Political connections, institutional investors and dividend payouts in Malaysia

Abstract

Purpose: The purpose of this study is to examine the agency problem of expropriation using dividends in politically connected firms and the relevance of institutional investors in limiting this problem. The growing presence of this group of shareholders offers a unique opportunity to test their importance in the context of dividends payments and expropriation. Design/methodology/approach: This study uses the Tobit regression to test the association between political connection, institutional investors and dividend payouts. The results are also robust to the three-stage-least squares regressions method. Findings: The study is based on a random sample of 2,458 Malaysian firms-year observations for the period of 2004-2009. The results reveal that politically connected firms have an inclination to pay lower dividends, while institutional ownership is associated with higher dividend payouts. Furthermore, the findings reveal that higher levels of institutional ownership moderates the negative relationship between politically connected firms and dividends. Research implications: The findings have an important implication to regulators as it suggests that the institutional investors can influence the dividend payouts in politically connected firms through active monitoring, thus alleviating agency problems. This also provides a positive feedback on the regulators’ governance initiatives that quest to strengthen the roles of institutional investors. Originality/value: This study is the first to examine the effectiveness of the monitoring role of institutional investors in the context of expropriation by politically connected firms from the perspective of dividend payouts.