Ph.D. Dissertation By Muhammad Abbas Student ID # 11058-P ...

Impact of Leverage, Dividend Payout and Family Ownership on Value of

the Firm: Role of Growth Opportunity as a Moderator

Ph.D. Dissertation

By

Muhammad Abbas

Student ID # 11058-P

Ph.D Management Sciences

Qurtuba University of Science & Information Technology,

Peshawar, Khyber Pakhtunkhwa (Pakistan)

(2019)

Impact of Leverage, Dividend Payout and Family Ownership on Value of

the Firm: Role of Growth Opportunity as a Moderator

By

Muhammad Abbas

Student ID # 11058

Ph.D. Management Sciences

Department of Management Sciences

Date of Submission: 27/08/2019

Supervisor: Dr. Muhammad Junaid

Qurtuba University of Science and Information Technology

Peshawar, Khyber Pakhtunkhwa (Pakistan)

2019

Author’s Declaration

I Muhammad Abbas hereby state that my PhD thesis titled “Impact of Leverage, dividend payout and

family ownership on value of the firm: Role of Growth Opportunity as a Moderator” is my own work

and has not been submitted previously by me for taking any degree from this university, Qurtuba

University of Science & Information Technology Peshawar Campus or anywhere else in the

country/world. At any time if my statement is found to be incorrect even after my graduate the

University has the right to withdraw my PhD degree.

Name of Author: Muhammad Abbas

Date: 27 / 08 / 2019

Signature: ________________

Plagiarism Undertaking

I solemnly declare that research work presented in the thesis titled “Impact of Leverage, dividend

payout and family ownership on value of the firm: Role of Growth Opportunity as a Moderator” is

solely my research work with no significant contribution from any other person. Small contribution/help

wherever taken has been duly acknowledged and that complete thesis has been written by me. I

understand the zero tolerance policy of the HEC and University ―Qurtuba University of Science &

Information Technology‖towards plagiarism.

Therefore I as an author of the above titled thesis declare that no portion of my thesis has been

plagiarized and any material used as reference is properly referred/cited.

I undertake that if I am found guilty of any formal plagiarism in the above titled thesis even after award

of PhD degree, the University reserves the rights to withdraw/revoke my PhD degree and that HEC and

the University has the right to Publish my name on the HEC/University website on which names of

students are placed who submitted plagiarized thesis.

Author Name: Muhammad Abbas

Student/Author Signature: ___________________

Dedicated

TO

MY LOVING PARENTS

Who taught me the first word I

spoke The first alphabet I wrote

First step I walked

I feel I am nothing without them

Encouraged and helped me at every step of life

AND To

MY LOVELY BROTERs

Whose support have given me Strength,

Determination and Attitude to accomplish my goal

ii

ACKNOWLEDGEMENTS

Primary and foremost, all praises for Almighty Allah, the benevolent and merciful,

the creator of the universe, who provided me the strength and courage to complete

the work. I invoke peace for Hazrat Muhammad (peace be upon him), the last

prophet of Allah who is forever a torch of guidance for humanity as a whole.

This thesis is the end of my journey in obtaining my Ph.D. I have not traveled in

a vacuum in this journey. This thesis has been kept on track and been seen through to

completion with the support and encouragement of numerous people including my well-

wishers, my friends, colleagues and various institutions. At the end of my thesis I would

like to thanks all those people who made this thesis possible and an unforgettable

experience for me. At this moment of accomplishment, first of all I pay homage to my

honorable supervisor, Dr. Farzand Ali Jan, Professor/Dean of Iqra National University,

Peshawar. This work would not have been possible without his guidance, support and

encouragement. Under his guidance, I have successfully overcome many difficulties and

learned a lot. I can’t forget his hard times. Despite of his illness and health problems, he

used to review my thesis progress, give valuable suggestions and made corrections. His

unflinching courage and conviction will always inspire me in future, and I hope to

continue to work with his noble thoughts.

Thanks are due to Prof. Dr. Khursheed Iqbal, HOD, Faculty of Management

Sciences, Iqra National University Peshawarfor his encouraging discussions, valuable

guidance, and suggestions which enable me in broadening and improving my

capabilities. I want to express my heartiest gratitude to my affectionate and devoted

teacher Dr. Junaid, Assistant Professor at PIDE, Islamabad for helping me in

understanding the Stata Software which helped me a lot to complete this work.

I cannot finish without expressing my feeling for Higher Education

Commission, Islamabad for supporting me financially and helped me a lot in

accomplishing my PhD Degree. I would suggest that such organizations may be

supported more by the Government of Pakistan in order to provide research and

scholarship facilities to talented and poor students who can’t pursue their education

due to financial constraints.

iii

I would certainly be not where I stand today without the continuous support,

help and most of all encouragement of my family. Credit goes to them for their help

that held me up in the hour of need. Their support and sincere prayers made me

achieve whatever I aimed in my life. My family members especially my mother

suffered a lot due to her illness as I couldn’t give her sufficient time. My dearest

father sacrificed many things due to my busy daily schedule. Thanks to all my

family.

Muhammad Abbas

iv

TABLE OF CONTENTS

Title page --------------------------------------------------------------------------------

Cover page ------------------------------------------------------------------------------

Author’s Declaration-------------------------------------------------------------------

Plagiarism Undertaking----------------------------------------------------------------

Certificate of Approval----------------------------------------------------------------

Dedication ----------------------------------------------------------------------------------i

Acknowledgement ------------------------------------------------------------------------ii

Table of Contents--------------------------------------------------------------------------iv

List of Tables------------------------------------------------------------------------------vii

List of Abbreviations---------------------------------------------------------------------viii

Abstract--------------------------------------------------------------------------------------x

CHAPTER-1 Introduction-----------------------------------------------------------------------------------1

Chapter Introduction------------------------------------------------------------------------1

Study Background ----------------------------------------------------------------------- --1

Problem Statement-------------------------------------------------------------------------16

Research Questions-------------------------------------------------------------------------17

Objectives of the Study---------------------------------------------------------------------17

Significance of the Study-------------------------------------------------------------------18

Organization of Study-----------------------------------------------------------------------22

CHAPTER-2 Literature Review----------------------------------------------------------------------------23

Chapter Introduction ---------------------------------------------------------------------- 23

Leverage and growth opportunities ---------------------------------------------------- 23

Dividend and growth opportunities ---------------------------------------------------- 43

Family ownership and growth opportunities ----------------------------------------- 61

CHAPTER-3 Research Methodology----------------------------------------------------------------------77

Chapter Introduction ---------------------------------------------------------------------- 77

Empirical Model --------------------------------------------------------------------------- 77

Panel Regression Model ------------------------------------------------------------------ 78

v

Model Specification ----------------------------------------------------------------------- 78

Research Design --------------------------------------------------------------------------- 80

Data and Sample Selection --------------------------------------------------------------- 80

Dependent Variable ----------------------------------------------------------------------- 82

Independent Variables -------------------------------------------------------------------- 84

Conceptual Framework ------------------------------------------------------------------- 88

Theoretical Perspective of the Study ---------------------------------------------------- 88

Empirical Methods------------------------------------------------------------------------103

CHAPTER-4 Results and Interpretation----------------------------------------------------------------106

Chapter Introduction----------------------------------------------------------------------106

Descriptive Statistics ------------------------------------------------------------------ ---107

Matrix of Correlation----------------------------------------------------------------------109

Results of VIF Test------------------------------------------------------------------------110

Pooled OLS---------------------------------------------------------------------------------111

Moderation Regression-------------------------------------------------------------------112

Comparison of Means Test---------------------------------------------------------------113

Regression results of MBA Ratio-------------------------------------------------------115

Results of GMM Model------------------------------------------------------------------116

Regression results of SMBA-------------------------------------------------------------118

Leverage and Firm Performance--------------------------------------------------------119

Relevance and Contradiction with Previous Literature ----------------------------- 120

Dividend and Firm Performance ------------------------------------------------------- 121

Relevance and Contradiction with Previous Literature ----------------------------- 122

Family Ownership and Firm Performance -------------------------------------------- 123

Relevance and Contradiction with Previous Literature ----------------------------- 123

CHAPTER-5 Conclusion, Recommendations and Limitations-------------------------------------126

Chapter Introduction----------------------------------------------------------------------126

Conclusion ---------------------------------------------------------------------------------126

Summary of Hypothesis Acceptance and Rejection----------------------------------130

vi

Future Recommendations ----------------------------------------------------------------130

Limitations of the Study------------------------------------------------------------------134

References ---------------------------------------------------------------------------------------135

Annexure------------------------------------------------------------------------------------------165

vii

LIST OF TABLES

Table 3.1: Sectors Contribution………………………………………………………..81

Table 3.2: Measurement of Growth Opportunity in Context of Past Studies………....83

Table 3.3: Measurement of Independent Variables………………………………..…..87

Table 4.1: Descriptive Statistics…………………………………………………..…107

Table 4.2: Matrix of Correlation……………………………………………………..109

Table 4.3: Results of VIF Test………………………………………………………...110

Table: 4.4 Pooled OLS…………………………………………………………..…….111

Table: 4.5 Moderation Regression……………………………………………….…....112

Table 4.6: Comparison of Means Test…………………………………………………113

Table 4.7: Regression results of MBA Ratio…………………………………………..115

Table 4.8: Results of GMM Model…………………………………………………….116

Table 4.9: Regression results of SMBA……………………………………………......118

Table 5.1: Summary of Hypothesis Acceptance and Rejection………………………...130

viii

LIST OF ABBREVIATIONS

FOB FOC

Family Owned Business Family Ownership Concentration

NFOB Non-family Owned Business

GDP Gross Domestic Product

CEO Chief Executive Officer

PSE Pakistan Stock Exchange

GMM Generalized Method of Moments

MM

MBA

Modigliani and Miller

Market to Book Asset

IPO Initial Public Offering

ROE Return on Equity

ROA Return on Assets

P/E Price Earnings Ratio

OC Ownership Concentration

CCG Code of Corporate Governance

R & D Research and Development

EPS

SMBA

Earnings per Share

Sector Adjusted Market to Book Asset

ix

FV Firm’s Value

MV Market Value

SBP State Bank of Pakistan

IAFV Industry Adjusted Firm’s Value

CF Cashflows

IAI Industry Adjusted Investment

DIV Dividend

SECP Security Exchange Commission of Pakistan

DR Debt Ratio

DPR

Dividend Payout Ratio

x

ABSTRACT

Different factors are at play while impacting the value of a firm. Some factors have a monumental

influence in one context as compared to the other. Pakistan, being mostly comprised of family owned

firms, is affected due to the decisions which are made by the owners of family owned organizations

regarding the capital structure of its organization. This study intends to highlight the role of growth

opportunity as moderator while impacting the relationship among financial decisions, ownership structure and

value of firms. The study has examined the influence of leverage, dividend and family ownership

concentration on the value of firms under two conditions. Firstly, when there is growth opportunity what

would be the impact of leverage, dividend and family ownership concentration on the value of a firm?

Secondly, when there is no growth opportunity then what would be the possible outcomes? The study

employs annual panel data of firms which are listed at Pakistan Stock Exchange (PSX). Sector wise data

over the period 2005 to 2014 has been used. The study has been carried out on non-financial firms. The

first finding of this study reveals that debt has a positive impact on the value of a firm in both cases e.g.,

when there are growth opportunities and when there are few or no growth opportunities. The second

finding about positive relationship between dividend and firm’s value is uncertain when there are growth

opportunities. While in case of no or few growth opportunities the relationship between paying dividend

and firm’s value is positive. The third finding of this study is about non-linear relationship between

family ownership concentration and the value of a firm .When family ownership concentration is not at

extreme then it causes a negative impact on the value of a firm. But after a certain threshold level the

reverse impact get started. Generalized Method of Moments (GMM) has also been applied for the

purpose of detecting the problem of endogeneity. Besides these, the study also incorporates the steps followed

for finding the role of growth opportunity as a moderator.

Key words: Leverage, dividend, family ownership concentration, firms value, growth opportunity

1

CHAPTER # 1

INTRODUCTION

1.1 Chapter Introduction

This chapter gives an insight about the definition of main variables of the study which are

leverage, dividend payout, family ownership, firm value and growth opportunity. These variables

play an important role in corporate finance due to which it has a significant impact on the overall

structure and performance of Pakistani listed organizations at Pakistan Stock Exchange. Then

Problem Statement with reference to developed and developing countries is discussed that what

research gap is basically present in the context of Pakistan. This chapter also enriches the current

study with Objectives , Research Questions and significance of the study which briefly

highlights the stakeholders who can get benefits from the current studies e.g., Managers,

Investors, Lenders, institutional owners, Government and other Regularity Authorities like

Security and Exchange Commission of Pakistan in devising policies meticulously.

1.2 Study Background

Leverage, dividend and family ownership have an important role in value creation process of an

organization (Bae, Kang and Wang, 2011). Leverage has been defined by Pandya (2016) as the

sensitivity of an organization’s earnings per share to changes in its operating income, as a result

of the change in its capital structure. According to Brealey, Myers and Allen (2017), leverage

can lead to better financial performance which causes an increase in the value of a firm. The firm

value has been defined by Jensen (2002) as it’s the sum of values of all financial liabilities on

2

firm which includes debt, equity, preferred stocks and warrants. On the other hand Stakeholder

theory states that the value of a firm is composed of all stakeholders that includes all individuals

or groups who could substantially affects the welfare of a firm. The value of a firm is firmly

linked with the value of shareholders (Lonkani, 2018).In the current study family firms are the

main shareholders. According to Blondel, Rowell and Heyden (2002), a family firm is an

organization where one or several families or individuals are the ultimate owners and represents

the largest block of shares. The value of a firm is also affected through dividend which was

defined by Rustagi (2001) that it is that fraction of profits (after tax) which is going to be

distributed among the owners or shareholders of the firm. Similarly, Rika and Islahudin (2008)

defined the firm value as the market value. According to Myers (1977), the value of a firm is

comprised of two building blocks i.e. the value of Assets-in-place and value of growth

opportunities. Growth opportunities of firms, according to Mason and Merton (1985),refers to

new product lines, maintenance and replacements of existing assets, more capacity expansion

projects and acquisition of other firms.

The base of current vibrant and well developed literature in area of corporate finance was laid

down through seminal paper of Modigliani and Miller (1958) e.g. having an argument that cost

of raising funds is independent aspect of its capital structure by assuming perfect competition

with no transaction cost, no agency cost and no bankruptcy cost. Modigliani and Miller (1963)

also argued that dividend policy has no role in value creation process of a firm. However, with

the passage of time it was found that, dividend payout policy plays a major role in value creation

of an organization.

"How capital structure is chosen by firms?" "We don't know." is the statement enumerated by

Myers in 1984 in response to the well known note of Fischer Black at "The Dividend Puzzle" in

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which it was stated that "What should a corporation does about dividend policy? We don't

know". Myers (1984) enumerated that capital structure puzzle is more hard than dividend puzzle

because we have much information about dividend policy through dividend signaling hypothesis.

But what about the capital structure puzzle where we have least information about capital

structure that how firms issue equity, debt or hybrid securities. According to Myers (1984) our

understanding about corporate financing is inadequate. Barclay and Smith (2005) argued that

capital structure is still debatable due to different inconclusive theories. These theories do not

align with each other. Some scholars (Tang &Jang, 2007; Ebaid, 2009) support the Modiglani

and Miller (1958) irrelevancy proposition of value creation of organization which isn’t affected

through both dividends and debts while other (Roden & Lewellence, 1995;Abor, 2005) support

the debt component of capital structure, due to its taxes deductibility of the interest which causes

an increase in an organization’s value.

