CEO’s Dilemma · 2017. 1. 5. · S DILEMMA WITH FAMILY TIES ... In our master thesis we intend to investigate the impact on majority owned firms’ dividend policy of having the

Anders Sørgård

Per Skøien

- CEO’s Dilemma - Can CEO minority ownership increase the power of the minority group?

BI Norwegian Business School – Thesis

GRA 19003

Supervisor: Bogdan Stacescu

Submission date: 03.09.2012

Campus: BI Oslo

Programme: MSc in Financial Economics

MSc in Business and Economics – Major in Finance

This thesis is a part of the MSc programme at BI Norwegian Business School. The school takes no

responsibility for the methods used, results found and conclusions drawn.

Master Thesis GRA 19003 03.09.2012

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Acknowledgements

This thesis is the result of many people’s effort, and we want to express our

gratitude to all those who have assisted us in various ways.

We would like to thank our supervisor, Associate Professor Bogdan Stacescu, for

his persistent assistance, guidance and encouragement throughout this process.

Without his help the final product could never have been what it is today. We

would also like to thank the Centre for Corporate Governance Research for

providing us with access to the data.

Finally we would like to thank BI Norwegian Business School in general and the

staff of the financial faculty especially for their assistance and availability.

_______________ _______________

Anders Sørgård Per Skøien


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Abstract

The potential conflict of interest between majority and minority shareholders is a

highly relevant topic for many firms. Using a large sample of Norwegian non-

listed companies, this paper investigates the potential effects on this conflict of

having the CEO as one of the minority owners. We find a significant, positive

relationship between the dividend payout ratio and having the CEO as a minority

owner, conditional on the CEO not being in the majority owner’s family. When

the CEO is in the majority owner’s family, we find no such relationship. These

results suggest that in companies with a high potential for majority-minority

conflicts, having an independent CEO as one of the minority owners may help

reduce the potential for the second agency problem.


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Table of Contents

ACKNOWLEDGEMENTS............................................................................................................. I

ABSTRACT .................................................................................................................................... II

TABLE OF CONTENTS.............................................................................................................. III

1. INTRODUCTION ....................................................................................................................... 1

2. LITERATURE REVIEW........................................................................................................... 3

2.1 DIVIDEND THEORIES................................................................................................................ 3

2.2 AGENCY THEORY .................................................................................................................... 4

2.2.1 Introduction to Agency Theory ....................................................................................... 4

2.2.2 The Second Agency Problem .......................................................................................... 6

2.3 THEORETICAL LINK BETWEEN DIVIDENDS AND AGENCY THEORY ......................................... 7

2.4 INCENTIVE THEORY ................................................................................................................. 9

2.5 FAMILY FIRMS ...................................................................................................................... 12

3. DATA AND SAMPLE SELECTION ...................................................................................... 14

4. METHODOLOGY, MODELS AND SUMMARY STATISTICS ........................................ 16

4.1 RESEARCH QUESTION AND HYPOTHESES ............................................................................... 16

4.2 DEPENDENT VARIABLES ....................................................................................................... 17

4.3 REGRESSION MODELS ............................................................................................................ 18

4.3.1 Model 1 ......................................................................................................................... 19

4.3.2 Model 2 ......................................................................................................................... 19

4.3.3 Model 3 ......................................................................................................................... 20

4.3.4 Model 4 ......................................................................................................................... 20

4.4 CONTROL VARIABLES ........................................................................................................... 21

4.5 SUMMARY STATISTICS .......................................................................................................... 22

5. RESULTS .................................................................................................................................. 23

5.1 BASE CASE ............................................................................................................................ 23

5.1.1 Model 1 ......................................................................................................................... 23

5.1.2 Model 2 ......................................................................................................................... 24

5.1.3 Model 3 ......................................................................................................................... 25

5.1.4 Model 4 ......................................................................................................................... 25

5.1.5 Implications for Hypotheses ......................................................................................... 25

5.2 ROBUSTNESS TESTS .............................................................................................................. 26

5.2.1 Alternative Dividend Payout Measures ........................................................................ 26

5.2.2 Other Robustness Tests ................................................................................................. 27

5.3 LOGISTIC REGRESSION AND TOBIT ANALYSIS....................................................................... 29

5.3.1 Logistic Regression ...................................................................................................... 30

5.3.2 Tobit Analysis ............................................................................................................... 30


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6. CONCLUSIONS AND FINAL REMARKS ........................................................................... 32

6.1 CONCLUSIONS ....................................................................................................................... 32

6.2 POTENTIAL WEAKNESSES ..................................................................................................... 33

6.3 SUGGESTIONS FOR FUTURE RESEARCH ................................................................................. 33

REFERENCES .............................................................................................................................. 35

APPENDIX 1 – TABLES ............................................................................................................. 41

APPENDIX 2 – FIGURES ........................................................................................................... 49

FIGURE 1 – CEO’S DILEMMA WITH FAMILY TIES ......................................................................... 49

FIGURE 2 – CEO’S DILEMMA WITHOUT FAMILY TIES .................................................................. 49

FIGURE 3 – LOGIT ....................................................................................................................... 50

FIGURE 4 – TOBIT VS FITTED OLS .............................................................................................. 50

FIGURE 5 – TOBIT ....................................................................................................................... 51

PRELIMINARY THESIS REPORT........................................................................................... 52


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1. Introduction

In our master thesis we intend to investigate the impact on majority owned firms’

dividend policy of having the CEO as a minority shareholder. We find this

interesting because most of the existing literature on potential agency conflicts has

focused on the conflict between owners and management (Demsetz and Lehn

1985; Shleifer and Vishny 1997; Demsetz and Villalonga 2001), and literature

with focus on the conflict between majority and minority owners have mainly

focused on the concentration of minority ownership and family ties between

owners (Faccio, Lang and Young 2001; Berzins, Bøhren and Stacescu 2011).

In majority owned firms the controlling shareholder has both the incentives and

the ability to monitor the management’s actions, thus reducing the potential

conflict between owners and management (Shleifer and Vishny 1986; Tirole

2006; Bøhren 2011). However, in such firms there is a potential conflict of

interest between the majority and the minority owners, due to the incentive of the

controlling owner to extract private benefits (enjoyed only by the majority owner)

at the expense of security benefits (enjoyed pro rata by all security holders). This

problem is referred to as the second agency problem (Villalonga and Amit 2006;

Bøhren 2011) or the majority-minority problem (Shleifer and Vishny 1997). We

will use these terms interchangeably throughout this paper. Given CEO’s position

inside the firm she1 can monitor the actions of the majority owner directly, a

capability that other minority shareholders may not have, especially if the

concentration of minority shareholders is low (Berzins, Bøhren and Stacescu

2011). The goal of this thesis is to investigate if having the CEO as a minority

shareholder – thus possibly increasing the monitoring ability of the minority

group – will effect firms’ dividend payments. Furthermore, we will control for

potential family ties between the majority owner and the CEO as we believe such

ties may have an impact on the CEO’s behavior.

When addressing agency problems with respect to management it may be

counterintuitive to think about the second agency problem. The first agency

problem, between owners and management, is widely researched, and anyone well

read within the topic of corporate governance will likely have touched upon the

1 The reference to the CEO as a female in this paper is made for simplistic reasons and does not necessarily reflect the actual gender of the CEO


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subject. Therefore it is imperative to clarify that even though this paper addresses

agency problems linked to the CEO, we are in fact discussing the second agency

problem. The data sample used in this thesis consists only of observations where

the CEO has an ownership share, majority or minority. Thus a pure owner-

management conflict is not possible with our sample, because the management is

always an owner.

Existing literature primarily focus on public firms, even though a majority portion

of the economy consists of private firms. In Norway 99,9 % of all limited liability

firms are private, (based on average numbers from the period 1994-2008, not

counting subsidiaries or financial firms) and they account for 74 % of aggregate

assets (Bøhren 2011). In this respect Norway is unique in its high data quality and

availability, because mandatory information disclosure is largely the same for

public and private firms (Bøhren 2011).

The outline of this thesis is as follows: In chapter 2 we perform an extensive

literature review presenting relevant theory and empirical research. In chapter 3

we present our data and sample collection, while chapter 4 presents our

hypotheses, methodology and descriptive statistics. Chapter 5 presents the results

of our analysis and provides a series of robustness tests. Finally, in chapter 6 we

present our conclusions, final remarks and suggestions for future research. This

paper also have two appendices, Appendix 1 contains tables 1-27, which report

detailed information regarding our data and results. Appendix 2 contains figures

referred to in the text.


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2. Literature Review

2.1 Dividend theories

In 1956 John Lintner made the argument that a change in a firm’s dividend policy

is a result of management’s believes that earnings have permanently changed. He

stated that “…most managers sought to avoid making changes in their dividend

rates that might have to be reversed within a year or so.” (Lintner 1956, 99). His

article supports the findings of Graham and Dodd (1951) who argued that

dividend policy has an impact on firm value.

This is at odds with the dividend irrelevance theorem first formulated by Miller

and Modigliani (1961). They claimed that in a market without imperfections, firm

value is not affected by its dividend policy. Despite this, researchers have

observed that investors reward firms that pay dividends through higher stock

prices (Johnson, O’Meara and Shapiro 1951; Fisher 1961). This anomaly is

known as the dividend puzzle (Black 1976).

Research on the relationship between dividend policy and firm value is still

inconclusive (Black 1976). Relaxing the assumptions made by Miller and

Modigliani in 1961 may render the dividend irrelevance theorem mute, which has

lead to the development of several explanatory models. But also within the

framework described by Miller and Modigliani in 1961 the dividend irrelevance

theorem is challenged (DeAngelo and DeAngelo 2006).

One assumption Miller and Modigliani make in their paper is that all parties have

the same information. Relaxing this assumption has lead to the development of a

dividend policy model known as the signaling model, (Bhattacharya 1979; Miller

and Rock 1985). This model takes into account the information asymmetry that

exists between outside investors and insiders in the firm. It states that firms use

dividends as a way to signal outside investors about their expected future cash

flows, thus reducing informational asymmetries. Within the signaling model

framework, an increase in dividend payments is taken as a sign of increased

expected future cash flows, which again leads to increased firm value. Benartzi,

Michaely and Thaler (1997) find that stock prices tend to increase following a

positive dividend announcement and decrease following a negative

announcement, but they find no evidence of successive changes in earnings


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following a positive dividend change. However, they do find that following a

negative dividend change, firms experience a significant earnings increase in the

two following years. Also, Benartzi et al. (2005) find that dividend changes are

uncorrelated with future earnings. These findings contradict the signaling model.

Grullon, Michaely and Swaminathan (2002) propose an alternative hypothesis to

the signaling model called the maturity hypothesis. They claim that if the dividend

change is not a signal of changes in future earnings, but still leads to an increase in

the current stock price, then it must be because of a reduction in the firm’s

systematic risk. They explain; “…we should expect dividend increases to be

associated with subsequent declines in profitability and risk.” (Grullon, Michaely

and Swaminathan 2002, 388). As a firm matures, its investment opportunity set

shrinks. This may leave the firm with higher free cash flow, which according to

the maturity hypothesis can explain increased dividends.

Jensen (1986) links this free cash flow to agency theory by claiming that free cash

flow should be paid out as dividends to avoid the potential for agency conflicts.

He defines free cash flow as “…cash flow in excess of that required to fund all

projects that have positive net present values when discounted at relevant cost of

capital.” (Jensen 1986, 2). This is supported by Allen and Michaely (2003) who

states that dividend payouts are used to avoid overinvestment. According to Tirole

(2006), informational asymmetries may prevent outsiders form stopping insiders’

opportunistic behavior, and thus it may be important for companies wanting to

attract outside investors to reduce these asymmetries. Paying out excess cash as

dividends is one way management can reduce the potential dangers linked to such

asymmetries. La Porta et al. (2000) also claim that a firm’s investment policy

cannot be viewed independently from its dividend policy, and that dividends may

be viewed as a way to ensure that all shareholders are paid on a pro rata basis for

their investments.

2.2 Agency Theory

2.2.1 Introduction to Agency Theory

The ideas behind agency theory can be traced back at least to 1776, when Adam

Smith wrote that “…directors of such companies […] being the managers rather

of other people’s money than of their own, it cannot well be expected, that they


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should watch over it with the same anxious vigilance with which the partners in a

private copartnery frequently watch over their own”, (Smith 1776, 606-607). Thus

agency conflicts can be said to come as a result of the separation of ownership and

control. When a company has a single owner, who is also the only employee and

has financed the company using 100 % equity, there are no agency conflicts

(Bøhren 2011). But if one or more of these conditions are not met, ownership

becomes separate from control and the potential for agency conflicts occurs.

In 1976 Jensen and Meckling further formalized a definition of the agency

relationship as “…a contract under which one or more persons (the principal(s))

engage another person (the agent) to perform some service on their behalf which

involves delegating some decision making authority to the agent.” (Jensen and

Mekling 1976, 5). In this definition the authors use the word ‘contract’, which

may have several interpretations. Schanze (1987) points out that even though one

may experience overlap in the real world, it is important to distinguish between

principal-agent relationships and relationships based on formalized contracts. In

its nature a relationship between a principal and an agent is more complex, and

because of this it becomes impractical, if not impossible, to construct an adequate

contract covering all possible actions, rights and responsibilities of the agent in all

possible future states of the world.

Jensen and Meckling (1976) go on to define the agency problem as a result of

diverging interests between the principal and the agent, assuming they are both

utility maximizers. This divergence creates the potential for agency costs. The

authors divide agency costs into three separate sources:

- Expenditures by the principal. In order for the principal to ensure that the

agent acts in her best interest, the principal has to use some resources. This

can be to pay for costly monitoring of the agent or to pay for incentive

alignment programs.

- Expenditures by the agent. It may be necessary for the agent to commit

resources to guaranteeing that she will not take any actions that may harm

the principal’s interests. Such costs are also referred to as bond costs.

- Residual loss. Given that expenditures by both the principal and the agent

are costly, it may be suboptimal to spend all resources necessary to ensure

100 % alignment of incentives between the principal and the agent. Any


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divergence still present after the expenditures of both the principal and the

agent is called the residual loss.

Given that the potential for agency costs is the price of separating ownership from

control, investors need a reason not to simply keep the control for themselves.

Fama and Jensen (1983a; 1983b) look at the fundamental structure of firms, and

point at several potential benefits that can come from this separation. Firstly they

point to the benefits of specialization. A professional manager may be more suited

to manage a company than the company’s investors. In a specialized society,

everyone focuses one their area of expertise, and everyone benefits from it.

Secondly they point out that there are several effective ways of controlling an

agency problem. For example by aligning incentives or by dispersing the decision

making function among several agents. Thirdly the authors discuss the possibility

of controlling managers’ decision making through formal decision hierarchies and

through incentives to ensure mutual monitoring.

