of Credit and Inventory Management,
Journal of Finance 29(2), 133-40.
Schulze, W. S., Lubatkin, M. H., & Dino ,R. N. (2003). Exploring the agency consequences of
ownership dispersion among the directors of private family firms.Academy of
Management Journal, 48(2), 179-194.
Schwartz, E.,& Aronson,J. (1967). Some surrogate evidence m support of the concept of optimal
financial structure. Journal of Finance 2(1), 10-19.
Sciascia, S., & Mazzola, P. (2008). Family involvement in ownership and management:
Exploring nonlinear effects on performance. Family Business Review, 21(2), 331-345.
Shah, S. Z. A., & Hussain, Z. (2012). Impact of ownership structure on firm performance
evidence from non-financial listed companies at Karachi stock exchange. International
Research Journal of Finance and Economics, 84(2), 263-281.
161
Shah, S., Jaffari, A.R., Waris, A.R., & Sherazi, S. (2012). The impact of brands on consumer
purchase intentions. Asian Journal of Business Management, 4(2), 105-110.
Shefrin, H. M., & Statman, M.(1984). Explaining investor preference for cash dividends. Journal
of Financial Economics, 13(1),253-282.
Shefrin, H.M. & Thaler, R. (1984).Life cycle vs. self-control theories of saving: A look at the
evidence, Working paper, Cornell University, Ithaca, NY.
Shleifer, A., & Summers, L. (1988).Breach of trust in hostile takeovers. Corporate Takeovers:
Causes and Consequences , Chicago: University of Chicago Press.
Shleifer, A., & Vishny, R.W. (1986). Large shareholders and corporate control. The Journal of
Political Economy, 94 (3), 461-488.
Shleifer, A., & Vishny, R.W. (1997). A survey of corporate governance. The Journal of Finance,
52(1), 737-783.
Short, H., Zhang, H., & Keasey, K. (2002). The link between dividend policy and institutional
ownership. Journal of Corporate Finance, 8(2), 105-122.
Siddiqui,M.A., & Shoaib, A. (2011).Measuring performance through capital structure: Evidence
from banking sector of Pakistan. African Journal of Business Management. 5(5), 1871-
1879.
Singell, L.D., & Thornton, J.( 1997). Nepotism, discrimination, and the persistence of utility-
maximizing, owner operated firms. Southern Economic Journal, 63(2), 904–919.
Singh, M. & Faircloth,S. (2005). The Impact of Corporate Debt on Long Term Investment and
Firm Performance. Applied. Economics. 37(3), 875-83.
Smith, C.W., & Watts,R. (1992). The Investment Opportunity Set and Corporate Financing,
Dividend, and Compensation Policies. Journal of Financial Economics, 32(3), 263–292.
Stein, J. (1989). Efficient capital markets, inefficient firms: A model of myopic corporate
behavior. Quarterly Journal of Economics, 103(1), 655-669.
162
Stulz, R.M.(1988). Managerial control of voting rights: Financing policies and the market for
corporate control. Journal of Financial Economics 20(1), 25-34.
Sualehkhattak,& Hussain,C.M.(2017).Do Growth Opportunities Influence the Relationship of
Capital Structure, Dividend Policy and Ownership Structure with Firm Value: Empirical
Evidence of KSE? Journal of Accounting & Marketing, 2(1), 46-67.
Sulong, Z., & Nor, F.M. (2010), Corporate governance mechanisms and firm valuation in
Malaysian listed firms. Journal of Modern Accounting and Auditing, 6(1), 1-18.
Tahir, S. H., & Sabir, H. M. (2015). Ownership structures as determinants of financial
decisions:Evidence from Pakistani family owned listed firms. Zbornik radova
MeĎimurskog veleučilišta u Čakovcu, 6(1), 117- 127.
Tang, C.H., & Jang, S.S. (2007).Revisit to the Determinants of Capital Structure: A Comparison
between lodging Firms and Software Firms. International Journal of Hospitality
Management,26(1), 175-187.