Barclay and Smith (2005) stated that theories regarding capital structure are inconclusive

because of the reason that the corporate finance empirical methods are not properly equipped.

They added by comparing the capital market and capital structure that corporate finance lagged

behind. The first reason is that corporate finance models are less precise as compared to capital

asset pricing models regarding decision making. Capital structure models only provide direction

or qualitative analysis. For example a theory may argue that the less debt should to be used in a

capital structure for increasing an organization’s value. Then it raises a question that how much

less debt should be used. No mutual exclusiveness of theories is the second reason. For example,

underinvestment theory does not take into account overinvestment, although both play an

important role in optimal capital structure formation. The third reason is of the issue of

measurability of variables which have an impact on the optimal capital structure. For example,

4

according to signaling theory, managers have private information regarding company’s

prospects. Then the problem of its testing arise and also timing of this proprietary information

that when managers have these informations. Barclay and Smith (2005) further enumerated that

due to the above mentioned and other reasons corporation finance is underdeveloped as

compared to assets pricing, but still there is voluminous literature available through which we are

able to learn about the tradeoffs between debts and equity while forming capital structures.

The decisions regarding Capital structure which are taken by the management are the most

important decision because capital-structures is an amalgamation of debts and equity shows that

for financing a project how much debt and how much equity has been used, it includes decisions

regarding dividend pay-out policy, financing a project ,issues of long-term securities and merger

financing etc. Corporate financial managers can increase the wealth of shareholders through

ensuring lower cost of capital, Management can use capital structure as a tool for managing the

cost of capital. The position, at which the costs of capital are minimum, is called optimal capital

structure. Different results are reported concerning the relationships between capital structures

and an organization performance some studies revealed that both organizational performance and

the capital structure are negatively interrelated (Huang & Song, 2006; Chakraborty, 2010) while

other shows a direct relationship (Abor, 2005; Khan, 2014).

Companies can use different kind of sources for financing a project i.e. companies can fulfill its

capital requirement from three sources e.g. through retained earnings short and long-terms debt

& through issuing shares. A firm can also use a combination of these three sources but it should

to be selected meticulously. According to Jensan and Mackling (1976) when capital structures

are comprised of debts then it performs the function of monitoring of managers through which

firm performance improves.

5

The previous studies of Rapaport (1986) and Caby (1996) have reported that several different

strategic factors affecting the value of organizations in developed countries. Value creation

literature has been used by Rapaport(1986) for mergers and acquisitions of corporations, and has

highlighted the significance of income-tax rates, fixed capital investments and growth rates as

the main factors which affects the values of a firm. Recently, study of Naceur and Goaied (2002)

has focused on emerging markets for the analysis of factors which influence an organization’s

value. They conducted a study at Tunisian stock exchange and founded that managers maximize

the wealth of shareholders by increasing the market values of shares .They studied the value of

an organization by focusing on dividend policy, financial policy and profitability.

Both debt and equity, in corporate finance theory, are key source of financing a project but the

question arises that what level of both should to be used for the minimization of agency costs as

well as maximization of value creation of an organization. Modiglani and Miller (1963) argued,

that there is a distinction between values of a leveraged and unleveraged firms. This difference in

values is due to interest tax shield. According to Jensen and Mackling (1976), there is a level of

optimal leverages which causes minimum agency cost. The organization’s value is enhanced

through the optimal debts to equity ratios. This optimal debts-to-equity ratio is termed as the

point on which both the marginal benefit and cost debts become equal. Myers and Majliuf (1984)

in its theory of pecking order argued that, when organizations are utilizing the external financing

then it prefers debt over equity financing. According to signaling theory a firm will use debt

financing when there are favorable prospects and will use equity financing when there are

unfavorable prospects.

Myers (1977) argued that when a large amount of debt is used then it affects managers and they

don’t work in shareholder’s best interest by ignoring projects which have positives net present

6

values. The mentioned phenomenon was named as under-investments problem of the debts

financing, for example, that for organizations which have growth opportunities debt negatively

affects the value of firms .Nevertheless, Jensens (1986) proposed, that when an organization has

more free-cash than positives net present value projects then in such cases presence of debt

positively influence the value of an organization .The intuition behind that is managers will

have to pay out funds to debt providers, which make managers unable to do the misuse of cash

resources. If debt was not taken in such cases then there are chances of utilizing the free-cash in

the investment opportunities which have a negative net present value. The mentioned

phenomenon was named as over-investment problem. This over-investments problem could be

mitigated through payout excess funds in order to service debt if debt is taken by the firm. The

over-investments problem basically created due to separations between management and equity

ownerships. The aforementioned problem can be reduced through making managers shareholders

as well due to which the interest of both shareholders and managers will align.

In modern financial literature the widely addressed topic is Dividend policy. We can estimate the

importance of dividend policy from theories inconclusiveness. That’s why it is still a debatable

topic in the recent empirical studies. This discussion dates backs to seminal paper of Modiglani

and Miler (1961), in which it was discussed that dividends cause an increase in values of

organizations. Modiglani and Miller (1961) enumerated regarding the perfect capital-market that

the values of organizations are not affected through dividends policy. Modiglani and Miller’s

(1961) findings were challenged by Lintnar (1962) and Gordon(1963) through supporting Bird

in-hand theory. According to this theory, the investors prefers current divided over future

earnings and profits, which mean in the value creation process of an organization the dividend

policy plays an important role. The issue of dividend policy is still perplexed and unresolved;

7

where Black (1976) named it a puzzle whose parts don’t fits together. Black (1976) raised a

question that how do firms decide about dividend policy and at the same time answered it by

saying we don’t know. However, in previous literature many factors have been identified that

explained dividend policy instead of one factor (Anil & Sujjata, 2008).

Companies which are efficient and goal oriented earn Profits. The earned profits can be used for

different purposes. It can be used for acquiring other securities, retiring debt, invest in operating

assets and can be for distributing among the shareholders of the company. The income

distributed among the shareholders is called dividend. When a firm earn profit and does not

distribute that profit among the shareholders then shareholders expect a higher dividend from the

company in subsequent years as compare to previous year’s dividends. But, in organization

which is not giving the dividends, it could have an effect on shareholders because for some

shareholders it’s a source of living. Due to which they may want to sell their shares in a

secondary market. When supply of shares increases in the market as compared to demand then

consequently the share price of company will decrease. The ultimate result culminates in the

form of decreasing value of the firm. So therefore, company should meticulously deal the

dividend policy. There is also another issue related to dividend policy and that is the decision

about the distribution of dividends. The issue arises when a company has a hard time to decide

whether dividend should be paid in cash or issue the rights or should be paid in the form of

bonuses.

Dividend is basically a reward for shareholder for helping in financing the projects of a firm

otherwise if dividends are not paid to shareholders it would make share valueless (Kumar,

2003).The worthiness of dividend policy can be explained through two theories; agency cost and

signaling theory. According to the theory of dividend signaling, a manager has private

8

information regarding the future prospects of the company while shareholders do not. So when

the managers want to inform the shareholders as well then they issue dividends as a signaling

device for informing shareholders that there are projects which have a positive NPV (Net Present

Value) and growth opportunities, also recognized as information content of dividend. While on

the other hand, agency cost of dividend refers to the cost which shareholders basically borne due

to have a check on the activities of managers. When management and ownership are separated it

causes a tussle between the shareholders and manager as consequence, the manager may involve

in moral hazard problems and increase their assets at the costs of shareholder. Keeping in mind,

shareholders monitor the managers and bearing monitoring cost. This agency cost among the

manager and shareholder could be mitigated through offering shares managers and making them

shareholders as well. Due to which the interest of both managers and shareholders will align and

the performance of organization will be enhanced as a result.

La-Porta,Lopaz, Shleifer and Vishny(2000) had pointed out two hypotheses regarding

relationships between agency theory and dividend. First is Competing hypothesis and according

to competing hypothesis, if minority shareholders are made powerful and protected them will

pressurize managers for distributing dividends. Therefore dividend payouts can be used as

mechanisms for mitigating the agency cost, and thereby enhancing the performance and value of

firm. Substitution hypothesis is the second hypotheses, according to this hypothesis; a positive

image is made in mind of the minority shareholder due to which acquiring additional capital is

easy.

In today’s business environment dividends policy has an important role in the decisions making.

Dividend policy is not only important from company’s point of view, but also employees,

consumers, shareholders and government have a keen interest in dividend policy. It’s a pivotal

9

policy for the company on the bases of which other decisions are made (Alii, 1993).According to

Ross (2002) dividend policy determines that what funds will be retained for investment purpose

and what portion will be distributed among the shareholders. Through investments future

earnings and potential dividends are determined which affects the cost of capital (Foong,Zakaria

and Tan, 2007).

In literature of corporate finance there is an intense discussion regarding the interrelationship

between ownership-structure and performance of organization. Such relationship, as explored by

Berle and Means (1932) through finding dispersed ownership and organization’s performance

inversely correlated. According to their point of view when ownership is dispersed among many

minority shareholders then these minority shareholders are unable to exert influence and pressure

on firm’s management who are the controlling figure of the company. The management of such

firms hold minimal share of profit and are not effectively working for the welfare of

stockholders. Therefore, they start working for pursuing their own objectives and maximizing

their own wealth at expense of shareholder’s wealth. Later on this conflict was named as agency

theory. The managers, according to the Agency theory, are hired by the company’s owners for

their entrepreneurial and professional skills for increasing organizational performance. But when

both managers end shareholder’s interest do not coincide then shareholders have to maintain a

check on the activities of the managers and need to monitoring and the cost associated with such

monitoring is termed as agency cost.

A formal study was carried out on the influence of shares allocation between outsiders and

insiders on value of firm by Jensen and Meckling in 1976.After the research of Jenson and

Meckling (1976), the literature on ownership and its influence on organizational was

continuously evolved through theory of finance with lot of studies were done on it both

10

theoretically and empirically .Subsequently, it was also found by Stulz (1988) who concluded

that when the ownership concentration remains with insiders then the firm’s market value first

increases and then decreases. A non-linear relationship between insider ownerships and firm

performance was also founded by Morch, Shleifer and Vishny (1988). They viewed the

relationship between ownership structure and firm’s performance. The same was explored by

Holderness and Sheeshan (1988) and Domsetz and Lehn (1985), too.

The performance of an organization, according to Jensen and Mecklling (1976), is positively

affected through ownership concentration, as it causes a decrease in shareholders and manager’s

conflicts of interest. But on other hand, there are studies which enumerate a negative impact of

concentrated ownership (Fama, and Jensen, 1983). The controlling-shareholders, as enumerated

by La Pota et. al. (2000) and Shlefer and Vishney (1997), exploit the shareholders (minority) by

extracting privates benefit. When controlling shareholders involved in such activities they not

only harm the interest of minority shareholders but at the same time affect future prospects of the

company as well. Due to which company is not in a position to take project that had a positive

present value and its growth opportunities are going towards decline.

The association between organization’s value and structure of ownership is an important

dilemma in corporate-governance literature. If talk about it from firm’s perspective, the

profitability is basically determined through ownership structure which is enjoyed by all stake

holders. Ownership structures may be utilized as incentives device for minimizing the cost of

agency which basically arises from separation of management from ownership that could be use

for protecting the company’s property right (Babosa and Louri, 2002).

11

According to Javed and Iqbal (2008), closely held firms in most developing countries including

Pakistan control the economic landscape. Here the core problems are not the conflict between

manager and shareholders, but rather minority shareholder’s expropriation through majority or

controlling shareholders where all the expense is borne by the minority shareholders. They

further added that the main problem here is of getting control through interlock directorship,

complex pyramid structure, voting’s pact, and dual class voting-shares which allows the final

owner the controls while owning the small fractions of the ownerships. The decisions are made

by the dominant shareholders but they do not bear the full cost. When the members of a family

hold key official positions in the organization, mostly it results negative effect on the

performances and value and of an organization. Similarly, when family members are appointed

at Chief Executives Officer’s (CEO) position and they don’t possess the required talent,

competency or expertise to run the affairs of the business then a more severe effect it causes on

organizational performance.

From the last two decades, the relationships between organizational performance and ownerships

structure are a central area in corporation governance (Shah, Wahla and Hussain, 2012). Interest

of both manager and main shareholders on company’s value has remained the main focus of

researchers. These scholars found the relationships among organization’s performance and

ownerships structure while having conflict in mind among manager and own and also

enumerated that organizational value is not affected through one factor while there are numerous

factor which significantly affects firm’s value e.g., divided policy, financial structure,

control/governance and the role of ownership has also now proved to add value to the firm.

The Principal-Agent relationships, according to Adam smith, 1976), is the premise of research on

ownerships structure. After Adam Smith, Berle and Mean (1932), and Jensen and Meckling

12

(1976) made notable extension. Fama and Jensen (1985) further explored ownership structure by

studying its benefits, and potential problem which it might pose to firm performances. Later La

Pota, Lopez-de-Salinas, and Shlefer (1999) investigated that nearly all large firms are structured

into business groups which are control by few old rich families. The structure proposed these old

families also plays a vital role in the overall developments of economy e.g. according to

Abdullah, Shah and Khan (2011),Noboa family of Ecuador provides income of about three

million people of the total population of eleven million people and has about five percent

contribution to GDP. Similarly, 43 percent of Swedish economy is controlled by Wallenberg

family (Agnblad, Berglöf, Högfeldt and Svancar, 2001). Barca and Becht (2001) have described

identical situation throughout the European continent. Likewise, Asia also presents the same

situation where corporate controls are in the hand of some leading families (Claessens, Dejankov

and Lang, 2000).Similarly, the chief owners in Pakistan, according to Javid and Iqbal (2010), are

business-groups which are controlled through family.

Founding family ownership is one of the ownership structures. In founding family structure, the

founding family or members of the founding family who holds majority of the common shares

are vigorously involved in the affairs of business management (Wang, 2006). According to

Anderson and Reeb it is a unique structure as well in a sense that they hold poorly diversified

portfolio and they are also long-terms investor and frequently senior management positions are

also controlled by them. Founding-family ownership structures are also important ownership

structures. The importance of these families businesses are apparent from the fact that these

families businesses have employed more than seventy five percent of workforce around the

world with a GDP contribution of seventy five percent or even more in most of the countries (

Wang, 2006). It is also worth mentioning that 37 percent companies in Fortune 500 are families

13

businesses, and 80 to 90 percent business around the world is family business. (Gashi &

Ramadani, 2013). Thus, according to Akhtar, Hussain, Hassan and Iqbal (2015), due to their

contribution to economic development, their success and performance had remained the focus of

several researcher studies.

Different researchers studied ownership structure from different angles.For example, Fama and

Jensen (1985) studied ownership structure by stating its advantage and probable problem which

it might pose to firm’s performances. Similarly, Tahir and Sabir (2015)studied Family owned

business and noted down that Family owned business are attached with some possible benefits

that it may contribute to decrease investment-cash flow sensitivity. They stated the following

reasons. First, it helps in reducing the imperfection of financial markets. Second, strategic

investment projects are better evaluated by family owned businesses due to the fact that they

have deep knowledge of the business and have long-life attachment to the operation of business.