Tirole (2006) states that sources of potential agency conflicts occur between firm

insiders and outsiders. And they revolve around three main issues:

- The first is related to informational asymmetries, and it is called adverse

selection. It refers to the fact that company insiders may have private

knowledge regarding the firm’s technology or environment.

- The second, called hidden knowledge, is closely related to the first. The

difference is that while adverse selection refers to information the insider

possesses before entering into a contract with the outsider, hidden

knowledge refers to private information acquired after the date of

contracting.

- The third issue concerns the problem that outsiders have limited ability to

observe the insider’s actions regarding project selection, risk level and

effort exerted. This issue is commonly referred to as the problem of moral

hazard.

2.2.2 The Second Agency Problem

As mentioned in the introduction, the focus of this thesis is on the second agency

problem, i.e. potential conflicts between majority and minority owners. If

investors are not paid on a pro rata basis, this is a sign of majority-minority


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conflicts (Bøhren 2011). As argued above, in firms with a majority owner

conflicts between owners and management become less severe. Instead, the

majority-minority problem becomes an important area of attention. If the majority

owner’s incentives are not aligned with that of the minority owners’, the potential

for the second agency problem arises (Shleifer and Vishny 1997). The potential

for such agency conflicts becomes higher if the majority owner owns close to 50

% of the company’s shares (Berzins, Bøhren and Stacescu 2011). In this case the

majority owner has control of the company, thus enjoying 100 % of any private

benefit extracted, while only enjoying close to 50 % of any dividends. Hence, the

majority owner has an incentive to avoid dividend payments and instead extract

value from the company through various private benefits.

A higher ownership share for the CEO may reduce the potential for the second

agency problem because it will increased minority ownership concentration and

monitoring capability. When the minority ownership is dispersed, it becomes

more costly for these owners to coordinate their efforts to monitor and control the

majority owner (Berzins, Bøhren and Stacescu 2011).

If the CEO herself is the majority owner, it creates a situation where the CEO has

ample opportunities to extract private benefits at the expense of the minority

owners, because now the majority owner monitors herself. Thus this is a situation

with a high potential for second agency problems.

2.3 Theoretical Link between Dividends and Agency Theory

As can be seen in Jensen (1986), La Porta et al. (2000) and Berzins, Bøhren and

Stacescu (2011) dividend policy is commonly used as a measure for agency

conflicts. However, in what way this relationship should manifest itself is subject

to different theories.

Two models connecting dividend policies and potential agency conflicts are the

outcome and substitution model (La Porta et al. 2000). The authors explain that in

firms with high potential for majority-minority conflicts, the outcome model

argues that the majority owner will use his control to extract private benefits at the

cost of the minority owners. As a result, dividends will be low. The substitution

model on the other hand, argues that the majority owner values a good reputation

among the minority shareholders. Given that low dividends are taken as a sign of


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expropriation by the controlling owner, dividend payouts will be higher in firms

where the potential for majority-minority conflicts is higher.

In the same paper, La Porta et al. (2000) find support for the outcome model by

showing that stronger legal protection of minority shareholders is associated with

higher dividend payouts. When looking at majority owned, Norwegian non-listed

firms, Berzins, Bøhren and Stacescu (2011) find support for the substitution

model. Furthermore, they find that the concentration of minority owners is

negatively correlated with dividend payments, which also supports the

substitution model.

One could argue that the link between dividends and agency costs remains

unclear, but Ang, Cole and Lin (2000) claim that measuring absolute agency costs

is problematic because one needs a base case company to compare against, one

with no agency problems2. Even though such companies do exist they are not

publicly traded, which have made acquiring data for empirical research difficult.

However, using a dataset consisting of privately held companies the authors are

able to find such a group of base case firms. They also introduce another

alternative measure for agency costs, the ratio of annual sales to total assets. This

they argue is a proxy for the loss in revenues as a result of inefficient asset

utilization.

In this paper we will use dividends to measure agency costs. We choose this

because this paper is closely linked to the work done by Berzins, Bøhren and

Stacescu (2011), who in their paper also used dividends. We also believe that

despite the criticism it remains the main empirical tool for measuring agency

costs.

The research into agency conflicts in firms falls under the canopy corporate

governance. In economic literature corporate governance is a relatively new field,

but it is rapidly growing, producing around 1000 new research articles every year

(Bøhren 2011). A majority of these papers focus on listed firms, owing to the

limited data availability on non-listed firms (Damodaran 2002). Because dispersed

ownership is more common in listed firms, conflicts between managers and

2 As defined by Bøhren (2011), see chapter 2.2.1 for details


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owners are more researched than conflicts among majority and minority owners

(Berzins, Bøhren and Stacescu 2011).

2.4 Incentive theory

There are two sides of agency theory. One concerns preventing the agent from

opportunistic behavior. The other is about incentivizing the agent to exert the

desired behavior, thus closely linking agency theory and incentive theory. This

need to incentivize the agent also comes as a result of the separation of ownership

and control.

David Sappington begins his paper Incentives in Principal-Agent Relationships

with the quote “If you want something done right, do it yourself”, (Sappington

1991, 1). This quote hints to the problems that may occur from separating

ownership and control. Incentive theory focuses on tasks that the owner finds

either too complicated or too costly to perform herself. In these cases the owner3

will hire someone else to perform the tasks, preferably someone more suited.

The author shows that the moment the two sides of this relationship have

diverging interests, friction occurs4. As mentioned above, Jensen and Meckling

(1976) describe diverging interests as a source of agency conflicts. Sappington

(1991) proposes that in this case it becomes optimal for the principal to align the

incentives of the agent with his own. One approach is for the principal to engage

in monitoring of the agent. Another is to introduce some performance dependent

reward system, which will make the agent’s wealth more dependent on the same

factors as the principal’s wealth.

Holström and Milgrom (1991) show that monitoring and performance incentives

can be both complements and substitutes. They state that when an agent has more

of her own wealth tied to the company, she should be subject to less monitoring.

This is especially true when monitoring is costly. The link between monitoring

and incentive schemes should also lead to lower incentive schemes when

monitoring becomes less costly (Eisenhardt 1989).

3 In economics ’the owner’ commonly refers to the owner of the capital 4 Assuming they are utility maximizing


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Most research done on monitoring and incentive schemes in the agency theory

context have focused on the first agency problem, between the CEO and the

owners, (Eisenhardt 1989; Holström and Milgrom 1991; Core and Guay 1999;

Prendergast 1999; Bebchuk and Fried 2003). They focus on monitoring and

incentive schemes as ways of aligning the incentives of owners and management.

In our paper the main focus is the second agency problem, between majority and

minority owners. Berzins, Bøhren and Stacescu (2011) propose that a majority

owner is concerned with her reputation among existing and potential minority

owners, and thus try to establish a reputation of fair treatment. A potential

economic rationale for this can be that the majority owner predicts a sustained

need for new equity investments in the future, thus increasing her need for a good

report with the minority owners. Thus the reputation effect gives the majority

owner an incentive not to exploit the minority owners.

Furthermore, given the CEO’s unique position as a central person in any

company’s organizational structure, she will know about – if not actively

participate in – any form of private benefit extraction done by the majority owner.

Therefore, as stated by Professor Øyvind Bøhren5, the CEO is in a superior

position to monitor the majority owner. And given that any private benefit

extracted by the majority owner will come at the expense of the minority owners;

an increased ownership share in the company for the CEO will lead to increased

incentives to monitor.

Seward and Walsh (1990) point out that “Top managers are aware of their

precarious employment situation […] they know that they are at risk of being

dismissed for suboptimal organizational performance even if they did not

contribute to the problem (or worse, even if they kept a problem from becoming

as bad as it could have been).” (Seward and Walsh 1990, 430-431). In this paper

the authors focus on the first agency problem. Still, we believe that the argument

that the CEO has a strong incentive to avoid any conflicts with the majority owner

is transferable to the discussion of the second agency problem. Using a dataset

consisting of all public companies in Norway from the period 1989-2001, Bøhren,

Sharma and Vegarud (2004) find that 8 % of CEOs that are forced to quit, resign

as a result of a direct conflict with the company’s owners. Furthermore, 32 %

5 Personal correspondence with authors, 31. May 2012


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resigned because of conflicts with the Board of Directors. Given that the largest

owner has a significant influence over the company’s board, it may be difficult to

accurately separate the causes behind the CEOs’ resignations. Regardless, this

shows that as far as job security counts as an incentive for the CEO, avoiding

conflicts with the majority owner is important.

How Norwegian CEOs value job security can be related to their level of risk

aversion. To provide an accurate measure of risk aversion is outside the scope of

this thesis, but according to the cultural dimensions developed by Hofstede (1980)

Norwegians score 0,56 on the uncertainty avoidance dimension (Geert-Hofstede

2012). Hofstede claims that this would indicate that people are fairly relaxed and

not averse to taking risks. Using this as a proxy for risk aversion among

Norwegian CEOs may indicate that they are willing to engage in some conflicts

with the majority owner, even if this means increased uncertainty regarding their

job security. A second factor that could impact Norwegian CEOs’ level of risk

aversion is that the CEO compensation level in Norway is relatively small

compared to most European countries and the USA, both in absolute numbers and

relative to the average employee (Nielsen and Randøy 2002).

Another, and much more researched, incentive for the CEO is the economic return

in the form of salary and stocks or stock options, (Jensen and Murphy 1990b;

Bergstresser 2006; Bøhren 2011). The CEO is more incentivized to exert effort

when her expected return is dependent on the level of her effort. And equity-based

compensation is an effective way of linking the CEO’s wealth to that of the

owners. The level of compensation is determined by the Board of Directors

(Bøhren 2011), and as mentioned above, the majority owner has severe influence

over the board.

As the CEO’s ownership share increases, the capital returns will become a more

dominant part of her total wealth. Her wealth will thus vary more with that of the

other shareholders (Jensen and Murphy 1990a). Assuming that the CEO is utility

maximizing, this will increase her incentives to actively monitor the majority

owner and engage in conflicts in order to reduce the second agency problem, even

if this may have a negative effect on her job security.

6 On a scale from 0 to 1


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In this thesis we refer to the conflicting incentives of the CEO as the CEO’s

dilemma. On one side, the CEO has economic incentives to reduce the second

agency problem through active monitoring. On the other side, engaging in

conflicts with the majority owner may conflict with the incentive of job security.

This places the CEO in a situation where she has to weigh the conflicting

incentives against each other. Further complicating the issue of CEO’s dilemma is

potential family ties between the CEO and the majority owner, presented in the

following chapter.

2.5 Family Firms

A majority of the firms in our sample are family firms, and the CEO is also often

in the majority owner’s family. When referring to the term ‘family’ in this thesis,

we use a wide definition referring to relationships of both blood and marriage up

to the fourth level of kinship.

From a resource-based perspective Huybrechts et al. (2011) point out that family

firms have a special set of intangible resources compared to non-family firms.

Researchers have classified these resources together into a concept called

‘familiness’ (Cabrera-Suárez, Saá-Pérez and García-Almeida 2001; Sirmon and

Hitt 2003; Chrisman, Chua and Steiner 2005). The concept refers to a unique set

of resources that occurs as a result of the interaction between family and business.

One such intangible resource is that of the organizational culture, (Hofstede 1980;

Peters and Waterman 1982). According to Zahra, Hayton and Salvato (2004)

family firms develop a more group oriented organizational culture, where

members of the family involved with the business collaborate more and tend to

behave altruistically towards each other (Lubatkin et al. 2005). Sirmon and Hitt

(2003) claim that such altruistic behavior within the family results in family firms

having lower agency costs than other firms, especially because members of the

same family tend to have mutually shared interests. However, according to

Berzins, Bøhren and Stacescu (2011) an assumption that family members always

have aligned interests may not be correct, as family members can have different

opinions regarding business matters.

Another intangible resource covered by the familiness concept is human capital.

Human capital is knowledge, skills and capabilities people acquire in order to act


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in new ways (Coleman 1988). Schulze et al. (2001) find that family firms are

more likely to hire directors from within the family, even though outsiders may be

more qualified. This adverse selection problem may lead to a suboptimal human

capital within family firms.

However, both internal and external directors hired into family firms experience a

low turnover rate compared to other firms (Miller and Le Breton-Miller 2003). In

their paper, Miller and Le Breton-Miller look at this lower turnover rate as a

positive human capital resource because the know-how and experience is

preserved within the firm for a longer period of time. We believe that it can also

be looked at as a sign of higher job security within family firms.

If the CEO is a minority owner with family ties to the majority owner, it is

possible that this connection can have an impact on the behavior of the CEO.

Hence it is important to control for family ties when looking at the CEO’s

dilemma, as such ties can complicate the dilemma further. A graphical illustration

of CEO’s dilemma is provided in figures 1 and 2 of Appendix 2.


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3. Data and Sample Selection

The dataset used in this thesis is extracted from BI’s Center for Corporate

Governance Research’s (CCGR) database. The database contains highly detailed

accounting and ownership data for all Norwegian companies with limited liability

(AS and ASA). The accounting dataset is available from 1994-2009, and the

governance dataset, containing information such as ownership ranks, Herfindahl

indexes and family ties between owners, is available from 2000-2009. This high

level of details is made possible by Norwegian law’s strict accounting statement

requirements.

Our population consists of all private, limited liability firms in Norway. In order

to obtain the sample used to estimate our models we apply a series of filters,

reducing the dataset to our final sample, see Table 1 for details. The rationale

behind these filters follows closely that of Berzins, Bøhren and Stacescu (2011).

1. First we exclude financial firms. Such firms operate under special

regulatory capital requirements and special accounting rules.

2. We exclude firms without positive sales and assets. The reason is twofold;

first we want to exclude firms without activity. Second we want to avoid

including shell corporations.

3. We have removed companies where the accounting or ownership data has

inconsistent values. Inconsistent values include largest owner or CEO

ownership outside the range 0-100 percent and negative revenues, equity

or dividends.

4. Given our research question, only companies with a majority owner are

included. This is done to ensure that the agency conflicts in the firms are

majority-minority related, not conflicts between managers and the

controlling shareholder. Also, we exclude companies with only one owner

because such companies are not subject to the second agency problem.

5. Firms with negative earnings are taken out to avoid any problems arising

due to negative payout ratios.

6. Finally the smallest 5% of the firms measured by revenue are excluded

because it can be argued that such firms do not have any agency conflicts.

