Corporate dividend policy, minority shareholders right and equity value of firm: Evidence from Singapore

• Author: Varun Dawar,Santanu K. Ganguli,Rakesh Arrawatia
• DOI: http://doi.org/10.1002/pa.2039
• Published date: 01 May 2020
• Date: 01 May 2020

ACADEMIC PAPER

Corporate dividend policy, minority shareholders right and

equity value of firm: Evidence from Singapore

Santanu K. Ganguli

1

| Varun Dawar

2

| Rakesh Arrawatia

3

1

Professor of Finance, Jaipuria Institute of

Management, Indore, India

2

Department of Financial Studies, University

of Delhi, New Delhi, India

3

Faculty of Finance, Institute of Rural

Management Anand, Anand, India

Correspondence

Santanu K. Ganguli, Jaipuria Institute of

Management, Indore, India.

Email: skganguli@rediffmail.com

The purpose of the paper is to find out empirically whether an ideal business environ-

ment coupled with adequate legal protection provides an enabling mechanism for the

minority shareholders to extract dividend from the firms and, as a consequence,

whether the equity value of the firms gets impacted by dividend policy.

The study (a) employs Tobit model on a sample of FTSE ST companies of Singapore

to show the relation between dividend and minority shareholders base and, then

(b) sought to explore the relation between equity value and dividend policy in the

backdrop of strong legal protection for minority shareholders through OLS and 2 SLS

regression models.

The study empirically demonstrates a positive relation between the dividend payout

and minority shareholders base indicating that, in a civil law origin country with

strong corporate governance code ensuring investors protection and property right,

the minority shareholders can extract dividend from the firms that, in turn, has a

favourable impact on equity valuation.

Consistent with the “outcome”and “catering model,”the findings of the study

indicate that the overall business environment and legal protection enable minority

shareholders to assert their cash flow rights with positive valuation implication.

The paper objectively reveals how superior business environment, good governance

and property right impact inter-play between dividend payout, minority shareholders

base and valuation of a civil law country.

1|INTRODUCTION

Miller and Modigliani (1961) through a seminal paper observed that in

a frictionless capital market, that is - in the presence of perfect

information, smooth mobility of capital, absence of agency problem,

dividend has no role in value creation. But such frictionless situation

hardly exists in the real world. Firms around the world pay dividend to

address various issues pertaining to market imperfection like mitiga-

tion of information asymmetry, satisfying investors' preference for

dividend payment in presence of differential tax treatment,mitigation

of agency problem of free cash flow that can be partly viewed as

ethical issue as well. Since the publication of the paper, a number of

studies have been conducted globally in almost all capitalist econo-

mies looking for explanations of payment of dividend. In fact there is

a huge body of literature available on the firms' dividend policy as a

business decision keeping in mind the impact of the decision on firm

value, attracting investment for growth, tax implication of the distribu-

tion, respecting shareholders right and so on.

In the backdrop,the present study sought to find answers to the

questions –a) Does an ideal setting of business environment coupled

with adequate legal protection of minority shareholders serve as a

basis or mechanism of extracting dividend from the firms ?, b) if divi-

dend is extracted as an outcome of legal protection and catering to

the needs of investors, does the equity valuation get impacted as a

consequence thereof?

Primarily, the argument for dividend payment is based on the

objective of mitigating information asymmetry through dividend

signalling and clientele approach. Managers possessing superior

Received: 25 July 2019 Revised: 19 September 2019 Accepted: 5 October 2019

DOI: 10.1002/pa.2039

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https://doi.org/10.1002/pa.2039