It enables them to decrease the variance of new investments from optimal level. This optimal

level helps in controlling the sensitivities of investment’s cash flows (Morgado & Pindado,

2003).Third, agency costs between bondholder and shareholders are decreased. It helps in

lowering the space among the costs of internal, and external funds (Jensen & Meckling,

1976).When financial constrains are lowered then it leads to select optimal investment projects

which at the end decreases the sensitivity of investment cash flows. Fourth, family owners are

more concerned with the reputation of their business which leads to higher earning quality due to

which the agency conflicts are reduced. When agency conflicts are reduced then sensitivity of

investment-cash flows alleviated in family owned businesses. Abdullah, Shah and Khan (2011)

compared family-own firm with non-family organizations and stated two reasons due to which

family ownership can outperform non-family firms. First, better investment decisions are made

14

by management of family firms. Because family managers have more knowledge about the firm

end are more foresighted, and also has longs term investments ideas. Second, the notorious

principal agent problem can be reduced by family management because it assists in the

alignment of incentives of the management with expectations of shareholders.

Family ownership if on the one side is beneficial for the performance of the firm then on the

other side it has disadvantages too. For example, Westhead and Howorth (2006) has

documented that if concentrate ownerships and management (Singel & Thornton, 1997) is in

hands of kinship-group who owns bulk of share in business then it may limits the pool of

experience, and may slow down the performances of the firm. Similarly, focus on objectives of

the family (Birley,Ng& Godfry, 1999), and unwillingness to work for the expansion of the firm

(Werd, 1997; Upton,, Teal, & Felan, 2001), may also limit the organizational performance.

According to Pérez-González (2001) firm performance may be affected negatively by family

succession through several ways. First, family succession reduces the prospective quality and

sizes of pool of liable successors. Because Professional managers constitute a self-select group of

extremely driven people, while family successors may the required skills and motivation of

managing the firm adequately. Secondly, whatever may be the characteristics of family

successors but firms under their control may underperform when a firm has long and staunch

tradition of honoring implicit contract which it has with related stakeholders e.g. employs or

local associations. Though it may be costly for the firm but these implicit contracts give benefits

to founding families indirectly. A CEO who is not from family members may renege on signed

contract and may transfers wealth to investors of organizations (Shleifer and Summers

(1988).Thirdly, when heir of a family is unrivaled in administration of a firm then he or she

might utilize the assets of the organization for its own needs. But unrelated managers may be

15

unable to exercise such misuse of resources because they may be controlled by founding family

and they may be under pressure to perform by labor market (Fama, 1980).Similarly, Anderson

and Reeb (2002) also carried out a study on founding families and found that, when Chief

Executives Officer is from family members then it has a detrimental effect on bondholder and

shareholder’s relationship. The costs of debts are high, when Chief Executives Officer is from

family members as compare to outside CEO. It is primarily attributed to founder descendent

rather than to founder CEO. It shows that unique and value adding skills are brought by founder

of the firm and descendents often detract from firm performance. It may be because of the fact

that descendents acquire the CEO position through family ties instead of required job

qualifications.

Shlefer and Vishny (1997) suggested that owners hip’s concentration may have more advantage

in countries which are not highly develop and have no systematic protection of property-right,

defined and enforced by judicial system. But La Portia,Lopez-de-Silanes, Shlefer and

Vishny(1999a), and Shlefer and Vishny (1997) focused on a new problem related to ownership-

concentration which is a clash between small shareholder and large shareholders. According to

Claessens, Djankov and Lang (1999), when corporation controls are in the hands of a large

shareholders then the policies framed by them often results in expropriations of the minority

shareholders. For example large shareholder enriches themselve through not paying dividends or

they transfer earnings to other firms which they control. Similarly other types of expropriations

include paying executives excessively, giving lucrative positions to unqualified relatives ,selling

products and assets to related parties on unfair prices and outright theft etc. (Abdullah,Shah and

Khan ,2011).Claessens, Djankov and Lang(1999) added that families mostly expropriate

minority shareholders and this expropriation of minority shareholders depend on country specific

16

circumstances e.g. individual shareholder’s legal and judicial protection, quality of banking

system and degree of financial disclosure required.

1.3 Problem Statement

There is a growing body of literature which has focused on the relationship between financial

decision and value of firm which is conditional to growth opportunities of firm ( López-Gracia,

Iturriaga and Sanz, 2015), but much less is known about impact of ownership concentration on

firm’s value (Al-Najjar and Al-Najjar, 2016) in Asian organizations like Pakistan (Sualeh and

Hussain, 2017) in the presence or absence of growth opportunities (Iturriaga and Crisóstomo,

2010). In Pakistan, only the nature of ownership-structure was explored by Cheema, Bari and

Saddique (2003) without checking its influence on performance of organization. The gap was

then filled by Javed and Iqbal (2007) in which they found a connection between corporate

ownership of an organization, firm’s performances and corporate-governance. Wahla, shah and

Hussain (2012) also documented the influence of managerial-ownership and ownership-

concentration on the performance of nonfinancial organizations which were listed at Karachi

Stock-Exchange. In all the above studies the relationship between firm’s ownership structure and

value has discussed from different dimensions. But no study relates the moderating role of

growth opportunity on the relationships of ownership structure and financial decisions with

firm’s value (Sualeh and Hussain, 2017). Therefore, this study aims at exploring the moderating

role of growth-opportunities on the relationship among family ownership, financial

decisions(leverage and dividend) and organization’s value as there are chances of expropriation

of minority-shareholders by family firms (Javed and Iqbal,2010).

17

Research Questions, based on the aforementioned arguments, are as follows.

1.4 Research Questions

1. How leverage affects organizational performance in the existence or nonexistence of

growth opportunity?

2. How dividend payout affects organizational performance in the presence or absences of

growth opportunity?

3. What is the influence of family ownerships on organization’s value conditioned to growth

opportunities?

4. Does a non-monotonic relationship exist between family-ownerships and value of an

organization?

5. Are minority shareholders expropriated by family owned organizations?

1.5 Objectives of the Study

This study aimed at determining the factors influencing the probability of future firm value for

Pakistani corporations. In particular, the objectives of this study were to find,

1. The link between value creation of a firm and leverage in the presence or absence of

growth opportunities.

2. The impact of dividend payout on performance of a firm when there are growth

opportunities.

3. The linkage between family ownerships and firm’s value; Conditioned to growth

opportunities.

4. The non-monotonic relationship between organization’s value and family-ownerships.

5. Expropriation of minority shareholders by family-owned firms.

18

1.6 Significance of the Study

The significance of this study is as follows.

First, it may help the firms in making appropriate decisions regarding leverage and dividend

policy. When there is growth opportunity the firms can focus on least debt otherwise all the

important decisions regarding investment will be done by debt providers. Similarly, this study

can also help the firms in making decisions regarding the dividend policy that in what

circumstance they should give dividend and in what not.

Secondly, this study is also beneficial in exploring the threshold levels of family ownerships

concentration that whether after certain threshold level the effect of family ownership on

organizational performance varies or not which will help Pakistani firms in making solid

decisions about the ownership structure.

Third, the study can also help regulatory body such as SECP in devising policies meticulously

for the wellbeing of minority shareholders and framing limits for debt and ownership

concentration.

The leverage, according to Signaling theory, is negatively linked with the dividend payments.

The negative relationship could be because of fact, that those organizations which are more

levered face large transactions costs due to the external financings. In such situations, the

organizations should utilize their internal finance in order to sustain their operation.

Furthermore, it is also worth mentioning that commitments towards creditors inhigh levered

organizations are greater which reduce the discretions of manager to utilize their funds. It in

turns causes a drop in agency cost. In addition, the negatives linkage between dividend payment

and financial leverage could also imply that the financial leverages are the major rationing

criterions for creditors of the financial markets of Pakistan.

19

Investments opportunity of organizations has negative relationships with the dividend policy.

The negative relationships may help the Management of an organization to realize that the future

investments opportunities have an important effect on deciding the directions o dividend

decisions of listed companies of Pakistan. The Policy which leads to the growth may generate

opportunity for the Profitable investments, and may helps the top management of an organization

regarding distributions of earning-cut short by keeping them for the expansion of the business.

As organizations, according to the signaling theory of dividend policy, which are devising plans

for the expansions are trying to avoid the selling of stocks. These organizations rather depends

upon retain earning and debts and give a message to outer shareholders for not paying dividend

for a specific time.

This study may also help the government and regulatory authorities in introducing a broad based

reform programs(e.g. Financial liberalization) in order to enhance the economic growth of

Pakistan through instilling competitions in the financial institution, framing a marketed adjusted

monetary, ex-change, and credits management-systems, and also strengthening governance and

supervisions of these financial institutions. Furthermore, Financial liberalization may cause an

increase in the dividend payments as once the financial constraint are eased-out then the

organizations will start shifting from the debts market to the equity markets for meeting their

monetary needs.

The study may be beneficial from the legal and political perspective as well for Pakistan. As

according to Shingade and Rastogi (2019), very little steps has been taken by the politicians for

stopping shareholder’s activism in Asia regarding raising and framing policies for stopping the

expropriation of minority shareholders. So the study will help in order to raise awareness in

politicians in Pakistan regarding the protection of minority shareholders.

20

According to Tax-preference theory the tax rates and dividend payments are negatively

associated. So, the study may help the management of an organization in understanding that

whenever the tax rates are increases then the organizations should lessen their dividend

payments, and invest their retain earnings in positive NPV projects in the presence of growth

opportunity.

Similarly, when an organization make a decision to pay the dividends, then the profits of

organizations are taxed two times by the government because of the transfers of money from the

firm to the shareholder. The first time taxation is occurred at the firm's year end when the

organizations have to pay the taxes on earnings while second times taxes are deducted when

dividends are received by the shareholder, which comes from organizations after-tax earnings.,

The shareholder first pay taxes as the owner of an organization that brings-in earning, and then

again as individuals, who must pay income tax on their own personnel dividends earnings .So,

for avoiding the double taxations of shareholders through paying divided when tax rate is high

then it would be more logical for the CEO of an organization to reinvests the profits in project

which may as a substitute give shareholders earnings in the form of capital-gain.

Managers who are holding substantial shares in an organization shall try to stay away from the

utilization of high leverage and will require high dividends payments to pay compensation for

their financial risks. As a result, the small investor needs to avoid organizations that comprise of

high leverage and high managerial ownerships. In terms of agency perspectives,, leverage and

the dividend policy can be utilized as substitutes as an internal mechanisms for mitigating the

agency conflict. It also helps in framing a precise policy for causing a reduction in organizational

conflicts (Agency conflicts) and improving the quality of corporate governance quality of an

organization.

21

The study may help the Institutional investors in deciding the financial structure of an

organization. Institutional investors, Conditioned to growth opportunities, play a very crucial role

in the elimination of un-systematic risks of an organization with the help of portfolio. Institutions

have a great interest in monitoring the decisions of managers and profitability of an organization

due to their diversified portfolios. Institutions always prefer debt financing over the equity

because debt gives them incentives to monitor the management and mitigate the managerial

opportunism.

The study also carries importance for the family businesses regarding deciding the capital

structure of their organization. For example, in order to avoid agency costs the family owned

firms should issue debt instead of equity. Debts decrease the conflicts among the shareholders

and mangers of an organization and give an incentive to the shareholders for investing in high

risky business when there are chances of growth opportunities for getting high returns in case of

success. But if the investments fail then the whole burden will be tolerated by the external

lenders.

This study also helps in increasing the interests of academia and other practitioners in the

understanding of the family business due to their special characteristics and peculiarities. The

specific characteristics and peculiarities of family business plays crucial roles in the shaping of

behavior of manager and also decision-making processes of the corporations that ultimately

shapes the corporate culture with the passage of time. Similarly, the study also helps the

academician in understanding the moderating roles of growth-opportunities which it plays in

making financial decisions and its impact on the performance of an organization while taking a

net present value project.

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1.7 Organization of Study

The Study is organized as follows;

Chapter-1 gives insight about the Introduction of the Study which includes definitions of

main variables and also present the research gap which has been crafted in the context of

Pakistan while examining the Previous studies .

Chapter-2 presents overview of the Literature .In this chapter a funneling process has

been carried out where first literature regarding the main variables have been analyzed in

the context of developed countries, then in Asia and finally the analysis have been

dragged to Pakistani context.

Chapter-3 is about Research Methodology. In this chapter the criteria for sample

selection has been mentioned along with an insight of the sectors and its contribution as

well. Furthermore, details regarding the Panel regression model and model specification

etc are included.

Chapter-4 describes Result and Interpretations. This section includes software generated

output along with the relevance and contraction of those results in the context of Pakistan

which are framed and premised on the generated results.

Chapter-5 shows Conclusion, Recommendation and Limitations. The Conclusion is based

upon the generated results and then recommendations are crafted in the context of

Pakistan and also some limitations of the study have been enumerated.

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CHAPTER # 2

LITERATURE REVIEW

2.1Chapter Introduction

This chapter gives an insight about past studies conducted regarding the main variables of the

study under consideration. It shows that how leverage, dividend and family ownership are linked

with growth opportunities. The scheme of this chapter comprise of studies which have conducted

first in the developed economies and then have dragged the topic to the developing countries.

Furthermore, studies from Pakistan have been incorporated in order to show that what areas of

corporate finance have already been discussed and what are missing. This chapter also presents

an evolution (in terms of progressive work) of the main variables of the study. In the last

literature based hypothesis have been presented which are developed on the basis of past studies

conducted in the developed and developing countries in order to show what needs to be explored

in the context of Pakistan.

2.2 Leverage and growth opportunities

Corporate Governance is the system by which business organizations are directed and controlled

because the corporate governance structures specifies the distribution of rights and

responsibilities among different participants of the corporations, such as, management ,board of

directors, external auditor and shareholders ( Mansur and Tangl,2018). According to Fu (2019)

,Corporate governance has been considered an important factor in the finance filed over the last

few years because the management of companies, according to Aslam, Haroon and Tahir (2019),

is regarded as an important element of organizational performance in terms of monitoring and

evaluation. The Asian financial-crisis which started in 1997 deteriorated many of East Asian

24

organizations financial performance caused mainly due to the failure of good governance (Haat,

Rahman and Mahenthiran, 2008). Better-governed organizations are relatively earning more

profits, valuable, and paying more cash to the shareholder (Brown end Caylor, 2004).When

Shareholders or Investors are making decisions regarding the investment, they consider

organization’s growth rates, business risk and capital structure (Al-Najjar, 2010).A good number

of studies regarding relationships between capital structure and controlling shareholder’s

ownership already exists, which shows mix results (Chakraborty, 2016). Boubaker (2007)

established positive relationships between the capital structures and controlling shareholder’s

ownership. On the other side, Neilsen (2006) found negative relationships between the debt and

control while Ellul (2008) found a curvilinear relationship between control and debts. Due to

liberalizations in developing-economies, dissimilar sectors has become meticulous about the

choice of sources of fund and forming their capital-structures, known-as optimal capital-structure

(Bhardawaj, 2012).she further stated that in spite of abundant empirical and theoretical findings,

the corporate capital structure still remains a controversy as concepts of capital structure and

costs of capital carry an important position in the modem corporate finance.

In 1958, Modigliani and Miller laid the foundation of the modern theory of capital structure. It

was proposed by them that the capital structure irrelevance theory that states that the value of an

organization is unaffected by the capital structures of a firm. It means that Weighted Average

Cost of Capital (WACC) has no role in firm’s value creation process. However, M&M had

assumed markets, wherever there are no-transactions’ charges, symmetric mention, risks free

debts and no tax. These all assumptions are in contradiction with real-world. In 1963,

Modigiliani and Miller modified their old M&M’s model. They included tax deductibility of

interest in their new model. They argued that when interests are tax deductible expenses then

25

firm value is increased by taking leverage. So, it means that firms can increase its value by

taking 100 percent of debt for financing a project. But in reality, probably there exist such firms

because of no debt tax shields (DeAngalo & Masulis, 1980) interest tax-savings, and personal tax

(Miller, 1977).Due to which taking infinite loan is limited. When a firm capital structure is more

composed of debt it may cause financial distress which was defined by Warner (1977) as a state

in which an organization is incapable to pay its debt or a situation which leads to deteriorating

financial decisions. Financial distress was also defined by Wruck (1990) as a situation where

current obligations are not fully satisfied through operating cash flows and compels the firm to

take corrective measures. Warners (1977) and Kim (1978) found the relationships between

leverages and bankruptcy. They enumerated that when an organization increases its debts then

financial distress also increases due to which its chances of bankruptcy also increases (Cheng &

Tzeng, 2011).