As outlined in chapter 2.3, a common measure for agency conflicts is a company’s

dividend policy. Still it is important to acknowledge that dividend policy may be

affected by other factors. A firm’s profitability, liquidity and financial constraints


Page 15

may affect its ability to pay out dividends. In our thesis we have taken such

possibilities into account by adding control variables. Also, a country’s tax laws

may have an impact on dividend policy. In Norway the taxation on dividends

changed in 2006 with the introduction of the 2006 Norwegian shareholder income

tax, (Alstadsæter and Fjærli 2009). The tax reform resulted in similar effective tax

rates on labor income, capital gains, interest income and dividend income.

Therefore we limit our data sample to include only the years after the reform took

place, in order to avoid tax effects having an impact on dividend policy.

After applying these filters we are left with a sample of 59 535 observations

across four years, 2006-2009. These are again distributed between 11 671 and

16 575 observations per year, see Table 1 in Appendix 1 for details. An important

note is that we have no observations where the CEO is without an ownership

share. This means that the CEO is either the majority or one of the minority

owners in all of our observations. This curiosity is unintended by the authors, and

we will address it again in chapter 6.

As in the papers by Berzins, Bøhren and Stacescu (2011) and Michaely and

Roberts (2012) all firms in our sample are located within the same legal regime,

where minority stockholders are well protected. This is rare in the empirical

literature, as most research has been done using samples reaching across several

different legal regimes (see for example La Porta et al. (2000)).


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4. Methodology, Models and Summary Statistics

4.1 Research question and hypotheses

This thesis places itself under the canopy of CEO ownership and corporate

governance, where its contribution lies in investigating the potential links between

the CEO and the second agency problem. More specifically, if having the CEO as

a minority owner can help reduce the potential for the second agency problem.

Following the argumentation in chapter 2, we have developed the following

general research question:

Is there a relationship between CEO ownership and a company’s dividend payout

policy?

Given our sample, there are three possible cases of CEO ownership: The CEO can

be the majority owner, the CEO can be a minority owner with family ties to the

majority owner, or the CEO can be a minority owner with no family ties to the

majority owner. Together these cases are the foundation for our thesis, as we are

looking at potential differences among them.

As argued in chapter 2 we suspect that family ties may have specific implications

on how the CEO behaves as a minority owner. Therefore we find it necessary to

separate CEOs with and without family ties to the majority owner. To analyze if

there are differences between these three cases of CEO ownership, we have

developed four specific hypotheses:

Hypothesis 1: Having the CEO as a minority shareholder versus a majority

shareholder makes no difference on the company’s dividend payout policy

The alternative hypothesis is that there is a difference in a company’s dividend

payout policy when the CEO is a minority versus a majority shareholder.

Hypothesis 2: Having a minority owning CEO with family ties to the majority

owner has no impact on the company’s dividend payout policy


payout policy when the CEO is a minority shareholder with family ties to the

majority shareholder versus the two other cases presented above.


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Hypothesis 3: Having a minority owning CEO with no family ties to the majority

owner has no impact on the company’s dividend payout policy


payout policy when the CEO is a minority shareholder without family ties to the

majority shareholder versus the two other cases presented above.

Hypothesis 4: Having a minority owning CEO has no impact on a company’s

dividend payout policy after controlling for family ties to the majority owner

The alternative hypothesis will be that when including all CEO ownership cases in

the same model, thus controlling for family ties, CEO minority ownership has an

impact on the dividend payout policy.

We will run four models to test our hypotheses; Model 1 is designed to test

hypothesis 1, Model 2 is design to test hypothesis 2, etc. To see if we can falsify

one or more of our four hypotheses, we have developed the following research

model7:

The model follows relatively closely to the model used by Berzins, Bøhren and

Stacescu (2011). The link between their paper and ours was presented in chapter

2. Each model will include different specifications of the CEO ownership

variable, in line with the three cases presented above; CEO as majority, CEO as a

minority with family ties to majority owner and CEO as a minority with no family

ties to the majority owner.

4.2 Dependent Variables

In this thesis our base case will be to measure the dividend payout ratio as

dividends divided by operating income. But, because it is possible for companies

to manipulate earnings numbers and in this way artificially manipulate their

dividend payout ratio, we perform a similar control as La Porta et al. (2000) and

Berzins, Bøhren and Stacescu (2011); we also use alternative measures for the

7 The notation ”ij” refers to company i, year j


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dividend payout ratio. Our two alternate dividend payout ratios are dividends to

sales and dividends to total assets;

In the robustness section of this paper, presented in chapter 5.2.2, we will also

perform a logistical regression where the dependent variable will be a dummy

equal to 1 if the company pays dividends.

4.3 Regression models

CEO ownership is our key independent variable. We run the regression four

times, each time with a new specification of the CEO ownership variable, each

specifically designed to test hypotheses 1 to 4. In Model 1, CEO ownership is a

dummy variable equal to 1 when the CEO is a minority owner in the company. In

Model 2, CEO ownership is a dummy variable equal to 1 if the CEO is a minority

owner and is in the majority owner’s family. In Model 3, CEO ownership is a

dummy variable equal to 1 if the CEO is a minority owner with no family ties to

the majority owner. Model 4 includes both the CEO ownership dummy variables

from models 2 and 3. If both dummies are 0, it means that the CEO is the majority

owner.

According to the competing models presented by La Porta et al. (2000) a

reduction in the second agency problem should lead us to predict a positive in

models 1-3 according to the outcome model, and a non-positive or negative

according to the substitution model. Having the CEO as a minority owner will

potentially increase the power of the minority owners and the outcome of this

will be higher dividend payments. The substitution model expectations will be the

opposite in every model, increased minority power will lead to lower dividend

payments. In the following sections we will for simplicity only present our

outcome model expectations. The expectations for Model 4 will be clarified in

chapter 4.3.4.


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4.3.1 Model 1

In Model 1 we only look at whether the CEO is a minority owner or not,

disregarding any potential family ties between the CEO and the majority owner.

As mentioned in chapter 3, the CEO has an ownership share – minority or

majority – in all our observations, hence this model looks into if there is any

difference between having the CEO as a majority or a minority owner. Given that

the potential for second agency problems is highest when the CEO is herself a

majority owner, we would predict higher dividends with the CEO as a minority

owner. Thus the outcome model predicts a positive coefficient in Model 1.

4.3.2 Model 2

In Model 2 the dummy variable obtains the value 1 if the CEO is a minority

owner with family ties to the majority owner. The effects of such a family

relationship between the CEO and the majority owner can be ambiguous. As

argued in chapter 2.5 family members often have mutually shared interests. This

would lead us to believe that any decision made with respect to the firm’s

dividend policy will not be affected by whether or not the CEO is a minority

owner, because the CEO’s interests are the same as those of the majority owner

anyway. In this case the prediction would be an insignificant coefficient. If

their interests are not aligned, the family ties should not impact the dividend

payout ratio. In chapter 2.4 it was further argued that the CEO faces a dilemma as

a minority owner when her interests are not aligned with the majority owner’s. On

one hand she has incentives to monitor the majority owner and potentially reduce

the second agency problem. On the other hand she has incentives to avoid any

conflicts with the majority owner due to job security considerations. If the job

security incentives outweigh the monitoring incentives we believe that the CEO

will take no action to reduce the second agency problem. Thus having the CEO as

a minority owner should not affect the company’s dividend payments and the

coefficient should be insignificant also here, (having a CEO with aligned interests

or having a CEO with conflicting interests, but who does nothing about it should

provide the same result; a passive CEO). If the monitoring incentives outweigh

the job security incentives the CEO should engage in monitoring, thus reducing

the potential for the second agency problem. If the monitoring incentives


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dominate, the outcome model prediction is a positive coefficient. The above

discussion is visualized in figures 1 and 2.

4.3.3 Model 3

In Model 3 the dummy variable obtains the value 1 if the CEO is a minority

owner and has no family ties to the majority owner. Given that there are no family

ties, this is a case where we expect having the CEO as a minority owner more

clearly will increase the power of the minority group. Again the CEO’s incentives

will be important, and the outcome model prediction follows closely that of

Model 2; if the job security incentives are strongest, should be insignificant. If

the monitoring incentives are the strongest, should be positive.

4.3.4 Model 4

Finally we run Model 4, where we include the two dummy variables from models

2 and 3 at the same time. The first dummy equals 1 if the CEO is a minority

owner with family ties to the majority owner. The second dummy equals 1 if the

CEO is a minority owner with no family ties to the majority owner. If both

dummies equal 0, it implies that the CEO is the majority owner. The motivation

behind Model 4 is that when looking at the three cases of CEO ownership in

isolation, which is done in models 1-3, we could end up with an incomplete

picture of the CEO’s dilemma. Hence we need to control for all family ties in the

same model, and this is done in Model 4. Furthermore, it may give us an

indication as to which of the two possible explanations presented under Model 2

that can explain an insignificant coefficient for the first dummy variable. If the

CEO is unwilling to monitor the majority owner because the job security

incentives outweigh the monitoring incentives, both and are expected to be

insignificant. If, however, turns out to be insignificant and significant, this

could be because CEOs that are related to the majority owner remain passive even

though the monitoring incentives outweigh the job security incentives, simply

because they have aligned interests with the majority owner. Such a result will be

in accordance with Sirmon and Hitt (2003), who claim that members of the same

family tend to have mutually shared objectives. Again, we invite the interested

reader to see figures 1 and 2 for a detailed visualization and clarification of the

CEO’s dilemma, both with and without family ties.


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4.4 Control Variables

This chapter presents and explains the control variables used in our regressions.

The control variable Liq is included because a firm holding a lot of easily

liquidated assets or available cash is more likely to pay out dividends than other

firms, (DeAngelo, DeAngelo and Stulz 2006). Liquidity is calculated as the ratio

of Cash and Cash equivalents to Total assets; and we predict that 8 is positive;

Somewhat similar to the rationale behind the liquidity variable above, we expect

firms with high profitability to pay out more in dividends than other firms (Fama

and French 2001). Profitability is calculated as Return on Assets (ROA), and the

prediction is that the coefficient is positive;

Financially constrained companies may have trouble financing dividend

payments. Companies experiencing high growth may be financially constrained

due to a need to finance this growth (Fama and French 2001; DeAngelo,

DeAngelo and Stulz 2009). The variable Growth is a measure of this, and it is

calculated as sales’ Compounded Annual Growth Rate (CAGR) over the last three

years. When interpreting this variable it is important to note that it is the effect of

sales growth after controlling for profitability. Based on this we predict a negative

coefficient.

The Risk variable is a measure of the volatility of a company’s sales9. If a

company experience high sales volatility, they may be reluctant to pay out the

same proportion of their earnings as dividends as they would with less volatile

sales. This is in line with Lintner’s (1956) explanation that managers increase

8 Models 1-3 have one key independent variable, thus the control variables start from β2. In . Model 4, with its two key independent variables, the control variables are shifted upwards 9 Measured using standard deviation


Page 22

dividends only if they are confident that the increase does not have to be reversed

in the near future. The link between dividends and risk can also be explained by

the maturity hypothesis proposed by Grullon, Michaely and Swaminathan (2002),

finding a significant relationship between dividend changes and changes in

systematic risk. Our prediction of the coefficient is thus that it is negative.

Fama and French (2001) found that the dividend paying firms in their sample

were on average 13 times larger than the non-paying firms. Grullon, Michaely and

Swaminathan (2002) explain through their maturity hypothesis that when a firm

matures, its growth opportunities shrink, leaving it with a higher free cash flow.

By linking this to the free cash flow hypothesis by Jensen (1986), the authors

predict that as a firm’s size and age increases, its dividends should also increase.

This leads us to predict positive coefficients for both, and ;

4.5 Summary Statistics

Table 2 in Appendix 1 contains summary statistics. On average about 14 % of the

firms in our sample pay out dividends in a given year, and the average payout

ratio is about 7 % for the entire sample and 54 % for the payers. As in the research

papers of Berzins, Bøhren and Stacescu (2011) and Fama and French (2001), the

median firm in our sample does not pay dividends. The largest owner holds on

average 60 % of the company, and in about 85 % of the cases the largest family

also has the CEO. All the ownership variables are stable over time. Note that in

order to handle outliers, we have winsorized some of the variables, see Table 2 for

details.


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5. Results

In this chapter we will present the results from our regression analysis. Section 5.1

reports our base case findings for the four models presented in chapter 4, while

section 5.2 presents the effect of alternative dividend payout measures and a series

of other robustness tests. In section 5.3 we perform a logistical regression and a

tobit analysis.

Table 3 shows that the correlations between the variables are generally low, and

therefore we do not expect a serious problem with multicollinearity (Gujarati

2003). Furthermore, the correlations between the different dividend payout

measures are fairly high, thus we expect stable results across alternate payout ratio

measures.

5.1 Base Case

In tables 4-7 we report the findings from models 1, 2, 3 and 4 respectively. Each

table presents the findings separately for each year and for the pooled sample.

Also, each table includes results created following the Fama-MacBeth (FMB)

approach (Fama and MacBeth 1973) calculated from the year-by-year estimates.

These are included because they are helpful in order to test the stability of the

parameters. However, when interpreting these results it is important to be aware

of one potential weakness; the FMB findings are only affected by the stability of

the parameters, not whether or not said parameters are significant. Ergo these

results should be handled with some care, as stable, insignificant parameters

across years may result in a significant FMB coefficient.

5.1.1 Model 1

Model 1 looks at the impact on company dividend policy of having the CEO as a

minority versus a majority owner, without controlling for family ties between

owners.

The individual years, the pooled sample and the FMB results all reflect a stable,

positive and significant dummy regressor. Thus, firms tend to pay higher

dividends when the CEO is a minority owner compared to if she is a majority

owner. These findings are in line with the outcome model since the dividend

payout ratio tends to increase when the CEO is a minority owner. One possible


Page 24

explanation for this can be that the power of the minority group increases.

Another explanation can be that the majority owner has less power when she is

not the CEO. An important note here is that these explanations are not mutually

exclusive, but can both lead to the findings presented.

The control variables are generally as predicted in chapter 4 both in terms of sign

and significance. For a given ownership structure the liquidity and profitability

variables are significant and positive, implicating that companies with more liquid

assets and higher profitability have a higher dividend payout ratio. Also, as in the

paper by Fama and French (2001), the size variable is positive and significant,

indicating that large companies pay more in dividends than small. As expected,

both the growth variable, which provides an indication of how financially

constrained a company is, and the risk variable have a negative impact on

dividend payments. This implies that firms experiencing high growth and high

sales volatility tend to have lower dividend payout ratios. The age variable is

insignificant in two out of four years, but when it is significant it has a positive

impact on dividend policy, as predicted.

The control variables are stable across all models, hence we will not repeat the

above discussion in the following text.

5.1.2 Model 2

Model 2 looks at the impact on firm dividend policy of having the CEO as a

minority owner when she is related to the majority owner.