Thaler, R.H., & Shefrin,H.M.( 1981). An economic theory of self-control. Journal of Political
Economy, 89 (2), 392–406.
Titman, S., & Wessels, R.(1988). The determinants of capital structure choice. Journal of
Finance, 43(1),1-19.
Torre, A., Gozzi, J.C.,& Schmukler, S.L.(2007). Capital Market Development: Whither Latin
America? Policy Research Working Paper, World Bank, Washington, D.C.
Ullah, H., Fida, A., & Khan, S. (2012). The impact of ownership structure on dividend policy
evidence from emerging markets KSE-100 Index Pakistan.International Journal of
Business and Social Science, 3(9), 298-307.
Upton, Nancy, J.,Teal, Elizabeth., & Felan, Joe. (2001). Strategic and Business Planning
Practices of Fast Growth Family Firms. Journal of Small Business Management. 39(1),
60 - 72.
163
Van Horne, J. C. (1970). New listings and their price behavior. Journal of Finance, 25(4), 783–
794.
Villalonga, B., & Amit, R. (2009). How do family ownership, control and management affect
firm value? Journal of Financial Economics,80 (2), 385-418.
Wahla, K..Shah, Z. A., & Hussain,Z. (2012).Impact of Ownership Structure on Firm
Performance Evidence from Non-Financial Listed Companies at Karachi Stock
Exchange. International Research Journal of Finance and Economics, 84, (1), 2012-
2026.
Wald, J.K. (1999). How firm characteristics affect capital structure: an international comparison,
Journal of Financial Research, 22(2), 161-187.
Wang, D., (2006). Founding family ownership and earnings quality. Journal of Accounting
Research, 44 (3), 619-666.
Wang, Y.(2002). Liquidity management, operating performance, and corporate value: evidence
from Japan and Taiwan. Journal of Multinational Financial Management, 12(2), 159-
169.
Ward,J.(1988).The Special Role of Strategic Planning for Family
Business.Family Business Review, 1(2),105–118.
Warner, J. (1977).Bankruptcy Costs: Some Evidence. Journal of Finance, 17 (2), 337--347.
Weisbach, M. S. (1988). Outside Directors and CEO Turnover. Journal of Financial Economics,
20 (1), 431-460.
Wen, Y., & Jia, J. (2010). Institutional ownership, managerial ownership and dividend policy in
bank holding companies. International Review of Accounting, Banking, and Finance, 2
(1), 8-21.
Westhead, P., & Howorth, C. (2006). Ownership and management issues associated with family
firm performance and company objectives. Family Business Review, 19(4), 301–316.
Willet, J. B., & Singer, J.D. (1988).Another Cautionary Note About R2 : It’s Use in Weighted
164
Least Squares Regression Analysis. The American Statistician, 42 (3), 236-238.
Wilner, B.S.(2000).The Exploitation of Relationships in Financial Distress: The Case of Trade
Credit.Journal of Finance, 55(1), 153–178.
Wruck, K. H.(1990). Financial distress, reorganization, and organizational efficiency. Journal of
Financial Economics, 27(2), 419-446.
Yahia-ZadehFar, M.,Shams,S.,& Mattan,M.(2010). Relationship between firm characteristics
and its capital structure in firms listed in Tehran Securities Exchange. Journal of Basic
and Applied Scientific Research,7(2), 7-23.
Yeh, Y., & Lee, T . (2018). Family Control and Corporate Governance: Evidence from Taiwan.
International Review of Finance. 2(1),21-48.
Yeh, Y.H. (2003). Corporate ownership and control: New evidence from Taiwan. Asian Journal
of Business Management, 4(2), 105-110.
Zattoni, A., Gnan, L., & Huse, M. (2015). Does family involvement influence firm performance?
Exploring the mediating effects of board processes and tasks. Journal of Management,
41(4), 1214–1243.
Zraiq,A.,& Fadzil, B. (2018). The Impact of Audit Committee Characteristics on Firm
Performance: Evidence from Jordan Article Information. Academy of Accounting and
Financial Studies Journal. 2(2), 42-55.