There is amalgamation of results regarding relationships between capital structures and firm’s

value. Some of studies (Brger & Bonaccorsi de Patti, 2006; Roden & Lewellen, 1995) have

indicated positives relationship between capital structures and firm’s value While others

(Chakraborty, 2010; Huang and Songs, 2006), have reported a negative relation between capital

structures and firm performance. Similarly, Murtaza et al. (2020) found that Tangibility and

leverage are negatively associated with the performance of organization. There are other studies

(Tang and Jang, 2007) as well which have shown fragile or non-statistical relationship among

capital structure and organizational performance.

Myers (1984) presented two theories e.g. statics trade- off and pecking order theory regarding the

optimal structure. The static trade off theory is about cost benefit analysis. It states, that an

organization can reach optima’s capital structure through balancing benefit and financial distress

26

cost. According to this theory a firm will keep increasing the levels of debts until benefit of debts

are greater than perceived financial distress cost. Interest tax-shield are the benefits of debt while

the distress include agency and bankruptcy cost. Static trade- off theory indicates positive

relationships between organizational performances and capital structures (Kardeniz et al., 2009;

Chakrborty, 2010). According to the trade off theory ,organization’s adjustments toward optimal

leverage is effected through three factors which are taxes, agency costs and financial distres

.Baxter (1967) stated thathigh utilization of debts increase the probability of bankruptcy due to

that creditor demands extra risks premiums. He suggested that organizations shouldn’t use debts

beyond the points where cost of debts become larger then tax advantages. Kraus and Litzenbrger

(1973) argued that if an organization’s debts obligations are greater than its earning, then

organization’s market-value is essentially a concaved function of its debts obligation. DeAngelo

and Masulus (1980) further worked-on Miller’s differential tax models by entering other non

debt shield, for example, investment tax credits and depreciation charges. They enumerated that

every organization has internal optimal capital structures which maximize the values of their

relevant organizations. The determination of capital structure is only through positives defaults

cost and interactions of personnel and corporate tax. Altmann (1984) is the first who documented

direct and indirect cost of bankruptcy. Through study in twelve retails and seven industrial

organizations, he mentioned that organizations in the simple faced almost twelve percent of

indirect liquidation cost at times t-1, and sixteen percent at times t. He inferred that the capital

structures ought to be such that present value of marginal taxes benefit is equivalent to the

marginal present-value of bankruptcy cost. Bradly, Kim and Jarrell (1984) made use of model

which synthesize the contemporary balancing theory of optimal capital structures. They

established strong direct relations between an organization’s debts level and no tax shields.

27

According to the Pecking order theory for a firm there is no optimal capital structures. It also

states that managers and shareholders have different level of information. In order to reduce

asymmetry of information between shareholders and managers, company give first priority to

internal sources of finance e.g. retain earnings for financing the operations of an organization.

The reason behind the transaction is small or zero price and availability is easy. The company's

next preference is for debt because it does not alter the company's voting pattern. The firm is

ultimately issuing equity shares, following the withheld income and debt. Capital structures and

organizational value according to Pecking Order Theory are negatively linked.

Most of the early research on the capital structure favors the scheme of optimal capital structure.

For example, Schwartz and Aronson (1967), carried out a study in which they showed that

average o debt to asset ratio of dissimilar firms are different in different industries and also

indicated that organizations have a tendency in similar industry to clusters around the average of

their relevant industries. Furthermore, the averages of such industries had a negative relationship

with research and development spending and other proxy for the corporate growth opportunities.

Long and Malitz (1985) conducted a study in which they showed five highly leveraged

industries, for example, petroleum refining, paper and allied products, textiles, blast furnaces and

steel and cement which all were asset intensive and mature. On the other hand showed five

lowest debt ratios industries ,for example, radio and TV receiving, aircraft, photographic

equipment, drugs and cosmetics which all were growth industries with high Research and

Development and advertisement. Other studies (Bradley, Jarell, and Kim, 1984) had used cross

sectional regression technique for determining theoretically the extent to which optimal capital

structures seems to effect the actual financing decision.

28

Barclay and smith (2005) conducted a study on 8800 organizations for the period of 1950 to

2003.The Differences in the leverage ratio were recognized both in each organization during

each year and for the same organizations. They tried to figure out how far the choice and

leverage of the corporate dividends can be demonstrated by the variations in investment

opportunity, relatives to the size of organizations, the higher is the possible problem of

underinvestment related with the debt financing, and so, the lower would be an organization’s

leverage ratio. On the other side, the more limited an organization growth opportunities’, the

higher is the possible problem of overinvestment, and hence the greater would be an

organization’s leverage.

Margariitis and Psillaki (2010) analyzed effect of efficiency on the capital structures through two

opposing hypotheses. Under the efficiency risks hypothesis, organizations which are more

efficient might prefer higher debt to equity ratio, because high efficiency decreases the

predictable cost of financial distress and bankruptcy. On the other side, according to franchise

value hypothesis, Organizations which are more efficient might choose low debts to equity ratios

in order to shield the economic rent resulting from high efficiency from likelihood of liquidations

(Berger & Patti, 2006). They added additionally that organizations with t large external block-

holdings are probably has high debt ratio at least up to the point where risks of liquidation might

encourage them to the lower debts. According to Smith (2005), Managers prefer some type of

owner as compared to other because different type has different capabilities hinder their choice.

As an outcome, manager are trying to get the most out of organization value if their favorite

owner remains in-charge when organization performance is good, but effective debts covenant

constrains managerial preference following appalling performance.

29

Driffield et al. (2016) suggested that the relationships between leverage and managerial share

ownerships might be no-linear. At small level of managerial’ ownerships, agency’ conflict

decreases leading to high debts. Nevertheless, once manager holds a noteworthy portions of an

organization’s equity, an increases in the managerial’ ownerships might leads toin the

managerial opportunism and consequently may cause lesser debts. Other author, for example,

Friand and Hasbrouck (1988), and Friand and Lang (1988) argued that a raise in the managerial

ownerships push organizations for decreasing leverage in orders to reduce defaults risks, thus

advocate a negatives relationships between leverage and managerial’ ownership. Similarly Lang,

Stulz, and Ofek (1994) explored the relation between future growth and leverage for

organizations over the period from 1970 to 1989. They identified a strong negative relationships

between leverage and succeeding growths in number of employee and capital expenditure but

only for organizations with poor investments opportunity (for example, Tobin’s Q < 1).

Therefore, it can be suggested that leverage prevents organizations with poor investments

opportunities from overinvesting.

The relationship between working-capital management, organizational value is being discovered

by Banos-Caballero, Teruel and Solano (2014)and stated that earlier’ study on the working

capital-management fall in two competing views regarding working-capital investments. Under

one views, the higher working-capital level allows organizations to raise their sale and gain

greater discount for premature payment (Delooff, 2003) which may increases organization’s’

performance. On the other hand, the other views states that higher working-capital level needs to

be financed and as a result organizations are facing supplementary financing expense which

increases its chances of bankruptcy (Kieschick, Moussawi & LaPlante, 2009). Incorporating

30

positive and negative working capitals effect lead to then on-linear’ relationships between the

value of an organizational and investments working capital.

Wang (2002) found that organizations from Taiwan and Japan with high values hold

significantly lower investments in working capital than organizations with lower values.

Faulkender and Wang (2006) evaluated how an additional dollar invested in net working capital i

s appreciated by U.S. corporate shareholders using surplus stock returns as a proxy for the value

of the company.The results show that an extra dollar invested in net working capital is, on

average, less useful than a dollar invested in cash. They also found that an average increase in

net working capital will decrease excess reserves and that that decrease will be greater for

organizations with limited access to internal financing. As market imperfection raises external

capital expenses relative to the externally produced fund (Myers & Majluf, 1984) and could

result in debt rationing (Stiglitz and Weiss, 1981). Fazzari, Petersen and Hubbard (1988)

proposed that the organization's investments may rely on economic variables such as funding

expenses, access to capital markets, or domestic finance accessibility.

Furthermore, in their assessment, Fazzari and Petersen (1993) proposed that investment in worki

ng capital is more susceptible to funding limitations than investment in fixed capital.

Various explanations on the incentives for organizations to maintain a favorable working capital

have been provided. First, for many reasons, a large investment in stocks and expanded trade

credits may improve corporate efficiency. Large inventories may, according to Blinder and

Maccini (1991), reduce supply costs and price fluctuations and prevent disruption of

manufacturing procedures and company loss owing to product shortages.It also provides

organizations with better customer service and prevents greater production costs due to the

elevated production fluctuation (Schiff & Lieber 1974). On the other hand, the granting of trade

31

credits may also boost the sale of an organization as it is used as an efficient cost

reduction.It enables clients to acquire goods at low demand times (Emery 1987). It strengthens th

e longterm connection between supplier and customer (Wilner 2000) and allows buyers to check

the value of the goods and services before payment (Malitz & Ravid 1993).Thus; it decreases the

asymmetric information between the seller and the buyer. Deloof and Jegers (1996) is of the

view that trade credits are an imperative supplier-selection measure when it is difficult to

differentiate the product. Furthermore, Emery (1984) proposed that business credits are more

valuable short-term investments than marketable securities. Second, labor capital can function as

precautionary liquidity stocks, offering insurance against future money shortfalls (Fazzari &

Petersen, 1993). Lastly, from the point of perspective of accounts payable, Wilner (2000)

showed that organizations can get significant early payment discounts when their supplier

funding is reduced.

Similarly, researchers (Munter and Kren, 1995) demonstrated a board of director’s effectiveness

as a monitoring mechanism as they communicate the interests and objectives of the shareholder

to the managers. It has been discovered empirically that enhanced outsiders on boards are likely

to encourage choices that are in the best interests of internal shareholders (Weisbach, 1988).This

perspective was questioned by the theory of managerial hegemony, which considers boards as a

passive tool that maintains loyalty to the managers of the organizations that select them, lacks the

vital understanding of the organizations and is strongly dependent on top executives for

information (Coles et al., 2006).Specific organizational definitions linked to things such as

organizational skills are investment opportunities (Anderson et al., 1993). As a consequence, it is

difficult to monitor the action of executives in development organizations as it is difficult to

decide whether it is the action of executives or external variables that led to good choices for

32

investments. Hutchinson (2004) discovered negative relationships between external directors '

ratios and the growth rates of the organization. On the contrary, Hossain et al. (2000) discovered

the proportion of external managers to be favorably correlated with the investment possibilities

of the organization. Anderson et al. (1993) is of the view that growth organizations incur higher-

monitoring cost (in term of directors and auditors fees) as compared to the non growth

organizations.

According to Tang and Jang (2007), several factors are suggesting that the negative

relationships between the organization’s performance and organization’s investments

opportunities are weaker for organizations with higher management share ownerships. First,

executives who own an organization's stocks are more likely to use their discretionary choices to

enhance the organization's value. In other words, ownership of management shares must

guarantee that executives undertake risk-bearing policies that boost the efficiency of the

organization. In addition, it is anticipated that there will be less need to encourage executives to

seek risky but lucrative investments as organisations with assets in location have dedicated

investment possibilities.

According to Ogden, Jen, and Connor (2003), the creditors or lenders are assuming the role of

active monitor for controlling the board composition as they demand reasonable returns on their

investment and for agency costs which they are facing. For three reasons, Shleifer and Vishny

(1997) given arguments about the impact of the creditor. First, when an organization makes a

debt repayment default, then lenders automatically assume certain freedoms of control. Second,

because of the facts that short-term lending is often preferred, these lenders are more frequently

approached for the resources. Third, interest payment liability must be made on a periodic basis,

which will persuade managing to be careful in creating cash flows (Ogden et al.,

33

2003).Therefore, the inclusion of debts would work as a governance mechanism in the

improvement of an organization’s performance. Myers (1977) also believes that short-term loans

are good to reduce conflicts such as underinvestment problem between shareholders and

executives. In particular for high quality organizations, short-term loans can benefit due to their

low refinancing threat (Diamond, 1991).

Gurbuz, Aybers and Kutlu (2010) used debt as control variable in their study of impact of

corporate-governance mechanism on organization’s performance. They examined forty one

organizations from Istanbul Stock-Exchange for periods from 2005 to 2008. The study carried

out panel-data analysis and GLS estimations. The outcome showed that debt sizes can influence

economic performance due to economic costs and default risks. The study considered that the

financial cost and the tendency for default worsen profitability of organizations and

showed negative links between leverage and organizational performance. From 1999 to 2003,

Florackis & Ozkan (2004) carried out a research using cross-sectional regression analyses on

publicly traded United Kingdom (UK) organizations. They realized that debt maturity has a

significant role to play in justifying the organizational costs. It demonstrates that shorts term debt

efficiency is reduced for high growth organization in terms of mitigating agency problems, given

that short-term debt utilization is not a governance criterion.

According to Al-Malkawi and Pillai (2012), the utilization of debt as governance-mechanism is

more appropriate for small organizations which are facing an uneven cashflows The use of debt

for these growing organisations would function as a surveillance mechanism and pacify the fresh

investors. Safieddne and Titman (1999) issued a further statement on debt role as a governance

mechanism. They have indicated that high leverage rejects the threats to takeover, because these

organizations are showing an increase in their efficiency, the organizations reduce employments,

34

become very vigilant in their operation, and sell off their assets. On the other side, Megginson

(1997) presented empirical evidences in support of positive relationships between the leverage

and agency costs. Meanwhile, Stulz (1990) provided results which were describing that debts

could have a positive or negative impact on the value of an organization due to the influence of

debt on the investments decision taken by the organizations.

According to Cheng and Tzeng (2011), when a firm’s quality(measured through Altman’s Z-

Score) is higher, it may improve the credit rationing of the firm due to which equity holders and

debt holders give such firms more importance. For example, equity holders and debt holder

demands lower required rate of return from better credit rationing firms which cause a decline in

the costs of capital, and increases the organizational value. Therefore, leverage positively affects

organizational value, and this influence tends to be stronger when an organization has good

financial quality which results in lower chances of bankruptcy. According to Barclay and Smith

(2005), the direct expenses related to the bankruptcy process appear smaller with relation to

market value of an organization but the indirect cost may be substantial. For many organizations,

the loss in value is the most important indirect cost which results in cutbacks in promising

investments when organizations get into financial trouble. In situations less extreme than

bankruptcy the high leveraged organizations are more likely to pass up valuable investments

opportunities as compared to their low debt counterparts when faced with prospect of default.

Mikkelson and Partch (2005) enumerated that on the basis of this information gap between

investors and managers of the firms, there are three distinct and related theories to the financial

decisions which are market timing, signaling and pecking order theories.