The regression yields an insignificant relationship between the dummy variable

and the dividend payout ratio. Hence, the results argue that having the CEO as a

minority owner has no effect on a firm’s dividend payout policy if the CEO is

related to the majority owner. These results can be in line with the arguments of

Sirmon and Hitt (2003), who claim that family members have mutually shared

interests. But they can also be a result of the job security incentives outweighing

the monitoring incentives. To determine the reason behind the CEOs’ behavior,

we need to determine how CEOs that are unrelated to the majority owner behaves.

This is done in models 3 and 4, presented below.


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5.1.3 Model 3

Model 3 is similar to Model 2, but here we examine the impact on a firm’s

dividend policy of having the CEO as a minority owner when the CEO is not

related to the majority owner.

The dummy variable is now significant in three out of four years. Hence, having

the CEO as a minority owner has a positive impact on a firm dividends policy

when she is unrelated to the majority owner. This indicates that the monitoring

incentives outweigh the job security incentives, and it also indicates that the

findings from Model 2 come as a result of the family ties between the CEO and

the majority owner. Again, these results are in line with the outcome model.

5.1.4 Model 4

In Model 4 we combine models 2 and 3 and run the two dummy variables

together. This will as mentioned in chapter 4 give us one model that covers all the

three possible cases of CEO ownership. If both dummies are 0, the CEO is the

majority owner. If dummy 2 (3) is equal to 1, then the CEO is a minority with

(no) family ties to the majority owner. Note that the two dummies are mutually

exclusive, hence they cannot both equal 1 at the same time.

The dummy variable presented in Model 2 remains insignificant and the one in

Model 3 is now significant every year. These findings support that having the

CEO as a minority owner tends to increase a firm’s dividend payout ratio, after

controlling for family ties between the CEO and the majority owner. As argued in

chapter 4 there are at least two explanations for the first dummy variable to be

insignificant. Using the results from this model we argue that minority CEOs are

potentially suited monitors and that the insignificant effect of CEO ownership

when the CEO has family ties to the largest owner comes as a result of her having

aligned interests with the majority owner, not because job security incentives

outweigh monitoring incentives. Again, these results are in line with the outcome

model.

5.1.5 Implications for Hypotheses

Our results have the following implication for our hypotheses stated in chapter 4:

At a first glance one could make the mistake of thinking that one could

unconditionally falsify our first hypotheses. However, when testing hypothesis 2,


Page 26

3 and 4 it becomes apparent that whether or not having the CEO as a minority

owner affects a firm’s dividend policy is dependent on her family ties with the

majority owner.

5.2 Robustness Tests

In this chapter we perform a series of robustness tests. This is done to test the

stability of our findings and to look for other possible explanations for the

observed differences in dividend payout policy between the three CEO ownership

cases. First we run models 1-4 using alternative dividend payout measures as our

dependent variable. Second, we include different control variables to see if they

impact our results. Note that these second robustness tests are done only to Model

4, using the original dividend payout ratio, because as argued above Model 4

represents our key findings.

5.2.1 Alternative Dividend Payout Measures

As pointed out in chapter 4 measuring dividends over operating income may in

some cases yield a misleading number. Firms may for example conduct earnings

management, attempting to manipulate their reported earnings thus falsely alter

their dividend payout ratio. To control for this, we rerun models 1-4, this time

using alternative measures for the dividend payout ratio. This follows the

approach of La Porta et al. (2000), Faccio, Lang and Young (2001) and Berzins,

Bøhren and Stacescu (2011).

The first alternative measure is dividends to sales. As can be seen in tables 8-11 in

Appendix 1, the key findings from the base case models are largely reproduced.

One exception is Model 1, where the key independent variable becomes

insignificant in three out of four years. The findings in models 2, 3 and 4 are

stable and in support of the outcome model.

However, some of the control variables are more unstable when applying this

dividend payout measure. In line with the findings of Berzins, Bøhren and

Stacescu (2011), the control variables liquidity and profitability always have

positive and significant coefficients. The growth control variable also remains

stable for all the models. The rest of the control variables are more unstable, but as

argued above they do not affect our findings.


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The other alternative measure of the dividend payout ratio applied is dividends to

total assets. The results of using this payout ratio as the dependent variable can be

found in tables 12-15 in Appendix 1. Here the key findings are the same as in the

original models from chapter 5.1. The relationship between a firm’s dividend

payout policy and the CEO’s ownership share and family ties are stable and the

findings support the outcome model.

Again, the liquidity, profitability and growth variables are stable across the

models. Furthermore, the control variable size is also stable, as opposed to the

original models.

5.2.2 Other Robustness Tests

So far our findings have been in line with the outcome model and stable across

different measures of the dividend payout ratio. In the following we will perform

a series of other robustness tests to control for the sensitiveness of our findings to

changes in the model. The tests have been performed on Model 4, as this model

represents our key findings, and the dependent variable is dividends to earnings.

In the following we will present the key conclusions from these tests. For further

details, please see tables 16-25 in Appendix 1.

First we include a dummy control variable equal to 1 if the CEO has a seat on the

board. Given the board’s role in determining the company’s dividend payout

policy, having the CEO on the board may help explain the CEO’s impact on

dividend policy which we currently attribute to her ownership and family ties.

However, we find no significant relationship between this dummy variable and

the dependent dividend variable, see table 16 for details.

Secondly we include a margin variable, calculated the following way;

Our current measure of profitability is ROA, which by definition punishes firms

that are asset heavy compared to those that are not. Hence, it becomes interesting

to use an alternative measure of profitability to see if it affects our results. Margin

may be one such measure, assuming that companies with higher margins tend to

be more profitable. When applying this alternative measure of profitability, the


Page 28

margin variable also turns out positive and significant. However, the dummy

variables do not change, hence our results are robust to this different profitability

measure. If both margin and ROA are included simultaneously, the margin

variable becomes unstable and negative, while the profitability remains positive

and significant. This implies that after controlling for return on assets, having a

high margin has no clear impact on dividend policy. None of these findings have

any impact on our main findings. For further details see tables 17 and 22.

There are several ways of calculating a company’s liquidity. In our original model

we used cash and cash equivalents divided by total assets, but one can argue that

this measure may appear more liquid than it is. For example if the ‘cash

equivalents’ refers to stock holdings which are less liquid, it can be difficult to

quickly exchange these holdings into cash. Thus we also apply an alternative

measure; the company’s cash flow10. The alternative measure is significant and

positive when applied alone. When controlling for the original liquidity measure it

becomes more unstable but remains positive. Neither one has an impact on our

key findings. The models are reported in tables 18 and 23.

In the aftermath of the Norwegian tax reform of 2006 outlined in chapter 3, a

discrepancy occurred between personal taxation and company taxation on

dividends, leaving personal owners subject to tax on dividends while exempting

company owners. Thus it is possible that individual stockowners transferred their

ownership shares to holding companies in order to avoid dividend taxation. We

want to control for this possibility by including the ownership fraction held by

personal owners. If the ownership structures of firms affect the dividend

payments, a lower personal ownership share may lead to increased dividend

payments. However, at some point the personal owners will want to extract their

funds from these holding companies as well, and this transfer will normally come

in the form of taxable dividends. Thus this trend will not in the end exempt the

personal owners from taxation. Our tests show that the ownership fraction held by

personal owners variable is not significant, and has, as expected, no impact on our

findings. Tables 19 and 24 show detailed test results.

As argued in chapter 2, the potential for the second agency problem is reduced as

the ownership share of the majority owner increases. The discrepancy between 10 Cash flow is calculated using the CCGR formula (in millions) and normalized by the log of sales


Page 29

private and security benefits are reduced as the majority ownership share

approaches 100 %. Hence the majority owner’s motivation for extracting private

benefits at the cost of dividends are reduced as her ownership share increases. To

see how this effect impacts our findings we include the ownership of the largest

owner as a control variable. However, as can be seen in table 24 this variable is

insignificant.

When ownership becomes more dispersed, there is a greater chance that one or a

few of the owners experience an external liquidity shock while the other owners

do not. Such asymmetric liquidity shocks can be even more plausible if the

owners are not from the same family. On the other hand, if the ownership is

highly concentrated such external liquidity shocks are more likely to apply to

everyone at the same time. When owners face liquidity shocks, they will want

dividend payments in order to acquire the necessary liquid assets. This can lead us

to believe that higher dividend payments may be driven by higher ownership

dispersion, and not the CEO being a minority owner. However, as can be seen in

tables 20 and 25, the control variable included to account for ownership dispersion

– the Herfindahl index – is insignificant and has no impact on our findings.

Table 21 includes all control variables in the same model, and as can be seen this

has no impact on our findings; a stable, significant and positive relationship

between a company’s dividend payout ratio and the CEO being a minority owner,

not related to the majority owner.

5.3 Logistic Regression and Tobit Analysis

As discussed in chapter 4 our median firm does not pay dividends. In fact, only

around 14 % of the companies in our sample are dividend payers. However,

stockholder conflicts may be just as related to dividend payments for companies

that do not pay dividends as for those that do. Therefore it can be interesting to see

if CEO minority ownership actually affects the probability of a company paying

dividends. Also, our findings can be affected by the fact that our dependent

variable has a lower bound of 0, (a company can never pay negative dividends). In

order to investigate these points, we perform a logistic regression and a tobit

analysis.


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5.3.1 Logistic Regression

A logistical (‘logit’) regression can be useful if one wants to look at the

probability of an event occurring, e.g. the probability that a company pays

dividends. The logit model estimates a regression model using maximum

likelihood, because the probabilities are non-linear and cannot be made linear

through transformation. The logit model overcomes the limitation of linear

models that rely on OLS, which can result in fitted probabilities that are negative

or greater than 1, (Brooks 2008). Figure 3 in Appendix 2 illustrates this point.

The probability of a company paying dividends is calculated as follows:

∑

βiXi refers to the independent variables in the model, which in our case are

identical to those used in Model 4 from chapter 5.1.

The results obtained from this model, presented in table 26, show that similar to

our main findings the relationship between dividend propensity and CEO minority

ownership is positive when the CEO is unrelated to the majority owner and

insignificant when the CEO is a minority owner with family ties to the majority

owner. Hence the probability of a company paying dividends is higher if the CEO

is a minority owner unrelated to the majority owner.

5.3.2 Tobit Analysis

Because it is not possible to pay out negative dividends, our dependent variable

has a lower bound of 0. However, it is likely that some companies in our dataset

would in fact prefer to pay negative dividends (i.e. to receive money from their

stockholders rather than paying money to them). Such companies will in our

dataset have observed values of 0, because the dependent variable is censored,

(Brooks 2008; Dougherty 2011).

One indication that we have a censored variable is that a lot of observations are

clustered around the value of 0 (McDonald and Moffitt 1980). If the dependent

variable is in fact censored, this could mean that our slope coefficients are biased


Page 31

downwards and our intercept coefficient is biased upwards. The usual way to deal

with the problem of censored dependent variables is by performing a tobit

analysis, (Brooks 2008). The difference between a normal OLS regression and a

tobit analysis is illustrated in figure 4 and 5 in Appendix 2.

Table 27 presents the results of our tobit analysis. Our findings are still the same

as they were in Model 4, supporting the outcome model. Having the CEO as a

minority owner will increase the dividend payout as long as the CEO is unrelated

to the majority owner.


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6. Conclusions and Final Remarks

After presenting our findings and subjecting them to a series of robustness tests in

chapter 5, we will now turn to concluding remarks and final comments. This

chapter is structured as follows; chapter 6.1 provides our conclusions, while

chapter 6.2 highlights potential weaknesses with our paper. Finally, chapter 6.3

provides suggestions for future research.

6.1 Conclusions

In this thesis we have addressed the following research question:

Is there a relationship between CEO ownership and a company’s dividend payout

policy?

We have controlled for family ties that may exist between the CEO and the

majority owner because, as argued in chapter 4 and shown in chapter 5, such ties

could have an impact on the CEO’s behavior. We find a significant, robust and

positive relationship between the dividend payout ratio and the CEO being a

minority owner, conditional on the CEO being unrelated to the majority owner.

When the CEO is in the majority owner’s family, we find no such relationship.

These findings hold regardless of how we measure the dividend payout ratio and

when controlled for a series of alternative control variables. They are also stable

across the years in our sample.

Given the CEO’s unique position within the firm, having the CEO as a minority

owner may increase the power of the minority owners as a group. When this again

leads to higher dividend payments, this is in line with the outcome model

introduced by La Porta et al. (2000).

In their paper, Berzins, Bøhren and Stacescu (2011) test the effect of minority

concentration in majority owned companies, and find support for the substitution

model. The stronger the minority group is (higher concentration) the lower the

dividend payout ratio. Keeping this in mind, we are somewhat surprised that our

results support the outcome model, a stronger minority group (independent CEO

is a minority owner) leads to higher dividends.


Page 33

The conclusion regarding our research question is that a positive relationship

between CEO minority ownership and dividend payout policy exists, conditional

on the CEO being unrelated to the majority owner.

6.2 Potential Weaknesses

Our thesis focuses on the second agency problem and its relationship to CEO

ownership. But as the CEO’s ownership share increases, the potential for the first

agency problem also increases. Given that the companies in our sample all have a

majority owner, with ample incentives to monitor the CEO’s actions (Shleifer and

Vishny 1986; Bøhren 2011) we still believe that the first agency problem should

be dismissible.

The CEO has an ownership share – minority or majority – in all of our

observations. This makes it impossible for us to run tests comparing companies

with CEO as an owner to companies where the CEO has no ownership share.

Our sample period is limited to only four years. Although this is because of the

2006 tax reform, it gives us a short time horizon. Furthermore, some of the years

in our sample were subject to serious economic turmoil, which may have

influenced our results. However, we observe that our dataset is stable across the

years, which is supported by the OECD’s Economic Survey of Norway for 2010,

stating that the financial turmoil only had limited effects on the Norwegian

economy.

We do not distinguish between different levels of minority ownership shares for

the CEO. This could hide internal differences within the minority owning CEO

group. For instance, a CEO owning 45 % of the company’s shares may have

different interests than a CEO owning 7 %. This can have an impact the dividend

payout ratio.

6.3 Suggestions for Future Research

The findings in this thesis can be an interesting starting point for future research

within several fields of agency theory. Our focus have been on the second agency

problem, and our main contribution to this field is that having the CEO as a

minority owner will increase the power of the minority group, conditional on the

CEO being unrelated to the majority owner. An interesting area for future research


Page 34

would be to study potential differences between companies where the CEO has no

ownership share and those where she has an ownership share. Also, it would be

interesting to apply more detailed family data to our models, to see if there is a

difference between nuclear and extended family ties regarding CEO’s behavior as

a minority owner. As mentioned in chapter 6.2, a more refined relationship

between the CEO’s ownership share and dividend policy could be investigated by

using more detailed minority ownership data.