165
Annexure-I List of Sectors and Companies
Textile Sector: Spinning, Weaving, Finishing of Textile
Ellcot Spining
Dewan Textile Mils
Allawasaya Textile and Finishing Mills
Faisal Spinning Mills Ltd.
Gulistan Spinning Mills Ltd.
Prosperity Weaving Mills Ltd
Icc Textile Ltd
Shahtaj Textile Ltd
Samin Textle Mills
Crescent Textile Mills Limited
Kohinoor Textile mills
Sapphire Fibers
Nishat (Chunian) Ltd.
Fateh Sports Wear Ltd.
Gul Ahmed Textile Mills Ltd.
Liberty Mills Ltd.
Moonlite (Pak) Ltd.
Cresent Jute Products Limited
National Silk & Rayon Mills Ltd
Bannu Woolen Mills Ltd.
Food Sector
Dewan Sugar Mills Limited
Shakarganj Sugar Mills Limited
Haseeb Waqas Sugar Mills Ltd
Al - Noor Sugar Mills Limited
Al - Abbas Sugar Mills Limited
166
Habib Sugar Mills Ltd.
Shahmurad Sugar Mills Limited
Nestle Milkpak Limited
Rafhan Maize Product
Murree Berwery Company Limited
Ismail Industries Limited
Shezan Int.
National Foods Limited
Mitchell's Fruit Farms Limited
Chemicals, Chemical Products & Pharmaceuticals Sector
Abbott Laboratories Pakistan Limited
Sanofi-Aventis Pakistan Limited
Highnoon Laboratories Limited
Wyeth Pakistan Limited
Dewan Salman Fibre Ltd.
Engro Chemical Pakistan Ltd.= engro corporation
Ittehad Chemicals Ltd.
Sitara Chemicals
Fauji Fertilizer Pakistan Ltd
Berger Paints Pakistan Ltd
Manufacturing Sector
International Industries Limited
Khyber Tobacco Co. Ltd.
Bata Pakistan Ltd.
D. G. Khan Cement Company Ltd
Maple Leaf Cement Factory Ltd
Fauji Cement
Bestway Cement Limited
Lucky Cement
Pioneer Cement Limited
167
Dadabohy Cement Industries Limited
Gharibwal Cement Limited
Cherat Cement Company Limited
Fecto Cement Limited
Baluchistan Glass Ltd.
Ghani Glass Ltd.
Motor Vehicles, Trailers & Autoparts Sector
Dewan Farooque Motors Ltd.
Indus Motor Company Limited
Al - Ghazi Tractors Ltd
Atlas Honda Limited
General Tyre & Rubber Company
Honda Atlas Cars Pakistan Ltd
Hinopak Motors Limited
Ghandhara Industries Limited
Coal & Refined Petroleum Products Sector
Pakistan Refinery Limited
Pakistan Petroleum Limited
Attock Petroleum Limited
Attock Refinery Ltd
National Refinery Limited
Oil & Gas Development
Fuel & Energy Sector
Mari Petroleum Company Ltd. (Formerly Mari Gas Company)
Other Services Activities Sector
Dream world Ltd.
Gammon Pakistan Ltd.
Haydari Construction Co. Ltd.
168
Javedan Corporation Ltd. (Formerly Javedan Cement Ltd.)
Pakistan Hotels Developers Ltd.
Shifa International Hospitals Ltd.
Information, Comm. & Transport Sector
Pakistan Int.Container
Pak International Airlines
Pakistan National Shippng
WorldCall Communications Ltd.
Paper, Paperboard & Products Sector
Packages Limited
Century Paper & Board Mills Ltd
Security Paper Limited
Merit Packaging Limited
Electrical Machinery & Apparatus Sector
Siemens Pakistan Engineering
Singer Pakistan Limited
Pakistan Cables Limited
Climax Engineering Company Limited
Pak Telephone Cables Limited