35

In the issuance of securities, Market timing has important role, for-example, which security

needs to be issued in what circumstances. Since bondholders are entitled to fix promised

payments and shareholders are entitled to the amount what is left after fulfilling the claims of

bondholders. Therefore, the prices of stocks are more sensitive to any proprietary information

regarding the future prospects of the company as compared to the bond prices. The stock prices

will increase if the management has any sort of favorable information’ which isn’t yet reflected

in the market-prices of the stock. So, the current-stock prices will be perceived more under-

valued as compare to the bond prices by the managers. To avoid diluting the values of current

stockholder’s claims (including manager’s claim), organizations that have profitable usage for

more capital and they believe that their shares are undervalued then they may opt debt to issue

not equity. But on t other side, if managers who are thinking that the shares of the companies are

overvalued then in such case the managers will issue the equity instead of bond which is a stock

for stock acquisition. Some organizations may be seen to issue overvalued securities e.g. equity

or debt, even if the capital they have is of no current profitable use because of the free cash flow

problem. Investors know that managers have more information than them and they also know

managements’ intensions to avoid issuing undervalued securities and issue overpriced securities.

This well recognized tendency of organizations to take inventory offerings offers helps to

explain the systemically adverse reactions of the market to the announcements. There has been

significant research showing that the shareholder marks down approximately 3% below the

share rates of issuing organizations. Market responses therefore do not differ from null on

average to fresh debt offers, although negatively.

Signaling theory like the market timing explanation is based on the idea that managers have an

edge over investors regarding information, for example, managers have better information

36

regarding the future prospects of the organization as compared to the investors. But as oppose to

the market timing, where securities are viewed as an attempt for raising the cheap capital, the

signaling model checks the confidence level of managers related to the decision making which

are made regarding the organization’s prospects and also in cases where management is of the

view that their shares are undervalued in order to increase the value of their shares. If the

executives think that the share of the business is undervalued, they can try to boost the value of

their stocks by only communicating this data to the market by providing in greater detail and

better data about the future value of the business in relation to shareholders. But this is not as

straightforward as it appears. As the management of an organization is often unsuccessful in

releasing strategic data or forecasting, and stating that organization is undervalued is suffice

normally. In such cases the managers of the firms need to introduce a credible signaling

mechanism which is a big challenge for the managers. According to the Economic theory which

suggests that information released from a biased source (e.g. management in this case) would

only be reliable when associated with significant consequences for misleading the market.

Increasing the level of the leverage might be one of an effective signaling device. Debt compels

an organization to make fixed amount of cash payments for the time for which the debt security

has been taken. There are serious consequences including bankruptcy, if payments obligations

are not fulfilled. Equity is more forgiving as shareholders expect cash pay-outs which are subject

to the discretion of the managers who can omit or mitigate theses payments when an

organization is facing financial distress. Due to this reason when an organization is adding more

debts to the capital structure serves as a credible signal for higher expected cash flows in the

future.

37

The third theory related to the information cost and decision making of capital structure is

pecking order theory. The pecking order theory suggests that the dilution caused by issuing

securities is large enough which dominates all other considerations. This theory states that

organization uses the cheapest source of funds for financing new investments in order to increase

the value of an organization. Managers give preference to internally generated funds as

compared to the external funds. Dead equity is preferred as outsides fund is compulsory because

of incurrence of lower information costs related to debt issuance. When all the debt capacities of

an organization has been exhausted then issuing equity shares is the last resort (Myers,

1984).Therefore, Pecking order theory suggests that organizations would have low debt ratios

which have few investment opportunities and have low or negative free cash flows because the

cash will first be used for servicing the debt obligations. On the other side, organizations which

have high growth and low operating cash flow will be having high debt ratio because of showing

resistance to raising new equity.

The signaling explanation and market timings theories, as discussed, are of the view that

organizations is expected to initiate debts instead of equities once it is undervalue due to high

informations cost associated with equity offering e.g. .in form of the expected dilution. The

pecking order model is even of an extreme view by suggesting that the information cost related

with the risky securities are so much high that most of the organizations would not issue equity

until their debt capacity is completely exhausted. Both the signaling and market timing theories

are suggesting that an organization’s financing decisions are influenced by the management that

whether they perceive the organization as overvalued or undervalued. According to Barclay and

smith (2005), the pecking order model is at more extreme which states that there is no target

capital structure for an organization and the leverage ratio of an organization will be determined

38

through the difference between investment requirement over time and operating cash flows.

Therefore, the pecking theory forecasts the organizations with persistent higher earnings and

moderate funding requirement tend for having low leverage ratio. It is mainly because of the

reason that outside capital is not needed by these organizations. Organizations with Low Profits

and those with high financing requirement will have high leverage ratio because of manager’s

resistance to issue the equity. According to Driffield et al. (2006), High leverage and high

dividends are somewhat complementary strategies which are driven by similar consideration and

common factors. They have suggested that organizations select rational package of finance

policy e.g. the small and higher growths organizations are trying low leverage and not

complicated capitals structure but also have low dividends pay-outs and considerable stock based

perks and compensations for the senior executive. On the other hand, large and mature

organizations are trying to have more complicated capital structure and broad series of debts

priority, high leverage, less incentive compensations e.g. great usage of earning base bonus then

stocks base compensations plan(smith and watts,1992), higher dividends and more long term

debts. Therefore, dividend, compensation policies and corporate financings are driven through

same basic considerations, for example, an organization’s investment opportunity and to a less

extent by its size.

Fan et al. (2007) said that knowing the connection between the corporate financing stocks and

flows is the way to reconcile the distinct theories and address the capital structure puzzle.

Current theories of capital structure generally focus on stocks (the amount of debt and equity

relative to the target) or flows (e.g. decisions about which securities to issue at a particular

moment). For instance, the contracting price theory focuses mainly on leverage ratios that are the

debts and equities stock measure. On the other side, information theory such as the Peck Order

39

Model tries to more focus on flows, such as the cost of data connected with a given equity choice

or debt decision. As stock and flow is likely to play a major role in these decisions, none of these

techniques alone can give credible suggestions to optimal capital structures.

An analysis was carried out into the relationship of intellectual capital, market value and

financial outcomes by Cheng, Cheng, and Hwang (2005).They discovered that both market value

and economic performance have beneficial effects on intellectual capital and this can be a

significant measure of the future economic performance. They also expanded the role of

intellectual-capital in generating corporate value and building sustainable benefits for emerging

economic organizations, where technological advancement would effects the intellectual-capital

valuation. Intellectual capital is generally immaterial in nature, according to Barnney (1991), but

it is widely accepted as a major corporate-strategic asset that can create lasting competitive

advantage and greater economic results. The difference between the book value of the company

and the market value was defined by Edvinsson and Malone (1997) as the value of intellectual

capital. The intellectual capital of an organization consists of human and structural capital

(Bontis, 1996). The primary driver of corporate and national development is intellectual capital.

Some nations such as Saudi Arabia and Venezuela, as Kaplan and Norton (2004) have elevated

natural assets, but bad investment has been made in their individuals and the system. This results

in far less per capita production and a much slower development rate compared to nations like

Taiwan and Singapore with a tiny amount of resources but high human capital and information

capital and effective inner structures. Its outcome is that the production is significantly lower per

individual.

Harford, Mansi and Maxwell (2008) carried out a study on US firms and suggested that nation

levelsgratings and enforcement of shareholders right is perhaps more essential than

40

organization’s levels attempts to limit the shareholders right. They found reduced reserves for

weaker corporate governance organizations. When weakened government organizations

distribute cash to investors, they choose to repurchase shares rather than increase dividends and

thus avoid future payout commitments. They further stated that the combination of weak

shareholder rights and excess cash leads to an increases in acquisitions and capital expenditure.

Low shareholders and surplus cash farm have low returns and low value. Cross-country evidence

depicts that reduced money holdings are linked to higher correct investors (Pinkowitz, Stulz &

Williamson, 2006).It indicates that shareholders want executives to disburse the money (most

likely to shareholders) and, when empowered, force them to do so (La Porta et, al., 2000).

Pinkowitz, Stulz, Williamson (2006) examined impact of country level protections of right on

cash holdings and showed that cash is worth less to minority shareholders of organizations in

countries with the low investor protections. It portrays that bad protection of investor rights

makes expropriating corporate assets for their own benefit easy for the controlling shareholders

and management. In addition, Lin and Kalchev (2004) included corporate governance controls at

the organizational level and examined how the protection of investors in countries has a marginal

influence on financial holdings. They have found that weaker shareholders ' rights organizations

have more cash worldwide and this link is particularly powerful and strengthened in low

shareholder protection countries. They also found that the value of cash holdings corresponds

negatively to the value of the company and that, the greater the control on management, the less

the inner security for the shareholder. These findings assist us to understand how shareholder

freedoms at country level act in conjunction with the issue of firm-level agency and shareholder

authority.

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The debt-firm value relationship was also examined in Pakistan, and various studies were

conducted by distinct writers in separate industries of Pakistan. Khan (2012) carried out a survey

on Pakistan's engineering industry. He discovered a important and negative relationship between

debt and company performance measured by Tobin's Q and Asset Return (ROA). Memon et al.

(2012) confirmed the same outcomes. They also report a negative relationships between

accounting-based-performance measure e.g. ROA and debt. Siddiqui and Shoaib (2013)

performed a research on Pakistan's banking sector and discovered no connection between

leverage and bank performance. They used Tobin's Q for the company's performance. Amjed

(2011) also explored the connection between leverage and company performance and reported a

important and negative connection. The moderating role of leverage between ownership structure

and firm’s performance was studied in the context of Pakistan but no significant results were

found (Ali et al., 2015).

Rao,Khursheed and Mustafa (2020) tried to explore the influence of concentrate leverage and

ownerships over the performance of logistic sector organizations of Pakistan conditioned to

presence and absence of growth opportunities. A non linear relationship was found between

ownership and performance of organization while the relationship between leverage and firm’s

value was positive. Similarly a relationship was found byLópez-de-Foronda (2019) between

corporation leverage and overinvestment. A significant positive association was found between

overinvestment and corporate leverage. Ciftci et al. [ 2019 ] analyzed, by examining firms

operating in Turkey, the relationship between corporate performance and internal governance. It

was found that concentration ownership in family-owned enterprises leads to better

performances and controls. According to Cheng and Tzeng (2011),asset substitution effect can

be created by debt which can be explained as when the shareholders give a free hand to

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management to invest in risky projects without knowing the debt holder’s anticipated risk,

because the debt holders may not be willing to invest in more risky projects. If the risky projects

performed well then the debt provider will get only the pre-determine returns while the

shareholders will get all the extra benefits. On the other hand, if this risky project results in

losses then debt-holders will share those losses jointly with shareholders. For keeping themselves

on a safe side, debt-holders should monitor the firm and also need to impose covenant .( Skinner,

1993).Debt can also result in underinvestment problems. Which can be explained as when the

debt lender provide the debt to firm and the management comes to know that all the benefits

from the project will go to the debt providers, then they will try to avoid investment in those

projects which are profitable to the firm. (Myers, 1997).

The agency cost theory is based on the concept of conflict of interest between managers and

shareholders. It states that intersts of both manager and share-holders are contradictory, and are

not perfectly aligned. Jensen and Mecklling (1976) in their seminal paper focused on the

importance of agency-cost of equity. They argued that agency-costs arise when we separate

ownerships from controls of a firm. In such case, manager’ tend to satisfy own needs and utilities

and ignore the value of firm. In simple words managers give priority to their own needs over the

value of firm. The problems of agency cost aren’t only exists between manager and shareholders,

it is also exists among equity end debt investor where premise of conflict is risk of default

(Margaritis & Psillaki, 2008). This risk of default may lead to underinvestment or debt overhang

problem (Myers, 1977).In this case the relationship between leverage and value of firm is

negative.

But on the other hand there may be other situations which make a shift in the intentions of

managers and they start working in the best interest of the firm. As enumerated in the theory of

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free cash flow by Jensen (1986: p. 323),that ―the problem is how to motivate managers to

disgorge the cash rather than investing it below the cost of capital or wasting it on organizational

inefficiencies.‖ So for making managers disciplinary a high level of debt can be used which will

mitigate the misuse of cash flow by managers because of fear of insolvency (Grossman & Hart,

1982), or the pressure of fulfilling the debt obligations (Jensen, 1986).In such case we can expect

a positive relationship between leverage and a firm’s value.

Stulz (1990) extended the work of Myers (1977) and Jensen (1986) through developing a model

in which it was shown that on one side leverage decrease overinvestment problems but on the

other side it aggravates the underinvestment problems. This model shows the dual role of

leverage e.g. positive and negative on value of firm and presumed that all firms have both effects

(Margaritis & Psillaki, 2010). According to McConnell and Servaes (1995) leverage can have a

positive influence at firm’s performance when an organization has few growth opportunity and

will have a negative impact on value of firm when a firm has high growth opportunities.

H0: There is no relationship between leverage and firm’s value when there are growth

opportunities?

H1a: Leverage and firm’s value are negatively co-related when there are growth opportunities.

H1b: Leverage and firm’s value are positively co-related when there are no growth opportunities.

2.3 Dividend and growth opportunities

Dividend policy is widely used topic in the literature of finance. The importance of dividend in

determining the value of a company has result in theories inconclusiveness(Al-Malkawi, 2007),

due to which for researchers it is one of the debatable topic (Ramcharan, 2001).According to

Brealey and Mayers (2005), dividend policy is among the list of top ten unsolved problems in

financial economics. This argument supports Black’s (1976) statement about dividend that “The

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harder we look at the dividend picture, the more it seems like a puzzle, with pieces that don’t fit

together‖. The discussion on divided policy is dated back to work of Modigliani and Miler

(1961).MM said that in a perfect market dividend does not affect the value of a firm. But MM’s

claim was challenged by Linter (1962) and Gordon (1963) by supporting ―Bird in hand theory‖

while stating that high dividend leads to high firm value because of asymmetry and imperfection

of information.

Different researchers (Amidu and Abor, 2006) have criticized the theory of irrelevance of Miler

and Modigliani (1961) that divided has no impact on the share prices. They stated that those

assumptions out-lined by MM are not working in real life. According to Amidu (2007),

organizations incur floatation costs in their bids for raising additional capitals whereas investors

are incurring transaction costs whenever they are buying or selling their shares, organization

pays brokerage or subscription charges when issuing fresh stocks, investors pay income tax on

dividends received, dividends are also subject to withholding tax while capital gains are exempt

from tax. In addition, insiders have more access to information than outsiders, which

demonstrates that not all accessible information is fully reflected in the markets. It therefore

demonstrates that dividend policy has a important effect on the share price .According to Anil

and Sujjata (2008) there is not only one factor through which dividend behavior can be

explained. It means that there are many factors which explain dividends policy. A numbers of

factor had been recognized in the earlier studies regarding relevance of dividends policy of

organizations which includes agency costs, signaling and cash-flows (see Gordon, 1961, 1962;

Allen & Michaely, 2002; Bhattacharya, 1979).

Dividend plays an important role in agency problem. According to Jensen (1986) agency

problem can be reduced through paying dividend. He argued through in his free cash theory that

45

when firm pays dividends then the managers have least opportunity to do exploitation and

misuse of frees-cash. Akbar and Baig (2010) argued that when high divided are paid to share-

holder after investing in positive net present value projects then the share price goes up due to

increasing level of dividend payouts. According to Linter (1956) a firm will increase dividends

until its management is sure that this increase will be permanent. As Bhattacharya (1979)

enumerated that shareholders and managers have not the same level of information, therefore an

increase or decrease in dividends give a signal about price sensitivity to equity holders as well as

prospective investors. This signaling proposition was also supported by johm and Williams

(1985), and Miler and Rock (1985).The information-contents’ hypothesis was also favored by

Aharony and Dotan (1994) and Brickley (1983). While Benartzi et al. (1997) failed to do so.