Our findings are also interesting from an ownership-management viewpoint. The

potential for the first agency problem, though not addressed in this paper, is

strongly affected by the power of the CEO and the CEO’s power is larger when

she is a minority owner. Further research should look into CEO ownership in

companies where the first agency problem dominates.


Page 35

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Page 41

Appendix 1 – Tables

YearSample payers Sample all Small size

Negative earnings

Zero revenue

Single owner

No majority owner

Spurious data No activity

Financial firm Population

2006 1 997 11 671 11 671 12 285 12 315 14 843 29 007 35 502 95 891 96 575 105 3602007 1 152 16 575 16 575 17 452 17 475 21 152 45 598 54 483 97 426 97 801 109 5012008 1 933 15 828 15 828 16 663 16 732 20 211 44 781 53 087 96 936 97 337 109 9782009 2 044 15 461 15 461 16 275 16 345 19 721 44 756 52 917 95 807 96 209 109 354Sum 7 126 59 535 59 535 62 675 62 867 75 927 164 142 195 989 386 060 387 922 434 193

Table 1 shows the effect of applying different filters to produce our final sample (sample all) which we use in the regressions. Thepopulation consists of all Norwegian non-listed, limited liability firms. We remove financial firms such as banks and insurancecompanies due to their special regulatory capital requirements and special accounting rules. Furthermore we remove firms withno activity measured as zero total assets. We also remove spurious data which we define as percent ownership to largest owneror CEO ownership outside the range 0-100 percent and negative revenue, equity or dividends. The alert reader will notice that oursample significantly decreased when we remove spurious data, the reason is mostly due to missing CEO ownership data, whichis a key variable in our thesis. To make sure that conflicts between majority and minority owners is the agency problem weremove all firms that have no majority owner. Similarly we remove single owned firms due to their lack of such conflicts. To avoidincluding shell corporations we remove any company with zero revenues. We delete companies with negative earnings to avoidpotential problems with negative dividend payout ratios. Then we remove the smallest 5 percent of the companies measured bysales since they have no stockholder conflicts. Finally we show the number of firms with positive dividends.

.Table 1 Population, filters and sample

Dividend propensity 0,171 (0,000) 0,069 (0,000) 0,122 (0,000) 0,132 (0,000) 0,136 (0,000) 1,000 (1,000)Dividends to earnings 0,092 (0,000) 0,036 (0,000) 0,064 (0,000) 0,074 (0,000) 0,064 (0,000) 0,536 (0,540)Dividends to sales 0,015 (0,000) 0,005 (0,000) 0,010 (0,000) 0,012 (0,000) 0,010 (0,000) 0,084 (0,057)Dividends to assets 0,027 (0,000) 0,010 (0,000) 0,018 (0,000) 0,020 (0,000) 0,018 (0,000) 0,152 (0,126)Liquidity 0,307 (0,252) 0,324 (0,276) 0,329 (0,279) 0,332 (0,288) 0,324 (0,275) 0,416 (0,403)Profitability 0,102 (0,086) 0,108 (0,095) 0,084 (0,074) 0,072 (0,062) 0,091 (0,080) 0,205 (0,188)Growth 0,158 (0,054) 0,143 (0,065) 0,116 (0,045) 0,070 (0,017) 0,120 (0,045) 0,111 (0,056)Risk 0,225 (0,170) 0,227 (0,174) 0,227 (0,178) 0,177 (0,130) 0,211 (0,160) 0,195 (0,154)Size 6,462 (6,475) 6,471 (6,494) 6,488 (6,510) 6,472 (6,504) 6,474 (6,496) 6,724 (6,733)Age 0,835 (0,903) 0,811 (0,903) 0,838 (0,903) 0,860 (0,954) 0,836 (0,903) 0,934 (1,000)Holding of largest owner 0,601 (0,540) 0,599 (0,510) 0,598 (0,510) 0,598 (0,510) 0,599 (0,510) 0,597 (0,510)Holding of CEO 0,553 (0,500) 0,566 (0,500) 0,566 (0,500) 0,565 (0,500) 0,563 (0,500) 0,561 (0,500)Largest family has CEO 0,896 (1,000) 0,858 (1,000) 0,853 (1,000) 0,833 (1,000) 0,858 (1,000) 0,852 (1,000)CEO Minority 0,529 (1,000) 0,528 (1,000) 0,539 (1,000) 0,549 (1,000) 0,537 (1,000) 0,535 (1,000)CEO Minority inside family 0,425 (0,000) 0,386 (0,000) 0,392 (0,000) 0,391 (0,000) 0,397 (0,000) 0,388 (0,000)CEO Minority outside family 0,104 (0,000) 0,142 (0,000) 0,147 (0,000) 0,158 (0,000) 0,140 (0,000) 0,147 (0,000)Margin 0,099 (0,063) 0,102 (0,068) 0,088 (0,057) 0,077 (0,050) 0,091 (0,059) 0,173 (0,119)Cash flow 0,090 (0,043) 0,105 (0,051) 0,102 (0,047) 0,095 (0,045) 0,098 (0,046) 0,193 (0,127)CEO is on the board 0,897 (1,000) 0,886 (1,000) 0,888 (1,000) 0,885 (1,000) 0,888 (1,000) 0,897 (1,000)Herfindahl 0,532 (0,500) 0,532 (0,500) 0,536 (0,500) 0,536 (0,500) 0,534 (0,500) 0,531 (0,500)Fraction held by personal owners 0,822 (1,000) 0,943 (1,000) 0,948 (1,000) 0,952 (1,000) 0,923 (1,000) 0,916 (1,000)

Table 2 - Descriptive statistics

Table 2 shows the mean and (median) of the variables used in our thesis. Dividend propensity is the fraction of firms thatpay dividends, while dividends to earnings, sales and assets are the three ways we measure the dividend payout ratio.Liquidity and profitability is respectively cash and cash equivalents and operating profit to total assets. Growth is measuredas sales' CAGR over the past 3 (minimum 2) years. Risk is the standard deviation of sales divided by the average sales forthe last 7 (minimum 3) years while size and age are the log of sales and the log of number of years since the firm wasfounded respectively. Holding of largest owner is the ownership share of the largest owner while holding of CEO is theCEOs ownership share. Largest family has CEO is a dummy equal to one if the CEO is, or is related to (up to and includingthe fourth level of kinship) the largest owner. CEO minority is a dummy variable that takes the value 1 if the CEO is aminority owner regardless of any potential familie ties to the majority owner. CEO minority inside familes equal to 1 if theCEO is a minority owner and has family ties (up to and including the fourth level of kinship) to the majority owner. CEOminority outside family is equal to 1 if the CEO is a minority owner with no family ties to the majority owner. Note that CEO isregarded as a minority owner if CEO ownership is equal to or below 50% in the previous three variables. Margin is the ratioof operating income to sales and Cash flow is calculated using the standard CCGR formula (reported in millions) andnormalized by dividing by the log of sales. CEO is on the board is a dummy equal to 1 if the CEO is represented on theboard of directors. Herfindahl is a measure of ownership concentration while fraction held by personal owners is thecumulative ownership share held by personal owners. Note that dividends to earnings is winsorized such that the maximum value is set equal to 1 and that dividends to sales and assets are winsorized at the 0 and 99% level. Further is Liquidity,Profitability, Growth, Risk and Margin winsorized at the 0,5 and 99,5% level.

2006 2007 2008 2009 All Payers


Page 42

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tions


Page 43

EarningsCEO Minority 0,013 (0,010) 0,008 (0,036) 0,009 (0,054) 0,011 (0,008) 0,011 (0,000) 0,010 (0,002)LIQUIDITY 0,126 (0,000) 0,060 (0,000) 0,075 (0,000) 0,093 (0,000) 0,089 (0,000) 0,089 (0,008)PROFITABILITY 0,375 (0,000) 0,183 (0,000) 0,303 (0,000) 0,375 (0,000) 0,310 (0,000) 0,309 (0,006)GROWTH -0,016 (0,020) -0,003 (0,666) -0,032 (0,000) -0,048 (0,000) -0,028 (0,000) -0,025 (0,086)RISK -0,046 (0,000) -0,024 (0,008) -0,032 (0,013) 0,015 (0,238) -0,028 (0,000) -0,022 (0,193)SIZE 0,053 (0,000) 0,018 (0,000) 0,024 (0,000) 0,047 (0,000) 0,036 (0,000) 0,035 (0,025)AGE 0,007 (0,323) -0,002 (0,763) 0,018 (0,008) 0,019 (0,002) 0,011 (0,004) 0,011 (0,119)R2 0,106 0,050 0,085 0,105 0,085 0,086N 9361 8196 7536 11418 36511 36511

EarningsCEO Minority inside family 0,002 (0,640) 0,004 (0,311) -0,004 (0,428) 0,004 (0,396) 0,003 (0,191) 0,002 (0,466)LIQUIDITY 0,126 (0,000) 0,060 (0,000) 0,075 (0,000) 0,093 (0,000) 0,089 (0,000) 0,088 (0,008)PROFITABILITY 0,374 (0,000) 0,183 (0,000) 0,304 (0,000) 0,374 (0,000) 0,310 (0,000) 0,309 (0,006)GROWTH -0,016 (0,024) -0,003 (0,690) -0,032 (0,000) -0,048 (0,000) -0,028 (0,000) -0,024 (0,088)RISK -0,047 (0,000) -0,025 (0,007) -0,033 (0,010) 0,014 (0,273) -0,029 (0,000) -0,023 (0,178)SIZE 0,053 (0,000) 0,018 (0,000) 0,024 (0,000) 0,047 (0,000) 0,036 (0,000) 0,036 (0,025)AGE 0,005 (0,436) -0,003 (0,600) 0,016 (0,021) 0,017 (0,006) 0,009 (0,015) 0,009 (0,152)R2 0,105 0,050 0,085 0,105 0,085 0,086N 9361 8196 7536 11418 36511 36511

EarningsCEO Minority outside family 0,029 (0,001) 0,009 (0,112) 0,027 (0,000) 0,017 (0,010) 0,018 (0,000) 0,021 (0,021)LIQUIDITY 0,125 (0,000) 0,060 (0,000) 0,074 (0,000) 0,093 (0,000) 0,088 (0,000) 0,088 (0,008)PROFITABILITY 0,375 (0,000) 0,182 (0,000) 0,303 (0,000) 0,374 (0,000) 0,310 (0,000) 0,309 (0,006)GROWTH -0,016 (0,022) -0,003 (0,712) -0,032 (0,000) -0,048 (0,000) -0,028 (0,000) -0,025 (0,089)RISK -0,047 (0,000) -0,025 (0,007) -0,032 (0,012) 0,014 (0,260) -0,029 (0,000) -0,022 (0,183)SIZE 0,053 (0,000) 0,018 (0,000) 0,024 (0,000) 0,047 (0,000) 0,036 (0,000) 0,035 (0,026)AGE 0,007 (0,295) -0,002 (0,690) 0,019 (0,006) 0,018 (0,004) 0,010 (0,006) 0,011 (0,124)R2 0,106 0,050 0,086 0,105 0,085 0,087N 9361 8196 7536 11418 36511 36511

EarningsCEO Minority inside family 0,008 (0,130) 0,006 (0,113) 0,002 (0,649) 0,008 (0,067) 0,008 (0,006) 0,006 (0,020)CEO Minority outside family 0,033 (0,000) 0,012 (0,050) 0,028 (0,000) 0,020 (0,002) 0,021 (0,000) 0,023 (0,014)LIQUIDITY 0,126 (0,000) 0,060 (0,000) 0,074 (0,000) 0,093 (0,000) 0,089 (0,000) 0,088 (0,008)PROFITABILITY 0,376 (0,000) 0,183 (0,000) 0,303 (0,000) 0,375 (0,000) 0,310 (0,000) 0,309 (0,007)GROWTH -0,016 (0,020) -0,003 (0,674) -0,032 (0,000) -0,049 (0,000) -0,029 (0,000) -0,025 (0,086)RISK -0,046 (0,000) -0,024 (0,009) -0,032 (0,013) 0,015 (0,235) -0,028 (0,000) -0,022 (0,194)SIZE 0,053 (0,000) 0,018 (0,000) 0,024 (0,000) 0,047 (0,000) 0,036 (0,000) 0,035 (0,026)AGE 0,008 (0,252) -0,001 (0,809) 0,019 (0,005) 0,019 (0,002) 0,012 (0,002) 0,011 (0,107)R2 0,106 0,050 0,086 0,106 0,086 0,087N 9361 8196 7536 11418 36511 36511

Table 4-7 report the results for the base-case OLS regressions as specified in chapter 5. The p-values are shown in parentheses. Thedependent variable is dividends payable divided by that year's earnings. Further, the dependent variable is winsorized such that themaximal value is set equal to 1. CEO minority is a dummy variable that takes the value 1 if the CEO is a minority owner regardless of anypotential familie ties to the majority owner. Further, CEO minority inside family is equal to 1 if the CEO is a minority owner and has familyties (up to and including the fourth level of kinship) to the majority owner. CEO minority outside family is equal to 1 if the CEO is a minorityowner with no family ties to the majority owner. Note that CEO is regarded as a minority owner if CEO ownership is equal to or below50% in the previous three variables. Liquidity is cash and cash equivalents holdings to total assets and profitability is operating profit tototal assets. Growth is measured as sales' CAGR over the past 3 (minimum 2) years. Risk is the standard deviation of sales divided bythe average sales for the last 7 (minimum 3) years while size and age are the log of sales and the log of number of years since the firmwas founded respectively. Liquidity, Profitability, Growth and Risk are winsorized at the 0,5 and 99,5% level. We report the adjusted R2

for each year and for the pooled sample. Note that for FMB the reported R2 is the average for the individual years and N is set equal to thepooled sample. .