Mirza and Afza (2010) listed that, over the last five centuries, the discussion on dividend policy

has generate a rich body of literature in which most scientists (Rasheed & Rehman, 2009)

endorsed the beneficial connection between dividends and organization’s value, but there are

other results (Baker and Powell, 1999) showing a adverse connection between the value of the

company and dividends, whereas there are other results. Gordon and Walter (1985) suggested

"Bird In Hand" theory, which states that investors favor present dividends to future earnings.

Bhattacharya (1980) favored Signaling-hypothesis. According to Signaling theory dividends

provides informations regarding a firm’s future growth dues to which the conflicts among

managers-shareholders reduces. Dividend has a leading role in providing information to equity

holders about value of a firm (Li & Zhao, 2008).Investors will invest in that firm which pays

high dividends due to which the market value of that firm will be high than the one which does

not pay any dividend (Ullah et, 2012). There is a positive impact of timely payment of dividend

on the reputation of an organization in the equity market but unluckily the dividend pay-outs in

46

Pakistan as compared to other emerging economies are very low. According to the annual report

of Karachi Stock Exchange (2008), the ratio of dividend paying organizations has been

decreased to forty percent in 2007 while it was forty six percent in 2005.

Developing market’s dividends-policy as stated by Al- Kuwari (2009) is dissimilar from that of

develop markets while a number of factors are involved in it. According to Imran (2011) stock

market volatility, asymmetric information and tax- paying procedures are the factors which make

dividend policy different in developed and emerging-markets. The other reason is the focus of

emerging markets on dividend payout ratio rather than dividend paid up level (Glen et al.

1995).But on the other hand Aivazian et al. (2003) found no differences in dividend’ policy

between emerging-markets and U.S firms. Ayub (2005) conducted a study which was intended

to capture the impact on corporate dividend payments in terms of company specific factors. The

study was carried on 180 firms far periods 1981-2002.The results indicated 23 percent of

incremental profits which were meant to transform into dividends while remaining amount was

meant for additional investment. The study also concluded that the company pays dividend after

certain levels of growths.

According to Murtaza et al. (2020) both dividend policy and performance of firm are positively

correlated .A study conducted by Kumar (2006) which exhibited a positive relationship among

dividend, investment opportunities and earning trends. Similarly, a study was carried out by Ben-

Naceur et al. (2006) at Tunisian Stock-Exchange for periods of 1996 to 2004 on 84 companies.

Results of the findings revealed that firms which are profitable and have more stable earnings are

in a position to generate large cash flows. The study further added that these firms have high

dividend payouts and these firms give high dividends when they are growing with a fast pace .It

was found by Emmery and Finnerty (1997) that firms which are paying high dividends will need

47

more funds which they will get from the debt providers. This statement was also supported by

Miller and Rock (1985) and they added that paying high dividend is a sign of future profitable

growth. Din and Javid (2012) argued that for informing investors about the promissory

investment opportunities the management gives a positive signal to investors through dividend

payments which results an increase in the value of a firm. They further added that high dividend

payments indicate that the firms will use more leverage for funding investments in order to make

their capital structure optimum. That’s why Rozeff (1982) enumerated that agency problem is

reduced between shareholders and managers through high dividend payouts and assured the

relationship among dividends, profitability and growth.

González, Guzmán, Pombo and Trujillo (2014) conducted a study on 458 Colombian

organization for the period 1996 to 2006.The study’ was intended exploring family

involvement’s effect on dividends policy with some level of level of disperse ownership in

closely held organizations. Their main argument was related to demand of minority shareholders

for demand which increases the likelihood of dividends payment and prevention of misuse of

assets by insiders. They found that in such agency conflicts the type of family involvements have

a great impact. Their findings are as follows.

First, no significant impacts were found regarding family involvement in managements in

explaining that dividends policy will be used as a means for decreasing the agency-conflicts. It

shows that family Chief Executives Officers neither worsen-nor-alleviate the agency problems

which exists among minority shareholder and majority shareholders.

Second, involvement of family in ownership increases the supervision on the chief Executive

Officers which decreases the chances of opportunistic behavior which try to create shared-

48

benefits of controls for the minority-shareholders. Moreover, such benefit increases other

agency-costs which is created by the concentration of ownership. Consistent with this idea they

found that family involvement in ownerships had an important and negative impact on the

dividends policy of an organization.

Third, they originate that dividend policy is negatively affected by family involvement in the

control through pyramidal structures. Albeit pyramids structures which are used as a controlling

enhance mechanisms might let family get private benefits of pecuniary and non-pecuniary

nature, contestability among minority shareholders and majority shareholders within pyramids

structures might decrease the agency problem, counter balancing the negative effect. The

shareholders (minority) in the closely help organizations are usually very sophisticate- investor

e.g. prosperous families, international investors, large private organizations, equity and pension

funds etc.

Finally, they bring into being that Family involvement in control by disproportionate family

representations in board-of-directors increase likelihood and amount of dividends payments

considerably. Such type of involvement could cause the adverse effect which is correlated with

pure-control improving mechanisms (Villallonga and Amit, 2009); hence, the minority

shareholders are trying to limit the Chief Executive Officer approach for using cash-flows which

are free in order to avoid misuse of funds or wealth expropriation.

Family involvement in control is happened when different kind of control enhancing mechanism

are used by families which enables the families to increase its voting power which exceeds its

cash flows right. These structure includes disproportionate board representation, pyramids,

multiple share classes, voting agreements and cross holdings etc. (Villalonga and Amit, 2009).

49

Many studies (Sacristán-Navarro and Gómez-Ansón, 2007) have noted that such mechanisms are

used by family organizations .Pyramid structure allows the shareholders to control an

organization through one or more intermediates organizations which they don’t own fully

because Pyramid structures are organized which helps to put into effect the controlling-power

which exceed cash-flows rights are common in family organizations (Almeida and Wolfanzon,

2006). It allows family to get pecuniary and non-pecuniary private benefit e.g. appointment of

family member to the managerial position, high compensation, empire building, related- party

transactions, recognition as successful entrepreneurs, social status and societal power (Bjuggren

and Palmberg, 2010). Many studies which are summarize by Morck, Yeung and Wolfenzon,

(2005) show the problems of governance within pyramid business groups. If the pyramid

increases the conflicts-among shareholders (majority and minority) as enumerated by Bebchuks,

Kraakma, and Triantus (2000), the shareholders (minority) need to demand for additional

dividend in order to decreases assets expropriations.

It is argued by Villallonga and Amit (2009) that pyramids may serve aims other than just to have

control enhancement, so therefore, its impact on the value is not always negative e,g. the

privately held intermediate organizations may be used as investments vehicle for the

sophisticate-investor like pensions fund, institutional investors, private equity funds. A

monitoring role is played by such investors regarding the founding family and who are enough

vigilant to prevent the tunneling (Almeida and Wolfenzon, 2006). The other shareholders ,who

have large number of shares, in pyramids may monitor the managers and moderate the influence

of the family and reduce the expropriation of wealth by them (Maury & Pajuste, 2005).The

pyramidal family structures are common in Spain where potential extraction of private benefits

can be counter balanced by presence of an additional significant shareholder(Sacristáns-Navarro,

50

et. al., 2011).The potential benefits related to family board representation include better

management supervision, less managerial myopia, long-term’ perspective or long investment-

horizon etc (Sciascias & Mazzola, 2008).The representation of family can also produce shared

advantages and may reduce the organizational conflict with the shareholders (minority) through

developing longs term relationship with capital providers, supplier , customers (Andersons,

Mansi, & Reeb. 2003).However, a pure control enhancing mechanism can be affected badly

through family disproportionate-representations e.g. when the family member’s percentage on

board exceeds the cash flow rights(James, 1999).

According to Afza and Mirza (2010), the level of dividend can also be determined through an

organization’s financial and liquidity position e.g. If an organization faces the problem of

liquidity then it may choose to select stock-dividend a replacement for money dividend

.According to free cash flow hypothesis of Jenson (1986), organizations first choose to utilize

money in productive projects and then reimburse dividends from left over. Due to inefficient use

of funds as enumerated by Berle and Mean (1932), there is a conflict among manager and owner

ship. The dividend and payments of interest reduce management's frees cashflows, which

reduces the use of organizational funds for less productive projects or uses them for managers '

prerequisite.

For a panel of Indian organizations from 1994 to 2000, Kumar (2006) carried out a research on

the relation between pay-out policy and corporate-governance. He described dividend behavior

differences using the investment possibilities, economic structures, ownership structure, earning

patterns and dividend history of the organization. He discovered that earnings trend and

investment possibilities are strongly linked to dividend and debt-to-equity ratio and also

discovered that dividend choices are strongly linked to corporate and manager ownership, but

51

there are negatives relationships between squared corporate ownerships and dividends’ payout

policy. The link between dividend payment and foreign ownership has not been established. A

research by Sulong and nor (2010) showing that dividends are an efficient corporate governance

mechanism to exercise their monitoring role to limit cost linked with free cashflows, and thus

increase a company's value .They examined four hundred and three organizations which were

listed at Bursa Malaysia for a period from 2002 to 2005.

An interesting result which was provided by Gugler (2003) through studying two hundred and

fourteen non financial Austrian organizations for a period 1991 to 1999,This research showed

that governments own organizations of Australia use dividend as inner management system to

decrease the organization expense and are highly unwilling to cut their dividends. On the other

side, family controlled organizations, on the basis of their highly proactive investment

opportunity, do not view dividends as a mitigating factor in organization’s costs and do not

hesitate to cut the dividend. The research too showed the dividends in Austria are not recognized

as a governance tool for decreasing the cost of the agency and influencing organizational

efficiency. But contradicting with the aforementioned studies, included in their regression

models, Aljifri and Mustafa (2007) include dividends payments as a device (mechanism) of

corporate governance for expense of agencies and performance of organizations .They studied

fifty one organizations in United Arab Emirates and employee a cross sectional regressions

techniques for getting output. The pay-out ratios which were consider to be an inner governance

mechanism showed that it had negatives impacts on performance of organizations. Pan (2006)

and Harford, Mansi, and Maxwell (2005) saw dividend as a mechanism which is adopted by the

weakly governed organizations for reducing the agency costs. However, Michael and Roberts

(2006) is of the view that a constant dividend pay-out is a good governance sign.

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In the context of agency relations, Ullah, Fida and Khan (2012) have been performed a research

in which they have attempted to identify determinants of corporate dividend strategy .Analysis

was based on random sampling of seventy organizations which were listed at KSE-100 for the

period from 2003 to 2010.A step wise multiple regressions was used for investigate the

relationships-among dividend payouts an ownership variables. The empiric results indicated that

the managing stock and dividends payouts had a adverse relationship, and these are therefore the

alternative means to minimize the problem with the organization. The findings indicate that the

more the organizational dividends are distributed, which would lead to the less cash flows

available to managers with fewer possibilities to expropriate the assets of shareholders. The

greater their shareholding, the greater will be their organizational dividends .In addition,

organizational ownership had an eighteen percent explanator-power, while institutional-

ownership had a twenty-three percent explanatory potential.

The survey methodology was adopted by Dhanani (2005) along with data from secondary non-

financial and financial organizations. The study methods included the top 800 London Stock

Exchange-listed companies. The study was selected to assess empirically the relevancy and

importance in UK organizations of dividend theories and to assess how the size and sector

features of the business are influenced by these theories. The findings demonstrate that UK

executives support a relevance theory of dividend; organizations usually reject the remainder of

the investment payout policy .Khan (2006) investigated the ownership-structure of three hundred

and thirty large listed United Kingdom organizations. The results exhibited negative

relationships between ownership-concentration and dividends. She has further researched the

composition of ownership and describes the positive connection between ownership of insurance

companies and dividend policy. Gugler (2003) also looked into these relations between two

53

hundred fourteen Australian non-financial organizations through the OLS technique from 1991

to 1999. He noted that state-owned organizations execute a dividend smoothing, while families

do not. Moreover, state-owned organizations are highly hesitant in reducing dividends and

family-owned organizations are less hesitant .It was also noted that low-cost organizations,

regardless of who control the organization, optimally dispose the money available.

Many studies have tried to give rational explanations for why organizations are distributing the

dividends and why it is liked by investor. Alen and Michaly (2003) summarized the financial

determinant of the dividends payment for the cognitive agents which include signaling to lessen

the asymmetric informations, taxes, institutional investors, incomplete contracts (agency) or

transaction costs. In the signaling theory, managers use dividend as costly signal for their secret

and private information (Bhattacharya, 1979). The tax arguments propose that organizations

ought to reduce the dividends payment due to higher tax burdens on the individuals.

Organizations may pay-out the dividends in order to attract the institutional investors. Since the

legal restrictions are making dividends appealing to the institutional investor, then distributing

the dividends might be a suitable way to encourage such investments. According to the agency

theory, the continuous distributions of cash out of organizations, disciplines the manager an also

reduces the extent of agency cost (Easterbrook, 1984). Finally, the dividends might be an optimal

way for reducing the transactions cost on shareholder for running the fund. For example,

dividend might be important to the shareholder if it’s expensive for them to finance their

consumptions by selling out share.

According to Ramli (2010), the dividend clientele explanations suggest that some of the

investors are preferring dividend over capital gain. This conjecture is premised on the

observations that certain type of investors are prone to invest in the organizations which are

54

paying dividends. But alternatively, life cycle explanations suggest that distributing the

dividends shows the maturity level of an organization’s life. While these theories are only

describing the paying dividends and features of investors who are receiving it but they do not

give much insights into the reasons that why organizations are paying dividends and why

investors are inclines to them. The Dividend has been deemed to be the reward for shareholders

for their contributions in raising funds for an organization and for bearing the risks. In this sense,

the management of organizations formulates a dividend policy for dividing and distributing the

earnings among share-holders for their investment. The dividends policy of an organization has a

crucial impact on the value of an organization because it needs to sustain a state of equilibrium

between an organization’s growth policy and dividend payout policy. A small mistake could lead

to shareholder’s dissatisfaction as well as could shake the growth of an organization.

Ben-David (2010) added that different behavioral theories are considering managerial biases,

investor’s biases and market inefficiency (investor sentiments) as the key determinants of why

organizations are paying dividends. The catering theory of dividend proposes that organizations

are initiating dividends when investors start valuing the organizations which are paying

dividends more highly. The mental accounting , self-control and bird in hand theories are

motivating dividend payments by stating that investor favors dividend because of the behavioral

biases ,for example, narrow framing, regret avoidance and lack of understanding. There are also

some varied empirical evidences regarding the links between dividend payouts and managerial

biases. Some studies found that overconfident or optimistic managers are less prone towards

payment of dividend while others stated that managers would commit to pay the dividends based

on the private signal. Finally, there are two theories which are suggesting that dividends are the

results of social processes in population of organization and investor .One theory states that

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among the populations of mature organizations the payment of dividend becomes a social norms.

The second suggests that albeit the dividends payment don’t convey any information about the

future, investors are putting pressures on organizations for the payment of dividends because it is

traditionally use as valuation tools. Albeit behavioral finance might explain’ many aspect of the

dividend-payments but the question of why organizations are paying dividends remain open. The

reviews of literatures favor a strong support for the life cycle theory because many authors favors

that mature organizations with stable cash-flows are trying to distribute dividends. However, this

theory doesn’t explain that why mature organizations are choosing to distribute the dividends

and not go for repurchasing its shares.

There are different theories regarding the dividends which are as follows.