Table 7 - Model 42006 2007 2008 2009 Pooled Sample FMB


Table 5 - Model 2FMB


2006 2007 2008 2009 Pooled Sample


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SalesCEO Minority 0,000 (0,722) 0,001 (0,186) 0,001 (0,366) 0,002 (0,021) 0,001 (0,038) 0,001 (0,056)LIQUIDITY 0,022 (0,000) 0,008 (0,000) 0,011 (0,000) 0,013 (0,000) 0,014 (0,000) 0,014 (0,019)PROFITABILITY 0,100 (0,000) 0,039 (0,000) 0,077 (0,000) 0,091 (0,000) 0,078 (0,000) 0,077 (0,011)GROWTH -0,003 (0,083) -0,001 (0,531) -0,007 (0,000) -0,008 (0,000) -0,006 (0,000) -0,005 (0,069)RISK -0,005 (0,087) -0,002 (0,311) 0,002 (0,532) 0,010 (0,001) 0,000 (0,992) 0,001 (0,746)SIZE -0,002 (0,026) 0,000 (0,400) -0,005 (0,000) -0,003 (0,000) -0,003 (0,000) -0,003 (0,058)AGE 0,001 (0,339) 0,000 (0,566) 0,003 (0,050) 0,004 (0,002) 0,002 (0,013) 0,002 (0,135)R2 0,123 0,068 0,111 0,124 0,104 0,107N 9361 8196 7536 11418 36511 36511

SalesCEO Minority inside family -0,001 (0,270) 0,000 (0,748) -0,001 (0,563) 0,001 (0,340) 0,000 (0,767) 0,000 (0,706)LIQUIDITY 0,022 (0,000) 0,008 (0,000) 0,011 (0,000) 0,013 (0,000) 0,014 (0,000) 0,014 (0,019)PROFITABILITY 0,100 (0,000) 0,039 (0,000) 0,077 (0,000) 0,091 (0,000) 0,078 (0,000) 0,077 (0,011)GROWTH -0,003 (0,088) -0,001 (0,549) -0,007 (0,000) -0,008 (0,000) -0,006 (0,000) -0,005 (0,071)RISK -0,006 (0,082) -0,002 (0,288) 0,002 (0,562) 0,010 (0,001) 0,000 (0,936) 0,001 (0,770)SIZE -0,002 (0,030) 0,000 (0,427) -0,005 (0,000) -0,003 (0,001) -0,003 (0,000) -0,003 (0,061)AGE 0,001 (0,376) -0,001 (0,461) 0,002 (0,075) 0,003 (0,004) 0,002 (0,024) 0,002 (0,154)R2 0,123 0,068 0,111 0,124 0,104 0,106N 9361 8196 7536 11418 36511 36511

SalesCEO Minority outside family 0,004 (0,022) 0,001 (0,157) 0,003 (0,037) 0,002 (0,045) 0,002 (0,003) 0,003 (0,019)LIQUIDITY 0,022 (0,000) 0,008 (0,000) 0,011 (0,000) 0,013 (0,000) 0,014 (0,000) 0,014 (0,020)PROFITABILITY 0,100 (0,000) 0,039 (0,000) 0,077 (0,000) 0,091 (0,000) 0,078 (0,000) 0,077 (0,011)GROWTH -0,003 (0,080) -0,001 (0,554) -0,007 (0,000) -0,008 (0,000) -0,006 (0,000) -0,005 (0,070)RISK -0,005 (0,087) -0,002 (0,295) 0,002 (0,537) 0,010 (0,001) 0,000 (0,964) 0,001 (0,753)SIZE -0,002 (0,023) 0,000 (0,402) -0,005 (0,000) -0,003 (0,000) -0,003 (0,000) -0,003 (0,058)AGE 0,002 (0,265) 0,000 (0,557) 0,003 (0,042) 0,003 (0,003) 0,002 (0,013) 0,002 (0,122)R2 0,123 0,068 0,111 0,124 0,104 0,107N 9361 8196 7536 11418 36511 36511

SalesCEO Minority inside family 0,000 (0,655) 0,000 (0,415) 0,000 (0,924) 0,001 (0,090) 0,001 (0,233) 0,000 (0,402)CEO Minority outside family 0,004 (0,038) 0,002 (0,116) 0,003 (0,046) 0,003 (0,015) 0,002 (0,002) 0,003 (0,010)LIQUIDITY 0,022 (0,000) 0,008 (0,000) 0,011 (0,000) 0,013 (0,000) 0,014 (0,000) 0,014 (0,019)PROFITABILITY 0,100 (0,000) 0,039 (0,000) 0,077 (0,000) 0,091 (0,000) 0,078 (0,000) 0,077 (0,011)GROWTH -0,003 (0,081) -0,001 (0,539) -0,007 (0,000) -0,008 (0,000) -0,006 (0,000) -0,005 (0,070)RISK -0,005 (0,086) -0,002 (0,312) 0,002 (0,535) 0,010 (0,001) 0,000 (0,995) 0,001 (0,747)SIZE -0,002 (0,024) 0,000 (0,389) -0,005 (0,000) -0,003 (0,000) -0,003 (0,000) -0,003 (0,058)AGE 0,002 (0,280) 0,000 (0,614) 0,003 (0,042) 0,004 (0,002) 0,002 (0,010) 0,002 (0,121)R2 0,123 0,068 0,111 0,124 0,104 0,107N 9361 8196 7536 11418 36511 36511

Table 8-15 report the results for models 1-4 when we apply different ways to measure the dividend payout ratio. In table 8-11 and 12-15we regress on dividends divided by sales and assets respectively. All independent variables are as explained in table 4.

.

Table 11 - Model 4 with sales2006 2007 2008 2009 All FMB


Table 9 - Model 2 with salesFMB


2006 2007 2008 2009 All


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AssetsCEO Minority 0,004 (0,007) 0,002 (0,093) 0,002 (0,091) 0,004 (0,001) 0,003 (0,000) 0,003 (0,012)LIQUIDITY 0,044 (0,000) 0,017 (0,000) 0,023 (0,000) 0,025 (0,000) 0,027 (0,000) 0,027 (0,019)PROFITABILITY 0,173 (0,000) 0,078 (0,000) 0,129 (0,000) 0,153 (0,000) 0,135 (0,000) 0,133 (0,007)GROWTH -0,004 (0,130) -0,001 (0,626) -0,010 (0,000) -0,014 (0,000) -0,008 (0,000) -0,007 (0,092)RISK -0,015 (0,000) -0,005 (0,069) -0,004 (0,286) 0,010 (0,004) -0,005 (0,023) -0,003 (0,551)SIZE 0,010 (0,000) 0,003 (0,001) 0,004 (0,005) 0,008 (0,000) 0,006 (0,000) 0,006 (0,033)AGE -0,001 (0,661) -0,002 (0,223) 0,001 (0,522) 0,001 (0,718) 0,000 (0,771) 0,000 (0,748)R2 0,158 0,074 0,129 0,157 0,129 0,130N 9361 8196 7536 11418 36511 36511

AssetsCEO Minority inside family 0,001 (0,641) 0,001 (0,638) -0,001 (0,433) 0,001 (0,390) 0,001 (0,300) 0,000 (0,588)LIQUIDITY 0,044 (0,000) 0,017 (0,000) 0,022 (0,000) 0,025 (0,000) 0,027 (0,000) 0,027 (0,019)PROFITABILITY 0,172 (0,000) 0,078 (0,000) 0,129 (0,000) 0,153 (0,000) 0,135 (0,000) 0,133 (0,007)GROWTH -0,004 (0,147) -0,001 (0,651) -0,010 (0,000) -0,014 (0,000) -0,008 (0,000) -0,007 (0,094)RISK -0,015 (0,000) -0,006 (0,060) -0,005 (0,248) 0,010 (0,006) -0,005 (0,015) -0,004 (0,517)SIZE 0,011 (0,000) 0,003 (0,001) 0,004 (0,004) 0,008 (0,000) 0,006 (0,000) 0,006 (0,033)AGE -0,001 (0,506) -0,002 (0,152) 0,001 (0,783) 0,000 (0,918) -0,001 (0,423) -0,001 (0,274)R2 0,157 0,074 0,129 0,156 0,128 0,129N 9361 8196 7536 11418 36511 36511

AssetsCEO Minority outside family 0,010 (0,001) 0,003 (0,093) 0,007 (0,002) 0,006 (0,001) 0,006 (0,000) 0,007 (0,018)LIQUIDITY 0,044 (0,000) 0,017 (0,000) 0,022 (0,000) 0,025 (0,000) 0,027 (0,000) 0,027 (0,019)PROFITABILITY 0,172 (0,000) 0,078 (0,000) 0,129 (0,000) 0,153 (0,000) 0,135 (0,000) 0,133 (0,007)GROWTH -0,004 (0,136) -0,001 (0,659) -0,010 (0,000) -0,014 (0,000) -0,008 (0,000) -0,007 (0,094)RISK -0,015 (0,000) -0,005 (0,063) -0,004 (0,277) 0,010 (0,005) -0,005 (0,018) -0,004 (0,533)SIZE 0,010 (0,000) 0,003 (0,001) 0,004 (0,006) 0,008 (0,000) 0,006 (0,000) 0,006 (0,034)AGE -0,001 (0,707) -0,002 (0,213) 0,001 (0,468) 0,000 (0,849) 0,000 (0,692) 0,000 (0,746)R2 0,159 0,074 0,130 0,157 0,129 0,130N 9361 8196 7536 11418 36511 36511

AssetsCEO Minority inside family 0,003 (0,116) 0,001 (0,282) 0,001 (0,729) 0,003 (0,026) 0,002 (0,010) 0,002 (0,044)CEO Minority outside family 0,011 (0,000) 0,004 (0,058) 0,008 (0,002) 0,008 (0,000) 0,007 (0,000) 0,008 (0,016)LIQUIDITY 0,044 (0,000) 0,017 (0,000) 0,022 (0,000) 0,025 (0,000) 0,027 (0,000) 0,027 (0,019)PROFITABILITY 0,173 (0,000) 0,078 (0,000) 0,129 (0,000) 0,153 (0,000) 0,135 (0,000) 0,133 (0,007)GROWTH -0,004 (0,126) -0,001 (0,636) -0,010 (0,000) -0,014 (0,000) -0,008 (0,000) -0,007 (0,092)RISK -0,015 (0,000) -0,005 (0,070) -0,004 (0,283) 0,011 (0,004) -0,005 (0,023) -0,003 (0,552)SIZE 0,010 (0,000) 0,003 (0,001) 0,004 (0,006) 0,008 (0,000) 0,006 (0,000) 0,006 (0,034)AGE -0,001 (0,787) -0,002 (0,258) 0,002 (0,438) 0,001 (0,631) 0,000 (0,914) 0,000 (0,987)R2 0,159 0,074 0,130 0,157 0,129 0,130N 9361 8196 7536 11418 36511 36511

Table 15 - Model 4 with assets2006 2007 2008 2009 All FMB





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EarningsCEO Minority inside family 0,008 (0,105) 0,006 (0,111) 0,003 (0,556) 0,008 (0,089) 0,008 (0,005) 0,006 (0,013)CEO Minority outside family 0,034 (0,000) 0,012 (0,052) 0,029 (0,000) 0,020 (0,004) 0,021 (0,000) 0,024 (0,016)LIQUIDITY 0,126 (0,000) 0,060 (0,000) 0,074 (0,000) 0,093 (0,000) 0,089 (0,000) 0,088 (0,008)PROFITABILITY 0,376 (0,000) 0,183 (0,000) 0,303 (0,000) 0,375 (0,000) 0,310 (0,000) 0,309 (0,007)GROWTH -0,016 (0,021) -0,003 (0,674) -0,032 (0,000) -0,049 (0,000) -0,029 (0,000) -0,025 (0,087)RISK -0,046 (0,000) -0,024 (0,009) -0,032 (0,013) 0,015 (0,232) -0,028 (0,000) -0,022 (0,195)SIZE 0,053 (0,000) 0,018 (0,000) 0,024 (0,000) 0,047 (0,000) 0,036 (0,000) 0,035 (0,026)AGE 0,008 (0,256) -0,001 (0,805) 0,019 (0,006) 0,020 (0,002) 0,012 (0,003) 0,011 (0,108)CEO is on the board 0,007 (0,419) 0,001 (0,911) 0,007 (0,382) -0,005 (0,497) 0,002 (0,714) 0,002 (0,466)R2 0,106 0,050 0,086 0,106 0,086 0,087N 9361 8196 7536 11418 36511 36511

EarningsCEO Minority inside family 0,008 (0,105) 0,006 (0,111) 0,003 (0,556) 0,008 (0,084) 0,008 (0,005) 0,006 (0,013)CEO Minority outside family 0,034 (0,000) 0,012 (0,055) 0,029 (0,000) 0,020 (0,003) 0,021 (0,000) 0,024 (0,016)LIQUIDITY 0,126 (0,000) 0,059 (0,000) 0,074 (0,000) 0,092 (0,000) 0,088 (0,000) 0,088 (0,009)PROFITABILITY 0,377 (0,000) 0,196 (0,000) 0,313 (0,000) 0,393 (0,000) 0,321 (0,000) 0,320 (0,006)GROWTH -0,016 (0,022) -0,003 (0,711) -0,032 (0,000) -0,048 (0,000) -0,028 (0,000) -0,024 (0,087)RISK -0,046 (0,000) -0,024 (0,008) -0,033 (0,011) 0,013 (0,307) -0,029 (0,000) -0,023 (0,173)SIZE 0,053 (0,000) 0,017 (0,000) 0,023 (0,000) 0,046 (0,000) 0,035 (0,000) 0,034 (0,029)AGE 0,008 (0,254) -0,001 (0,855) 0,019 (0,005) 0,020 (0,001) 0,012 (0,002) 0,012 (0,104)CEO is on the Board 0,007 (0,418) 0,001 (0,912) 0,007 (0,379) -0,005 (0,497) 0,002 (0,706) 0,002 (0,465)Margin -0,002 (0,875) -0,018 (0,107) -0,012 (0,096) -0,020 (0,002) -0,014 (0,006) -0,013 (0,047)R2 0,106 0,050 0,086 0,106 0,086 0,087N 9361 8196 7536 11418 36511 36511

EarningsCEO Minority inside family 0,009 (0,096) 0,006 (0,116) 0,003 (0,522) 0,008 (0,080) 0,008 (0,005) 0,007 (0,012)CEO Minority outside family 0,034 (0,000) 0,012 (0,054) 0,029 (0,000) 0,020 (0,003) 0,021 (0,000) 0,024 (0,016)LIQUIDITY 0,117 (0,000) 0,058 (0,000) 0,069 (0,000) 0,090 (0,000) 0,085 (0,000) 0,084 (0,008)PROFITABILITY 0,371 (0,000) 0,194 (0,000) 0,300 (0,000) 0,385 (0,000) 0,314 (0,000) 0,313 (0,006)GROWTH -0,013 (0,054) -0,002 (0,786) -0,029 (0,000) -0,047 (0,000) -0,026 (0,000) -0,023 (0,101)RISK -0,054 (0,000) -0,026 (0,004) -0,042 (0,001) 0,009 (0,470) -0,034 (0,000) -0,028 (0,131)SIZE 0,040 (0,000) 0,014 (0,000) 0,015 (0,002) 0,041 (0,000) 0,028 (0,000) 0,027 (0,036)AGE 0,007 (0,338) -0,001 (0,793) 0,019 (0,006) 0,020 (0,002) 0,011 (0,004) 0,011 (0,120)CEO is on the board 0,006 (0,429) 0,001 (0,902) 0,007 (0,368) -0,005 (0,484) 0,002 (0,707) 0,002 (0,472)Margin -0,024 (0,098) -0,023 (0,046) -0,018 (0,005) -0,024 (0,000) -0,021 (0,000) -0,022 (0,001)Cash Flow 0,084 (0,000) 0,017 (0,161) 0,051 (0,001) 0,031 (0,033) 0,043 (0,000) 0,046 (0,051)R2 0,109 0,050 0,088 0,106 0,087 0,088N 9361 8196 7536 11418 36511 36511