The first one is clientele theory which suggests investors are prone towards dividends payments

due to different reasons because of institutional features, for example, tax differentials,

regulatory requirements or from behavioral choices. Shefrin and Thaler (1988) stated that

investors personnel lifecycle consideration determine the likening for dividend. Older investors

are favoring the dividend paying stocks because it substitutes for regular employment incomes.

The second theory which relates the dividend payouts to an organization is life cycle. Different

studies observed that organizations that pay dividends are trying to be less volatile and more

mature. According to Grullon and Swaminathan (2002), organizations that decreases (increases)

dividends experience a future increase (decline) in their profitability. According to them,

organizations that exhaust their investments opportunity increase the dividends and thus

dividends shows organization’s maturity rather than signaling the future profitability.

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There are some other theories which are premised on investors psychological biases for

explaining that why investors are prone towards dividends.

The first is Bird in Hand theory, which suggests investors need wealth to consume and have a

cash dividend preference over capital gain. Lintner (1962) and Gordon (1959) first formally put

it forward, but Miler and Modigliani (1961) challenged it theoretically. The seminal paper by

Miler and Modigliani shows that dividends and capitals are alternatives to each other. Investors

can also make dividends from their home by selling the shares if they want to.

The second theory is self Control theory. According to Shefrin and Statman (1984) and Thaler

and Shefrin (1981) who suggested investors are inclined towards dividends for controlling their

selves. Without dividend, the investors might be tempted to sell the stocks’ and use the profits

from the stocks for consumptions and they may sell more stocks than they basically intended. It

explains that dividend is helping the investors to speed consumptions and avoids later regrets

upon over consumptions. Black (1990) supports the observation that investor are prone towards

dividend because they like the scheme of readily-available wealth which try to control them from

consumption out of their capitals.

Mental Accounting is the third theory related to the dividend. Shefrin and Statman, (1984) have

suggested they investor might favor dividend as they may obtain less value from the one large

gains then from a series of little gain (for example, low capital gains and dividends). The

premised its arguments on the prospects theory (Kahnema& Tverky. 1979). According to theory,

public are evaluating income in isolations of their overall wealth, and their utility functions are

concave in the vicinity of gain and are convex in the vicinity of loss. Therefore, when big gains

are divided in o many smalls gain provide lot happiness to the investor and boosts investor’s

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demand for the dividends. To exhibit the process, assume an organization gains ten percents over

a year. Barberi and Thaler (2003) also provided an example of this idea. If investor has prospect

theory preference, then he/she will derive more utility from this gain if it is divided, for

examples, to a capital gain of seven percent and a dividend of three percent. The same will apply

for the losses. For a person with the prospect theory preference, a loss of ten percent might hurt

less if it is distributed into a three percent gain (dividend) and a thirteen percent loss.

Bouwman (2014) used the same proxy for the optimism and presented evidence consistent with

hypothesis that bigger dividends are distributed by executives who are hopeful about their future

income. She exposed that the markets react move heavily to dividends modifications announced

by optimistic executives when controlling for the income surprises and for the dividends change.

This evidence is in line with the hypotheses that their private signals about their organizations '

future profitability is overestimated by the optimistic director .But in one more study of the

managerial over-confident, Ben-Davids, Graham and Harvey (2013) found no evidence that

over-confident chief financial officer (CFOs) are less prone to pay the dividends. The study

found that managers who are highly confident about their forecast, also implements aggressive

corporate policies which include high leverage and high investment. Deshmukh et al. (2013)

controlled for the selection in announcement of dividends change and found that the markets’.

reaction to the dividends increases by the optimistic Chief Executive Officers are less positive as

compared to the response to the announcement by the less optimistic Chief Executive Officers.

Dividends pay-out by the biased managers could be selfregulating in a senses, if dividend is

enough high due to the optimisms regarding futures earning, than lower than predictable

realization of futures earning may forces prejudiced manager to decrease their dividend.

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Green et al. (1993) probed the relationships between future earnings of investments, financing

decision and dividends. Their findings exhibited that dividend’s pay-outs level is not completely

decided after an organization’s financing an investment decisions are made. Dividend’ decisions

are gotten along-with financing and investment decision. Their result did not favor the findings

of Miler and Modigliani (1961). Partington, (1983) carried out a study where he found that

organization’s use of target pay-out ratio, organizations motive for paying the dividend and the

extents to which the divided are calculated, are independents of the investment’s policy.

Higgen(1981) exposed directs links among financing and growth need. Fast emerging

organizations needs externals funding .as the working capitals need generally go beyond

incremental cashflow form news sale. Higgens (1972) showed pay-out ratio are negatively co-

related to an organization’s requirements for financing its growth-opportunities. Colins et. al.

(1996), showed negatives but not insignificant relationships among dividends pay-out an

historical sales growth. DSouza (1999), nevertheless, showed positives but not significantly

relation in the case of growths and a negative but not significant relation in the case of market to

book value. Alwi (2009) investigated empirically the effect of dividend as an inner

organizational system which affects the performances of organization. Two hundred

organizations listed at the Indonesian Stocks exchanges overid the periods 2000 to 2006 were

examined by him. It was examined that in period of higher organizational costs which are, when

cash flows are increasing and there is no investment opportunity, dividends declaration are

welcomed by shareholders. Therefore, dividend acts as important governance mechanisms for

reducing agency costs between minority shareholders and majority shareholders within a low or

high concentrated ownership structures which increases the performance of an organization.

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Kouki and Guizani(2009) carried out a study on Tunisian organization having concentrated

ownership argued that concentrate-ownerships firms distributes more-dividend and showed a

positives relationship among dividends and concentrate ownerships. Ramli (2010) empirically

revealed in studying the Malaysian listed organization at stock exchange where the ownership

structures are more concentrated and as the shares of large share-holder increases, the

organizations pay high dividends because block holders have greater control over the dividend

pay-out policy. According to the study conducted by La Porta et al.,(2000), control share-holders

can efficiently affects the decisions of organizations. Carvahal-da-Selva and Leel (2004) find out

when owner structures are concentrated, there shareholders bourn less risk from diversification.

Some other studies also exhibited negative relationships among dividends policy and

concentrated institutionals ownerships. Gurgler and (2003) investigated that companies with big

owner concentrations are trying to pay less dividend. The presences of huge concentrated

shareholders have an adverse effect on dividend payment and Maury and Pajuste (2002) claim,

that relation among dividends payouts & controlling blockholders is not positive .Renneboog and

Trojanowski (2007) revealed that the presence of strong blockholders or concentrations of large

shareholders weakens the relation between dividend payouts and earnings of organization.

Earnings of a company can be used for measuring firm’s performance (Ouma, 2012).Linter

(1956) argued that the significant determine of dividend-change is net earnings while De-Angelo

al. (1992) said that the present incomes is the serious determinant of dividends decisions. That is

why management is hesitant in decreasing divided payment except in periods in which earning is

reduced (Myers & Franks, 2008). Tradeoff theory along with pecking-order theory was

simultaneously checked by Fama, and French (2002).It was established that dividend payouts of

organizations (profitable) are high while dividend payouts are low when firms have more

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investments. According to Arnott & Asness (2003) growth of future earnings are high of high

dividend payouts firms as compare to low dividend payouts firms. They concluded that it is

evident from the past that future earnings growth and dividend payout have a positive

relationship and vice versa.

According to Lang and Litzenberger (1989) the value of a firm can be determined through free

cash flow and signaling theory when there is growth opportunity and when there is not .The

asymmetric information between shareholders and management is premised on the Signaling

theory (Amihud and Murgia, 1997).According to DeAngelo et al. (2000) dividend payment gives

a signals to shareholders that the firm has growth opportunities which shows that the

organization has positive net present value projects. So, therefore a positive relationship is

expected between dividend and firm’s value. But according to Iturriaga and Crisóstomo (2010)

when an organization has growth opportunities and at the same time the firm is distributing

dividends as well, would harm the investment projects. Due to which how the payment of

dividends will increase the value of firm when there are investment opportunities. So, the

positives relationship between a firm’s value and dividend is uncertain when there is growth-

opportunity. Free-cash flow theory states that a firm can mitigates fund under the discretionary

control of managers through paying high dividend. Therefore, according to Iturriaga and

Crisóstomo (2010) when a firm distribute its dividends where there is no or few growth

opportunities then it can reduce the misuse of firm’s scarce resources. They further added that in

such cases the value of firm should to be increased. So, therefore a positive relationship is

expected between dividend and firm’s value when there are poorest growth opportunities.

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H0: There exists no relationship between dividend pay-out and firm’s value conditioned to

growth opportunities?

H2: The relationship between a firm’s value and dividends is uncertain when there are growth

opportunities. But paying dividend has a positive impact on value of an organization when an

organization has few or no growth opportunity.

2.4 Family ownership and growth opportunities

Berle and Means (1932) discussed the connection between the composition of ownership and the

value of the company for the first time. Berle and Means (1932) stated that ―It has been assumed

that, if the individual is protected in the right both to use his property as he sees fit and to receive

the full fruits of its use, his desire for personal gain, for profits, can be relied upon as an effective

incentive to his efficient use of any industrial property he may possess. In the quasi-public

corporation, such an assumption no longer holds. As we have seen, it is no longer the individual

himself who uses his wealth. Those in control of that wealth and therefore in a position to secure

industrial efficiency and produce profits, are no longer, as owners, entitled to the bulk of such

profits. Those who control the destinies of the typical modern corporation own so insignificant a

fraction of the company’s stock that the returns from running the corporation profitably accrue to

them in only a minor degree. The stockholders, on the other hand, to whom the profits of the

corporation go, cannot be motivated by those profits to a more efficient use of the property, since

they have surrendered all dispositions of it to those in control of the enterprise‖ (see Abbas et al.,

2013).

Demsetz and Lehn (1985) challenged the argument of Berle and Mean. They enumerated that

there is no relationships between ownerships structures and accounting profits. From their results

no evidence was found between ownership and control separation. Hill and Snell (1989)

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conducted a study which was meant to expose effect of ownerships structures on productivity of

an organization. The results revealed that a firm’s stance towards diversification and investment

strategy are influenced through ownership structures which results on productivity of firm. Their

study was different from the previous studies as they have taken productivity into account

instead of profitability. They said that productivity is less perplexed measure of efficiency as

compare to profitability.

Hasan and But (2009) attempted to expose the relationships among capital structure, corporate

governance and ownerships .They selected 58 organizations which were non finance and were

listed on KSE for the periods 2002-2005.The results revealed that capital structure can be

determined in terms of board size of director, ownership structure and managerial holdings.

Another research carried out on organizations which were in non-financial and listed on the KSE

from 2008-2010 periods by Shah et al. (2012).In this research ownerships composition was

presented in terms of Concentrated Ownerships and Managerial ownerships. Tobin’s Q was use

for performance of organization. The results showed a significant negative relationships between

firm performance and Managerial Ownership, while an insignificant relation was established

between organizational performances and Ownerships Concentration. It also added that in

Pakistani context the agency problem raises due to high managerial shareholdings. Due to which

the performance of organization is affected.

Abbas et al. (2013) explored relationships between ownerships structure and organizational value

in terms large shareholdings. They measured the firm performance in term off ROE and ROA

.The outcomes indicated significant-positive relationships between both value of organization

and large shareholdings that shows that organizational performances are influenced through large

shareholders .According to Kuzntsov and Muravyev (2001), concentrated-ownership becomes a

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cost when large-shareholders are in a position to influence the decisions which result in

maximization of their own benefits and deprive minority shareholders of their deserved income.

Decrease in growth opportunities and low market liquidity due to higher costs of capital are

some bad consequences of concentrated ownership (Fama and Jensen, 1983).Ownership

concentration is high in countries where companies are publically traded (Facio & Lang

,2002).The study conducted by Cheema et al.(2003) in Pakistan and Yeh (2003) in Taiwan

founded firm’s shares are mostly in the hand of largest shareholders.

Based on Berle and Mean’s claim, Hassen (2008) suggested that if corporate officers are

involved in promoting their self interest at expense of equity holders then there is a remedy to it.

He suggested that shareholders encouragement for active participation is the key to its remedy.

This active participation would rise in the form of nominating and electing the directors through

indulgence in the selection process of officers who runs the reign of the company. But on the

other hand Jensen and Mecklling (1976) argued that these agencies problem could be mitigate

through making managers shareholder as well. Through this the interests of both manager and

shareholder will align. They further added that separation of control and ownership is not a good

choice because of monitoring cost which reduces the value of a firm and may cause managers to

involve in activities which are detrimental to firm’s performance. However, maintain separation

between ownership and control are in greatest interests of organization’s value as this brings

efficiency regarding decision making and risk bearing function. Due to this dispersed ownership

is better because the gains from efficiency are greater than agency costs Fama & Jensen

1983).According to Feinberg (1975) organizations where control and ownership are combined in

that case there are chances that they may made an exchange of profits and other benefits where

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they prefer other benefits over profits for example on jobs no financial consumptions (Demsetez,

1983) and preferring current consumptions over future consumptions(Fama and Jensen, 1985).

According to Javid and Iqbal (2008) corporate assets can be used by managers for their own

benefits in place of maximize the assets of shareholder when ownership is too diffused. So,

therefore the remedy of this problem lies in making managers shareholders as well (Jensen and

Meckling, 1976). Due to this, its moral hazard problem will be resolved and interest of both

managers and shareholders will be aligned (Himelberg et., al. 1999).Stalz (1988) argued that

higher managers ownerships can also decrease the value of a firm. Stulz findings were also

supported by Hermallin and Weisbch (1991) and Morcks et al. (1988) by arguingthey low

management ownership leads to a high value of companies, and a decrease in company value is

caused when management ownership increases.

But the Stewardship theory states that family firms which are closely held and outside

representation or influence is also less might exhibit focus on non financial objectives and

organizational serving culture. Family firms for ensuring its firm control over firm may make

hard control and ownership stakes for outside members (Nyman & Silbert- son, 1978).Similarly

shares will also be limited to those kinship members whose interests are similar with the family

agendas and they are not only interested in the financial performance (Howorth

&Westhead,2006).The autonomy of controlling shareholders and private dealings of shares are

the detrimental features of the family firms (La Porta et al., 1999) which had bad effect on the

performances of organization which may ultimately retard the performance of family firms.

Agency problem is created due to honest incompetence because of restricting the pool of

shareholders ( Chrisman, Chua, & Litz, 2004).Nevertheless, survival and development of the

business are key factors which compels the family firms to offer ordinary shares to outsiders

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e.g. informal investors and financial institution but these share are not offered from the

controlling family-group who owns the businesses (Meshra and McConaghy, 1999).

According to Westhead and Howorth (2006), the directions of firm in multigenerational family

firms are shaped by family owners. It is because of shifting the business’s ownership to the

subsequently kinship generations that is the prime objective of family owners (Chrisman, Chu,

and Sharma. 2003).They further added that the same organizational serving-culture and focus on

no financial-objectives might be shown by the multi generation family firms which may have

less entrepreneurial skills as compared to first generation due to which firm performance will be

badly affected .According to Hendry (2002),in family firms it’s very difficult for outsiders to

have an access to the key managerial positions for example to the post of Chief Executive

Officer or membership in management or board. Positions in management and board size may

only be increased if the family firms want to provide employment-opportunities to members of

dominant-kinship groups who owns majorities share. The family members may lack the quality

and experience of managerial skills which are required by a growing, competitive and complex

firm (Casson, 1982).He further added that these obstacles may be fulfilled by investing-in

training in order to widen the competencies end skills of the family-members. Similarly, it’s also

suitable for family organizations which lack the required managerial skills to hire non-family

professional managers for securing organizational development. Outside professionals may

enhance firm performance by proving expert opinions and specialist skills which the family firm

may not posses.