EarningsCEO Minority inside family 0,010 (0,060) 0,006 (0,120) 0,003 (0,516) 0,008 (0,081) 0,008 (0,007) 0,007 (0,017)CEO Minority outside family 0,033 (0,000) 0,012 (0,065) 0,029 (0,000) 0,020 (0,004) 0,022 (0,000) 0,023 (0,017)LIQUIDITY 0,117 (0,000) 0,058 (0,000) 0,069 (0,000) 0,090 (0,000) 0,085 (0,000) 0,084 (0,008)PROFITABILITY 0,371 (0,000) 0,194 (0,000) 0,300 (0,000) 0,385 (0,000) 0,313 (0,000) 0,313 (0,006)GROWTH -0,013 (0,054) -0,002 (0,791) -0,029 (0,000) -0,047 (0,000) -0,027 (0,000) -0,023 (0,101)RISK -0,053 (0,000) -0,026 (0,005) -0,042 (0,001) 0,009 (0,458) -0,035 (0,000) -0,028 (0,133)SIZE 0,040 (0,000) 0,014 (0,000) 0,015 (0,002) 0,041 (0,000) 0,028 (0,000) 0,028 (0,036)AGE 0,007 (0,351) -0,001 (0,791) 0,019 (0,006) 0,020 (0,002) 0,011 (0,004) 0,011 (0,122)CEO is on the board 0,006 (0,435) 0,001 (0,899) 0,007 (0,371) -0,005 (0,491) 0,002 (0,722) 0,002 (0,468)Margin -0,025 (0,097) -0,023 (0,045) -0,018 (0,005) -0,024 (0,000) -0,021 (0,000) -0,022 (0,001)Cash Flow 0,085 (0,000) 0,017 (0,156) 0,051 (0,001) 0,032 (0,032) 0,044 (0,000) 0,046 (0,050)Fraction held by personal owners 0,012 (0,271) 0,010 (0,457) -0,004 (0,817) 0,007 (0,673) -0,017 (0,017) 0,006 (0,189)R2 0,109 0,050 0,087 0,106 0,087 0,088N 9361 8196 7536 11417 36510 36510

Table 16-25 report the results for various robustness tests we have performed by including and excluding various variables from our base case models. The variables are as explained in Table 2

Talbe 192006 2007 2008 2009 All FMB

2006 2007 2008 2009 All FMB

2006 2007 2008 2009 All FMB

Table 162006 2007 2008 2009 All FMB

Table 17

Table 18


Page 47

EarningsCEO Minority inside family 0,008 (0,123) 0,007 (0,121) 0,003 (0,596) 0,008 (0,102) 0,007 (0,012) 0,006 (0,014)CEO Minority outside family 0,031 (0,001) 0,012 (0,064) 0,029 (0,001) 0,020 (0,005) 0,022 (0,000) 0,023 (0,014)LIQUIDITY 0,117 (0,000) 0,058 (0,000) 0,069 (0,000) 0,090 (0,000) 0,085 (0,000) 0,084 (0,008)PROFITABILITY 0,371 (0,000) 0,194 (0,000) 0,300 (0,000) 0,385 (0,000) 0,313 (0,000) 0,313 (0,006)GROWTH -0,013 (0,056) -0,002 (0,789) -0,029 (0,000) -0,047 (0,000) -0,027 (0,000) -0,023 (0,101)RISK -0,053 (0,000) -0,026 (0,005) -0,042 (0,001) 0,009 (0,458) -0,035 (0,000) -0,028 (0,133)SIZE 0,040 (0,000) 0,014 (0,000) 0,015 (0,002) 0,041 (0,000) 0,028 (0,000) 0,027 (0,036)AGE 0,007 (0,309) -0,001 (0,782) 0,019 (0,006) 0,020 (0,002) 0,011 (0,004) 0,011 (0,117)CEO is on the board 0,006 (0,455) 0,001 (0,895) 0,007 (0,375) -0,005 (0,491) 0,002 (0,725) 0,002 (0,475)Margin -0,025 (0,095) -0,023 (0,045) -0,018 (0,005) -0,024 (0,000) -0,021 (0,000) -0,022 (0,001)Cash Flow 0,085 (0,000) 0,017 (0,156) 0,051 (0,001) 0,032 (0,032) 0,044 (0,000) 0,046 (0,050)Fraction held by personal owners 0,013 (0,228) 0,010 (0,485) -0,004 (0,842) 0,007 (0,676) -0,017 (0,019) 0,006 (0,174)Herfindahl -0,026 (0,205) 0,003 (0,821) -0,005 (0,804) 0,000 (0,999) -0,002 (0,881) -0,007 (0,370)R2 0,109 0,050 0,087 0,106 0,087 0,088N 9361 8196 7536 11417 36510 36510

EarningsCEO Minority inside family 0,006 (0,384) 0,009 (0,086) 0,003 (0,709) 0,003 (0,632) 0,004 (0,290) 0,005 (0,040)CEO Minority outside family 0,029 (0,004) 0,015 (0,044) 0,029 (0,002) 0,015 (0,062) 0,019 (0,000) 0,022 (0,012)LIQUIDITY 0,117 (0,000) 0,058 (0,000) 0,069 (0,000) 0,090 (0,000) 0,085 (0,000) 0,084 (0,007)PROFITABILITY 0,371 (0,000) 0,194 (0,000) 0,300 (0,000) 0,384 (0,000) 0,313 (0,000) 0,312 (0,006)GROWTH -0,013 (0,055) -0,002 (0,793) -0,029 (0,000) -0,047 (0,000) -0,027 (0,000) -0,023 (0,101)RISK -0,053 (0,000) -0,026 (0,005) -0,042 (0,001) 0,010 (0,443) -0,035 (0,000) -0,028 (0,135)SIZE 0,040 (0,000) 0,014 (0,000) 0,015 (0,002) 0,041 (0,000) 0,028 (0,000) 0,028 (0,036)AGE 0,007 (0,287) -0,002 (0,733) 0,019 (0,006) 0,020 (0,001) 0,012 (0,002) 0,011 (0,120)CEO is on the board 0,006 (0,472) 0,001 (0,883) 0,007 (0,375) -0,005 (0,486) 0,001 (0,746) 0,002 (0,481)Margin -0,025 (0,095) -0,023 (0,046) -0,018 (0,005) -0,024 (0,000) -0,021 (0,000) -0,022 (0,001)Cash Flow 0,085 (0,000) 0,017 (0,163) 0,051 (0,001) 0,032 (0,031) 0,044 (0,000) 0,046 (0,051)Fraction held by personal owners 0,012 (0,300) 0,013 (0,383) -0,004 (0,842) 0,002 (0,911) -0,020 (0,009) 0,006 (0,256)Herfindahl -0,002 (0,957) -0,021 (0,552) -0,004 (0,936) 0,044 (0,299) 0,028 (0,264) 0,004 (0,784)Ownership with Rank 1 -0,027 (0,562) 0,029 (0,443) -0,001 (0,977) -0,051 (0,259) -0,036 (0,186) -0,013 (0,517)R2 0,109 0,050 0,087 0,106 0,087 0,088N 9361 8196 7536 11417 36510 36510

EarningsCEO Minority inside family 0,005 (0,322) 0,006 (0,147) 0,004 (0,441) 0,007 (0,149) 0,007 (0,023) 0,005 (0,003)CEO Minority outside family 0,033 (0,000) 0,014 (0,032) 0,029 (0,000) 0,019 (0,006) 0,021 (0,000) 0,024 (0,013)LIQUIDITY 0,180 (0,000) 0,088 (0,000) 0,137 (0,000) 0,153 (0,000) 0,140 (0,000) 0,140 (0,005)GROWTH -0,010 (0,141) 0,002 (0,775) -0,018 (0,012) -0,021 (0,002) -0,015 (0,000) -0,012 (0,105)RISK -0,033 (0,006) -0,017 (0,059) -0,021 (0,114) 0,012 (0,359) -0,019 (0,008) -0,015 (0,216)SIZE 0,074 (0,000) 0,031 (0,000) 0,046 (0,000) 0,068 (0,000) 0,055 (0,000) 0,055 (0,012)AGE 0,003 (0,673) -0,003 (0,602) 0,021 (0,004) 0,019 (0,003) 0,010 (0,012) 0,010 (0,185)Margin 0,176 (0,000) 0,072 (0,000) 0,068 (0,003) 0,097 (0,000) 0,097 (0,000) 0,104 (0,026)R2 0,073 0,032 0,049 0,061 0,052 0,054N 9361 8196 7536 11418 36511 36511

EarningsCEO Minority inside family 0,006 (0,241) 0,005 (0,197) 0,001 (0,783) 0,008 (0,073) 0,007 (0,017) 0,005 (0,034)CEO Minority outside family 0,034 (0,000) 0,013 (0,040) 0,029 (0,000) 0,021 (0,002) 0,022 (0,000) 0,024 (0,014)PROFITABILITY 0,404 (0,000) 0,208 (0,000) 0,325 (0,000) 0,411 (0,000) 0,338 (0,000) 0,337 (0,006)GROWTH -0,017 (0,014) -0,003 (0,651) -0,031 (0,000) -0,053 (0,000) -0,030 (0,000) -0,026 (0,090)RISK -0,063 (0,000) -0,030 (0,001) -0,046 (0,000) 0,009 (0,474) -0,039 (0,000) -0,032 (0,125)SIZE 0,026 (0,000) 0,008 (0,028) 0,006 (0,195) 0,031 (0,000) 0,018 (0,000) 0,018 (0,068)AGE 0,004 (0,588) -0,002 (0,712) 0,018 (0,008) 0,018 (0,003) 0,010 (0,009) 0,010 (0,159)Cash Flow 0,103 (0,000) 0,021 (0,074) 0,058 (0,000) 0,039 (0,008) 0,053 (0,000) 0,055 (0,052)R2 0,096 0,043 0,081 0,097 0,078 0,079N 9361 8196 7536 11418 36511 36511

Tables 232006 2007 2008 2009 All FMB

Table 222006 2007 2008 2009 All FMB

Table 212006 2007 2008 2009 All FMB

Tabel 202006 2007 2008 2009 All FMB


Page 48

EarningsCEO Minority inside family 0,005 (0,417) 0,008 (0,099) 0,001 (0,841) 0,007 (0,235) 0,006 (0,077) 0,005 (0,038)CEO Minority outside family 0,028 (0,004) 0,013 (0,049) 0,027 (0,002) 0,019 (0,012) 0,021 (0,000) 0,022 (0,008)LIQUIDITY 0,125 (0,000) 0,060 (0,000) 0,074 (0,000) 0,093 (0,000) 0,089 (0,000) 0,088 (0,008)PROFITABILITY 0,375 (0,000) 0,182 (0,000) 0,303 (0,000) 0,375 (0,000) 0,310 (0,000) 0,309 (0,007)GROWTH -0,016 (0,020) -0,003 (0,676) -0,032 (0,000) -0,049 (0,000) -0,029 (0,000) -0,025 (0,086)RISK -0,045 (0,000) -0,023 (0,010) -0,032 (0,012) 0,015 (0,225) -0,029 (0,000) -0,021 (0,198)SIZE 0,053 (0,000) 0,018 (0,000) 0,024 (0,000) 0,047 (0,000) 0,035 (0,000) 0,035 (0,026)AGE 0,009 (0,211) -0,002 (0,767) 0,020 (0,005) 0,020 (0,002) 0,012 (0,002) 0,012 (0,106)Fraction held by personal owners 0,011 (0,322) 0,010 (0,475) -0,003 (0,855) 0,007 (0,656) -0,017 (0,017) 0,006 (0,158)Ownership with Rank 1 -0,029 (0,163) 0,010 (0,553) -0,007 (0,764) -0,009 (0,638) -0,009 (0,466) -0,009 (0,358)R2 0,107 0,050 0,086 0,106 0,086 0,087N 9361 8196 7536 11417 36510 36510

EarningsCEO Minority inside family 0,006 (0,246) 0,007 (0,103) 0,002 (0,753) 0,008 (0,082) 0,007 (0,012) 0,006 (0,028)CEO Minority outside family 0,031 (0,001) 0,013 (0,046) 0,027 (0,001) 0,020 (0,003) 0,021 (0,000) 0,023 (0,011)LIQUIDITY 0,125 (0,000) 0,060 (0,000) 0,074 (0,000) 0,093 (0,000) 0,089 (0,000) 0,088 (0,008)PROFITABILITY 0,375 (0,000) 0,183 (0,000) 0,303 (0,000) 0,375 (0,000) 0,310 (0,000) 0,309 (0,006)GROWTH -0,016 (0,021) -0,003 (0,672) -0,032 (0,000) -0,049 (0,000) -0,029 (0,000) -0,025 (0,086)RISK -0,046 (0,000) -0,024 (0,009) -0,032 (0,012) 0,015 (0,235) -0,028 (0,000) -0,022 (0,194)SIZE 0,053 (0,000) 0,018 (0,000) 0,024 (0,000) 0,047 (0,000) 0,036 (0,000) 0,035 (0,026)AGE 0,009 (0,221) -0,001 (0,792) 0,019 (0,005) 0,019 (0,002) 0,012 (0,002) 0,011 (0,105)Herfindahl -0,024 (0,235) 0,006 (0,705) -0,008 (0,712) 0,001 (0,954) -0,005 (0,671) -0,006 (0,412)R2 0,106 0,050 0,086 0,106 0,086 0,087N 9361 8196 7536 11418 36511 36511

Table 24FMB2006 2007 2008 2009 All

Table 252006 2007 2008 2009 All FMB

EarningsCEO Minority and family = 1 0,076 (0,232) 0,074 (0,439) 0,106 (0,185) 0,056 (0,380) 0,095 (0,008) 0,078 (0,005)CEO Minority and not family = 1 0,306 (0,002) 0,263 (0,035) 0,392 (0,000) 0,173 (0,048) 0,243 (0,000) 0,283 (0,008)LIQUIDITY 1,188 (0,000) 0,969 (0,000) 0,715 (0,000) 0,903 (0,000) 0,930 (0,000) 0,944 (0,002)PROFITABILITY 5,966 (0,000) 5,296 (0,000) 6,324 (0,000) 7,064 (0,000) 5,956 (0,000) 6,163 (0,000)GROWTH 0,022 (0,854) 0,177 (0,336) -0,475 (0,019) -0,672 (0,000) -0,262 (0,003) -0,237 (0,323)RISK -1,124 (0,000) -0,870 (0,002) -0,822 (0,001) -0,244 (0,247) -0,878 (0,000) -0,765 (0,026)SIZE 1,266 (0,000) 0,898 (0,000) 0,865 (0,000) 1,095 (0,000) 1,027 (0,000) 1,031 (0,002)AGE 0,295 (0,002) -0,001 (0,995) 0,561 (0,000) 0,375 (0,000) 0,315 (0,000) 0,307 (0,078)McFadden R2 0,170 0,119 0,157 0,184 0,152 0,158N 9361 8196 7536 11418 36511 36511

EarningsCEO Minority and family = 1 0,045 (0,280) 0,081 (0,298) 0,084 (0,143) 0,043 (0,322) 0,073 (0,005) 0,063 (0,011)CEO Minority and not family = 1 0,180 (0,005) 0,235 (0,024) 0,278 (0,000) 0,110 (0,063) 0,170 (0,000) 0,201 (0,012)LIQUIDITY 0,793 (0,000) 0,836 (0,000) 0,521 (0,000) 0,637 (0,000) 0,686 (0,000) 0,697 (0,002)PROFITABILITY 4,160 (0,000) 4,781 (0,000) 4,840 (0,000) 5,107 (0,000) 4,610 (0,000) 4,722 (0,000)GROWTH -0,026 (0,739) 0,144 (0,334) -0,347 (0,014) -0,466 (0,000) -0,205 (0,001) -0,174 (0,305)RISK -0,646 (0,000) -0,719 (0,002) -0,532 (0,003) -0,122 (0,388) -0,559 (0,000) -0,505 (0,032)SIZE 0,833 (0,000) 0,750 (0,000) 0,614 (0,000) 0,743 (0,000) 0,739 (0,000) 0,735 (0,001)AGE 0,201 (0,001) 0,035 (0,750) 0,410 (0,000) 0,270 (0,000) 0,245 (0,000) 0,229 (0,060)N 9361 8196 7536 11418 36511 36511

Table 27 - Tobit2006 2007 2008 2009 All FMB

Table 26 - Logit2006 2007 2008 2009 All FMB

The following two tables present our results from the Logit and Tobit analysis


Page 49

Appendix 2 – Figures

Figure 1 – CEO’s dilemma with family ties

Source: Original figure created by authors

Figure 2 – CEO’s dilemma without family ties

Source: Original figure created by authors


Page 50

Figure 3 – Logit

Source: Standard model of Logit regression. For illustrational purposes only, not

based on actual data

Figure 4 – Tobit vs Fitted OLS

Source: Standard model of tobit analysis. For illustrational purposes only, not

based on actual data.


Page 51

Figure 5 – Tobit

Source: Standard model of tobit analysis. For illustrational purposes only, not

based on actual data.


Page 52

Anders Sørgård - 0857299

Per Skøien - 0818031

BI Norwegian Business School –

Preliminary Thesis Report

- CEO’s Dilemma -

Supervisor: Bogdan Stacescu

Submission date: 16.01.2012

Programme:

MSc in Financial Economics

MSc in Business and Economics, Major in Finance


Page 53

Contents

INTRODUCTION......................................................................................................................... 54

LITERATURE REVIEW............................................................................................................. 55

PRIVATE FIRMS ......................................................................................................................... 58

DATA ............................................................................................................................................. 58

RESEARCH QUESTION ............................................................................................................ 58

FINAL REMARKS ....................................................................................................................... 59

REFERENCES .............................................................................................................................. 60


Page 54

Introduction

In our master thesis we wish to investigate the impact on majority owned firms’

dividend policies of having the CEO as a minority shareholder. We find this

interesting because most of the existing literature on potential agency conflicts

have been focusing on the conflict between owners and management (Demsetz

and Lehn 1985; Demsetz and Villalonga 2001), and literature with focus on the

conflict between majority and minority owners have mainly focused on the

concentration of minority ownership and family ties between owners (Berzins,

Bøhren and Stacescu 2011).

In majority owned firms the controlling owner has both the incentives and the

ability to monitor the management’s actions, thus reducing the potential conflict

between owners and management (Shleifer and Vishny 1986). Furthermore, in

such firms there is a potential conflict of interest between the majority and the

minority owners, due to the incentive of the controlling owner to extract private

benefits (enjoyed only by the majority owner) at the expense of security benefits

(enjoyed pro rata by all security holders). This problem is referred to as the second

agency problem (Villalonga and Amit 2006) or the majority-minority problem

(Shleifer and Vishny 1997). Given CEO’s position inside the firm she11 can

monitor the actions of the majority owner directly, a capability that other minority

shareholders may not have, especially if the concentration of minority

shareholders is low, (Berzins, Bøhren and Stacescu 2011). The goal of this thesis

is to see if having the CEO as a minority shareholder, thus possibly increasing the

monitoring ability of the minority shareholders, will increase firms’ dividend

payments. We believe this is a natural continuation of the research done by

Berzins, Bøhren and Stacescu (2011).

11 The reference to the CEO as a female in this paper is made purely for simplicity and does not necessarily reflect the actual sex of the CEO


Page 55

Literature Review

In 1956 John Lintner made the argument that a change in a firm’s dividend policy

is a result of management’s believes that earnings have permanently changed. He

stated that “…most managers sought to avoid making changes in their dividend

rates that might have to be reversed within a year or so.” (Lintner 1956, 99). His

article supported the findings of Graham and Dodd (1951) who argued that

dividend policy has an impact on firm value.

This is at odds with the dividend irrelevance theorem first formulated by Miller

and Modigliani in 1961. They claimed that in a market without imperfections,

firm value is not affected by its dividend policy. Despite this, researchers still

observe that investors reward firms that pay dividends through higher stock prices

(Miller and Rock 1985). This anomaly is known as the dividend puzzle (Black

1976).

Research on the relationship between dividend policy and firm value is still

inconclusive (Black 1976). Relaxing the assumptions made by Miller and

Modigliani in 1961 may render the dividend irrelevance theorem mute, as shown

by Miller and Rock (1985). But also within the framework described by Miller

and Modigliani in 1961 the theorem is challenged (DeAngelo and DeAngelo

2006).

Another theory of dividend policy is known as the signaling model, (Bhattacharya

1979 and Miller and Rock 1985). The model is based on the information

asymmetry that exists between outside investors and insiders in the firm. It states

that firms use cash dividends as a way to signal outside investors about their

expected future cash flows, thus reducing informational asymmetries. According

to Tirole (2006), such asymmetries may prevent outsiders form stopping insiders’

suboptimal behavior, and it may thus be important for companies wanting to

attract outside investors to reduce these asymmetries. Within the signaling model

framework, an increase in dividend payments is taken as a sign of increased

expected future cash flows, which again leads to increased firm value. Benartzi,

Michaely and Thaler (1997) find that stock prices tend to increase following a

positive dividend announcement and decrease following a negative

announcement, but they find no evidence of successive changes in earnings

following a positive dividend change. However, they find that following a


Page 56

negative dividend change, firms experience a significant earnings increase in the

two following years. Also, Benartzi et.al. (2005) finds that dividend changes are

uncorrelated with future earnings. These findings contradict the signaling model.

Grullon, Michaely and Swaminathan (2002) propose an alternative hypothesis to

the signaling model called the maturity hypothesis. They claim that if the dividend

change is not a signal of changes in future earnings, but still leads to an increase in

the current stock price, then it must be because of a reduction in the firm’s

systematic risk. They explain; “…we should expect dividend increases to be

associated with subsequent declines in profitability and risk.” (Grullon, Michaely

and Swaminathan 2002: 388). As a firm matures, its investment opportunity set

shrinks. This may leave the firm with higher free cash flow, which according to

the maturity hypothesis can explain increased dividends.

According to Jensen (1986) free cash flow should be paid out as dividends to

avoid potential agency conflicts. He defines free cash flow as “…cash flow in

excess of that required to fund all projects that have positive net present values

when discounted at relevant cost of capital.” (Jensen 1986: 2). This is supported

by Allen and Michaely (2003) who states that dividend payouts are used to avoid

overinvestments. La Porta et al. (2000) also claims that a firm’s investment policy

cannot be viewed independently from its dividend policy, and that dividends may

be viewed as a way to ensure that all shareholders are paid on a pro rata basis for

their investments.

If all investors are not paid on a pro rata basis, this is a sign of majority-minority

conflicts (Bøhren 2011). As argued above, in firms with a majority owner,

conflicts between owners and management become less severe. Instead, the

majority-minority problem becomes an important area of attention. If the majority

investor’s incentives are not aligned with that of the minority owners’, the

potential for the second agency problem arise (Shleifer and Vishny 1997). This

potential for such agency conflicts becomes higher if the majority owner owns

close to 50 % of the company’s shares (Berzins, Bøhren and Stacescu 2011). In

this case the majority owner has control of the company, thus enjoying 100 % of

any private benefit extracted, while only enjoying close to 50 % of any dividend

paid out.


Page 57

As can be seen in Jensen (1986), La Porta et al. (2000) and Berzins, Bøhren and

Stacescu (2011) dividend policy is commonly used as a measure for agency

conflicts. However, in what way this relationship should manifest itself is subject

to different theories. Two models connecting dividend policies and potential

agency conflicts are known as the outcome model and the substitution model (La

Porta et al. 2000).

La Porta et al. (2000) explain that in firms with high potential for majority-

minority conflicts, the outcome model argues that the majority owner will use his

control to extract private benefits at the cost of the minority owners. As a result,

dividends will be low. The substitution model on the other hand, argues that the

majority owner will assign value to having a good reputation among the minority.

Given that low dividends are taken as a sign of expropriation by the controlling

owner, dividend payouts will be high in firms where the potential for majority-

minority conflicts are high.

In the same paper, La Porta et al. (2000) find support for the outcome model by

showing that stronger legal protection of minority shareholders is associated with

higher dividend payouts. When looking at majority owned, Norwegian non-listed

firms, Berzins, Bøhren and Stacescu (2011) find support for the substitution

model. Furthermore, they find that the concentration of minority owners is

negatively correlated with dividend payments, which also is in line with the

substitution model.

The research into agency conflicts in firms falls under the canopy corporate

governance. In economic literature corporate governance is a relatively new field,

but it is rapidly growing, producing around 1000 new research articles every year

(Bøhren 2011). A majority of these papers focus on listed firms, owing to the

limited data availability on non-listed firms (Damodaran 2002). Because dispersed

ownership is more common in listed firms, conflicts between managers and

owners are more researched than conflicts among owners (Berzins, Bøhren and

Stacescu 2011).


Page 58

Private Firms

As mentioned above, existing literature largely focuses on public firms, even

though a majority portion of the economy consists of private firms. In Norway

99,9 % of all limited liability firms are private, (based on average numbers from

the period 1994-2008, not counting subsidiaries or financial firms) and they

account for 74 % of aggregate assets (Bøhren (2011)). In this respect Norway is

unique in its high data quality and availability, because mandatory information

disclosure is largely the same for public and private firms (Bøhren (2011)).

Data

The data we will use when estimating our research question will be extracted from

BI’s Center for Corporate Governance Research’s (CCGR) database. The

database contains highly detailed accounting and ownership data for all

Norwegian companies with limited liability (AS and ASA). The accounting data

are available from 1994-2009. The governance data, such as ownership ranks,

Herfindahl indexes and CEO salaries, are available from 2000-2009. Our

supervisor Mr. Bogdan Stacescu will provide us with access to the database.

Research Question

Given the above presented theories and the research done on the subject of

corporate governance in general and the second agency problem in particular, we

have formulated the following research question;

Is the second agency problem affected by having the CEO as a minority owner,

and if so, in a positive or negative way?

We find this relevant for several reasons:

1) To our knowledge it has not been looked into possible benefits and costs of

having CEO as a minority owner in terms of agency costs, thus leaving a gap this

thesis will seek to fill.

2) The expected effect of having CEO as a minority owner is unclear. As

mentioned in the introduction, CEO has superior monitoring abilities to most

minority shareholders, which may prevent the majority owner from extracting

private benefits. Also, as CEO’s ownership share increases, her incentives to


Page 59

actively monitor and control the majority owner become higher. On the other

hand, the majority owner controls the company, which incentivizes the CEO to

avoid any conflicts in the interest of job security. Thus the part of the CEO’s

income that comes from her salary incentivizes her to avoid conflicts, while the

part that comes from dividends incentivizes her to monitor and control the

majority owner. This may validate a hypothesis that dividends should increase as

CEO ownership increases, as her dividend incentives become a more central part

of her total income.

3) The above points regarding CEO incentives implicitly assume that the CEO is

motivated by monetary compensation, and that the monetary gain from dividends

at some level of minority shareholding is large enough to dominate that of her

salary. If one of these assumptions is false, then the CEO may have an incentive to

avoid conflicts with the majority owner at any level of minority ownership. If this

is the case, having the CEO as a minority shareholder may actually harm the other

minority owners because the CEO is acting in the interest of the majority owner.

In this thesis, we will refer to CEO’s potential conflict of interest between the

roles of CEO and owner as CEO’s dilemma.

Final Remarks

At present, we have no a priori hypothesis regarding how the potential existence

of CEO’s dilemma will influence the dividend payout policy.

We will look at cash dividends as the only pro rata payout from companies to their

owners, disregarding any potential stock repurchases or other forms of payout.

Furthermore, data limitations prevents us from separating between stocks with

different voting rights, hence we will assume that all shares have equal cash flow

and voting rights.

Another potential weakness with our data set is that we cannot control for

potential family ties between CEO and the majority owner. This could make us

falsely believe that the CEO is an independent minority owner, when she de facto

could be part of the controlling family.

Our next step will be to finalize our hypothesis and research model and process

the data.


Page 60

References

Allen, F., and R. Michaely. 2003. “Payout Policy”. Handbook of the Economics of

Finance 1 (A): 337-429.

Benartzi, S., R. Michaely, and R. Thaler. 1997. “Do Changes in Dividends Signal

the Future or the Past?”. The Journal of Finance 52 (3): 1007-1034.

Benartzi, S., G. Grullon, R. Michaely and R. Thaler. 2005. “Dividend Changes Do

Not Signal Changes in Future Profitability”. Journal of Business 78 (5): 1659-

1682.

Berzins, J., Ø. Bøhren, and B. Stacescu. 2011. “Dividends and Stockholder

Conflicts: A Comprehensive Test for Private Firms”. CCGR Working Paper

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CEO’s Dilemma · 2017. 1. 5. · S DILEMMA WITH FAMILY TIES ... In our master thesis we intend to investigate the impact on majority owned firms’ dividend policy of having the

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