According to Dyer (2006), when owners and directors are siblings, the costs of the organization

is decreased in family relationships. For instance, owners that might have their siblings, children,

sisters and any other close relatives functioning as the agents need not bear the costs of

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monitoring their agents while owners of non-family companies have to incur costs to monitor

their agents .Similarly ,in family-owned organizations, the top management team is more

cohesive comparable with no family organization while families organizations has strong

confidence, common objectives and shared values(Ensley & Pearson,2005 ).McConaughy (2000)

conducted a study regarding CEOs family-owned organizations and no family organizations,

and compared their compensation. He concluded that family owned firms have to pay high to

non family CEOs in order to get what families CEOs would do. Gomez- Mejia, Makri and

Larraza-Kintana (2003) also confirmed the same results where professional CEOs were paid

significantly high as compared to family CEOs. Families are controlling their related mangers

through normative-controls (shared values) which will in turn cause fewer-costs than outside

managers who are controlled through high financial incentives in order to get comparable

performance (Dyer, 2006).It is cleared from the aforementioned studies that in family controlled

firms the agency costs are reduced which enhance the performances of an organization.

Albeit there are perceptions that family firms have reduced organizational cost because

alignment of goals of manager and owners but still there are other perspectives which highlight

those family firms are breeding grounds for conflicts (Kaye, 1991; Lansberg, 1999).There may

be competing values and goals in family owned firms which may arise from family dynamics

and complex conflicts due to families psycho-social history (Dyer&Hilburt- Davis, 2003).For

example, the differences in views and perspectives regarding roles and responsibilities, risk and

compensation and similarly distribution of ownership within a family compel members of the

family to compete with one another and may make the organization a battle ground. When

ownership of family owned firms is dispersed then it creates a wedge; connecting the interest of

controlling family-members who leads a family and other family-members (Schulzi,Lubatkiin &

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Deno 2003).All the member of families are not equally contributing to performance of the firms.

Some are contributing a lot while others are free riders and some are fighting for their own

interest. Due to this fact family firms may have significant agency costs.

Another factor which may be accounts for high agency cost is Altruism which makes

accountability and monitoring of family members difficult who works in the family owned

organizations. According to Schulze, Dino, Lubatkin and Buchholtz (2001), such altruism leads a

firm to poor performance. They studied 1376 firms and noted down that firms which have a

formal governance system against altruism perform better than those firms which are without

such formal system. In another study Gomez- Mejia et al. (2001) studied Spanish family

organizations and found that Spanish firms shows hesitation to fire out family CEO as compared

to non family CEO. But when family CEOs were replaced by outside CEOs the firms performed

better that those firms which had family owned CEOs. It was due to the reason that family

owners due to altruism were unable to discipline and monitor family owned CEOs .It causes

family firms to wait too long to make a change in the leadership until the firm performance fall

badly. As compared to family owned firms, a nonfamily firm feels no hesitation in monitoring of

CEOs and replaces them whenever the performance of the firm deemed unacceptable.

Resource based view also criticize the family firms performance (Sirmon & Hitt, 2003).It is

suggested by resources base viewed that firm’s asset are non-substitutable, inimitable, rare and

valuable which can help in the creation of competitive advantages (Barney, 1991).According to

Dyer (2006), the question arises that are families able to bring unique assets to the firms with

these assets which will help in the creation of competitive advantage? He further described three

types of assets or capitals which are linked with family firm’s performance. The first one is

human capital. The second one is social capital and the last one is physical/financial capital.

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There are some arguments which supports that family can bring competitive advantage with

these capitals while other arguments opposes and are of the observation that families

organizations are unable to bring competitive advantage with these assets. Due the the small

team of skill full employees the families firms might not be talented for handling process

efficiently and effectively until and unless recruits professionals from outside the family. But

hiring outsiders for performing the key operations of the family business would be very difficult

for family firms because they are reluctant to the integration of outside managers (

Dyer,1989).But if the nepotism prevails in the family organization the family firms may place

family members on the key positions which will affect the performance of the firm badly. Thus

family relations would stop family members to hire best professionals managers in order to run

the organization effectively which shows a competitive disadvantage on the part of human

capital in family firms.

Kim, Kim and Lee (2008) conducted a study regarding allocation of slack resources due to which

principal –principal conflict may arise because of difference in preferences. They stated that in

the presences of slack resources in the organization the agency theory is most pronounced which

can be used for different kind of purports without affecting survival of the firm. Agency theorists

argued that it’s a source of agency problem which inhibits risk taking by the organization, breeds

inefficiencies and hurts performance of the organization (Jensen, 1989).On the other side

organizational slacks may inhibit managers of the organization from risky strategic initiatives by

promoting their own private agendas at the cost of organization (Cyert and March 1963). In fact

organizational resources provides organizations with a safety net and it can be used to explore

new opportunities and new solutions which leads to greater risk taking and investments in

Research and Developments(Greve,2003).

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The study conducted by Kim, Kim and Lee (2008) was intended to examine the moderating

impact of different types of owner on the relationship between Research and Development

investments and financial slacks. The scope and boundaries of agency theory was extended by

them through including the interest of different principals. Because different shareholders have

different interests regarding Research and Development investments (Kochhar and David

1996).Therefore, organizational slacks affects Research and Development investments

differently because of its dependence on the type of investor. For example outside investors may

have different interests than family owned investors. The conflict of interest because of

principal-principal preference may result in different level of Research and Development

investments. According to Dharwadkar et al. (2000),the organizations in the emerging economies

are more inclined to principal-principal goals incongruence due to this conflict of interest

difference arise in the performance of organizations. Therefore the same also applies for the

allocation of slack resources due to the differences in views.

Choia, Zahrab, Yoshikawac and Han (2015) conducted a study for examining that whether the

impact of family’s ownership on Research and Development investments varies depending on

business group membership and growth opportunities. They used data from Korean companies

for ten years from 1998 -2007.It revealed that, there is a negatives relations between Research d

Development investments and family ownership but this relationship became positive when

growth opportunities were present. However, the moderating effect was different between family

business groups and independent family organizations. The positive influence that growth

opportunity had on promoting Research and Development investment was diminished for

affiliate of family business group. The findings implied that family owner invests more in

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Research and &Developments when family control goals are threatened by loss of growth

potential.

Julio-de -Castro, Berrone, Cruzand Luis (2017) compared the performances of non family and

family and family organizations along with its market-value. They enumerated that family-

owned organizations outperforms the nonfamily owned organizations. Their study provide an

interesting result that family ownership positively impact organizational value but when

concentrations of family-ownership raises above a specific levels then decrease in organizational

value get started. This is because of expropriation of minority shareholders. Moreover, it was

also observed that albeit higher concentration of ownership negatively impacts organizations, but

still performances of family companies was superior to the nonfamily organizations. Maury and

Pajuste (2005) carried out a study on Western Europe non financial organizations which include

a sample of 1672 organizations in order to find out that whether controlled firms and families

own organizations outperform the no-families controlling shareholders. It revealed the families

organizations have high performances as compare to other type of owners controlled

organizations. Value of Tobin’s show that when organizations are under family-control then the

values of firms raised by about seven percent in comparison to non-family organizations. When

Return on Assets was looked then family owned organizations has about sixteen percent higher-

profitability as compatible to the non-family organizations.

In order to develop the optimal concentration of families, Feng-Li and Tsangyo (2010)

conducted a study. Among eighteen Taiwan sectors, they researched 242 organizations. Between

1997 and 2006, these organizations were listed. To achieve the optimal levels of family

concentrations where the company's value would be greatest, a threshold regression test was

conducted .The firm-value as determined through Tobin s Q. Three levels of ownership

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concentration were determined for the relationships value firm. The level was .07 percent, 31.7

percent and 33.6 percent. The findings stated that the value of Tobin Q reduces by 257.7 percent

at the stage when ownership concentrations are below 0.07 percent.

A study carried out by Murtaza et al. (2020) focuses on determining the role of concentration of

ownership of Pakistani firms in the chemical sector. The finding shows that both concentration

of ownerships and firms value are positively correlated .Shah, Xiao and Quresh (2019) are of

the view that the structure of ownership is an important element and plays an important role in

corporate growth and performance. Hans and Nuaghton (2001) carried out a research on Korean

organization through classifying family-ownership into three categories which were pure-family

ownerships, owner- control disparity an family-ownerships. Data of 3054 organizations were

used which were ranging from the year 2000 to 2005. They discovered that family (pure) and

family ownership improved the company's efficiency and values, while owner control disparities

did not have insignificant effects on the organizational value and efficiency. Gursoy and

Aydogan (2002) investigated Turkish organizations where family’s organizations are highly

concentrated. The results depicted that higher family’s ownership concentration is associated

with higher P/E ratio; but accounting performance is lower. The family ownership in comparison

to group owned organizations had lower P/E ratio and therefore risk a lower performance. Where

is the government-owned organizations had high risks an high market’ performances, but had

low accounting-income.

It was stated by Kohli (2018) that executive remunerations are affected by the type of

ownerships which has an indirect impact over the value of an organization (Shingade and

Rastogi,2019). Similarly the a relationship between top management compensation and

ownership structure was studied by Saravanan et.al. (2017).For examining association between

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founding family ownerships and organizational performance, Anderson and Reeb (2003)

analyzed the big publicly-traded United States organizations. It confirmed that family

organizations performed all most the same like non family organizations. They incorporated both

Tobin-Q, ROA as performances measure. Results of Returns-on-Asset’s regressions showed

family-organizations were significantly most profitable as compare to t nonfamily organizations.

Overall, the results were contrary to the assumptions that shareholders (minority) are adversely

impacted by the ownership of the founding families. The results have also shown that family

ownerships are efficient and effective type of an organization.

Zulfiqar et al.(2019) analyzed the relationship between structure of ownership and financial

performance of firms .Three variables were incorporated by the study which were the type of

firms type of family firms and ownership concentration .It was depicted by the results that non

family firms performed better than family organizations .According to Hasan and Butt (2009),

conflicts among shareholders (minority and controlling) are the heart of literature of corporate

governances. Corporate governance works as a shield in protecting the minority-shareholders

from expropriations by manager or the rulings shareholder (Javid & Iqbal,2010). Corporate

governance, according to Javed and Iqball (2010), deals the relationships among controlling

shareholders, boards of director, management, minority shareholder and others type of stake-

holders. The East-Asian economic downfall attracted grave consideration to the significance of

corporate governance in the emerging countries. Code of Corporate Governance which was

issued by SECP on the year 2002 for strengthening the regulatory-mechanism and also it’s

enforcements. The introduction of this code was a most important work in reforms of corporate

governance in Pakistan. It takes into account many recommendations which are similar with

world top practice. Main fields of enforcement concern board-of-director reforms in order to

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hold them to all shareholders responsible. The second main area of enforcement include the

better disclosure which include improved and quality internal and external audits for the

organizations which are listed at the Pakistan stocks exchange.

Cheema, Bari and Siddique (2003) examined the concentrated control in Pakistan and added that

it is the defining feature of corporate governance in Pakistan which has some repercussions on

the development of capital market and corporate sector .The first consequence is the opaquenes

in usage of public-money, which can cause excessive privates benefits seeking. The second

consequence of concentrated control is about the trade of shares. Family controllers are very

restrictive regarding offering the company shares because of increasing cost of takeover and

protection of family control in order to not lose the company control. The third consequence is

about the declaration of dividends. Family controllers are reluctant to declare dividend and

prefers to reallocates those earnings in order to obtain personnel benefit. The fourth consequence

of concentrated control is that family based controllers try to oppose reforms because it dilutes

their control and increase disclosure requirements which affect ownership structure.

Ni,Huang ,Cheng and Huang (2020) explored the impact of role of relatives hiring by the owners

and its effects upon the value of an organization. The results depicted that there must be a

balance between board and structure of ownerships for improving the the value of an

organization. Ownership structure is one of the different mechanisms through which a firm is

affected (Jensen, 2000).In literature ownership structure has studied from three dimensions

which include ownerships concentrations (Demsitz and Lehm, 1985) ,owners identity (Pederson

& Thomson, 1997) and insider ownership (McConnell and Servaes, 1990).According to Francis

et al. (2005) and Miller et al.( 2007) when companies where concentrated ownership is high,

agency-theory suggested that there resources of companies are used by the managers f personnel

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benefits at cost of minority shareholder. Therefore, controlling shareholder who has majority of

shares will use their voting power for getting greater incentives for themselves (Arosa et al.2010)

and in case of family owned firms this situation can cause high exacerbation because these

benefits then remain with controlling family where as these benefits are distributed among many

shareholders (Villalonga and Amit, 2006).So in this way family controlling-shareholder can

simply approve their benefit and do exploitation o minority shareholders by considering the

enterprise as private band or family employment service and also by assigning family members

the top management positions or by approving large dividend payouts (Shlifer & Vishny, 1997;

Demsetz, 1983).In such cases agency cost rise in the form of dividend and other extra perks or

family management team’s entrenchment (Arosa et al.2010 ).Due to this entrenchment

controlling family shareholders start expropriation which harm the rights of minority

shareholders and firm’s profitability (Francis et al., 2005).

La-Porte et al. (1999) argued that conflicts among shareholders (minority and majority) are

because of concentration of ownership. When companies are effectively controlled by block

holders then they start framing policies which result in exploitation of shareholders (minority)

(Shlefer and Vishney, 1997). Such blockholders gain remuneration at the expenses of minority

shareholder ( Claessens et al., 1999).So, from this we come to know that when there is least

concentrated ownership it results in positive relationship between organization’s value and

concentrated ownership due to monitoring hypothesis( Arosa et al.,2010 ).She further added that

the relationship between organizational performance and concentrated ownership become

negative when there is concentrated ownership due to expropriation hypothesis.

There is amalgamation of results regarding the impact of concentrated ownership on

organization’s value. Some studies (King and Santor, 2007) support a positive relationships

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between concentrated ownerships and organization value while others (Shliefer and Vishny,

1986) reveals a negative relations between ownerships concentration and firm’s performance.

According to King and Santor (2007) increased ownership by blockholders or insiders causes an

increase in organizational performance due to three reasons. First, when insiders have large

shares in the company then it leads to better performance because through it the monetary

incentives of shareholders and managers are aligned. Due to which ,according to Jensen and

Mecklling, 1976, Principal-agent conflict vanishes because mangers are now also majority

shareholders .Second, when controlling shareholders ,according to Shlefer and Vishney (1986),

are not indulge in the affairs of management, they are still capable of controlling and monitoring

the managers which again leads to better firm performance. The third reason of positive

relationship between organization’s performance and concentrated-ownership is that family

owned companies have a foresight and long term intensions instead of short-term intensions

regarding the investments due to which they may make good investment decisions (James,

1999).

On the other hand Ownership concentration can have a negative impact on the value of a firm.

Block holders may engage in operations that boost their own profits which is detrimental to the

value of firm like consumption of perquisites (Morck et al. 2005).For example family owned

controlling shareholders may compensate themselves excessively or they may appoint their

family member on top management position instead of an external better qualified person(king

and senator, 2007).According to Morck et al. (2005) family owned controlling shareholders may

forego profitable mergers and expansions strategies due to excessive risk aversion. Therefore, an

effective board in family firms is required which potentially includes both independent directors

and family directors (Anderson et al., 2003). He further added that Excessive family

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representation on the board relative to Independent directors increases the likelihood of the

family expropriating wealth. Too little family-representation relative to independent-directors

potentially reduces managerial monitoring and hinders the board's effectiveness. Thus, family

board representation moderated by the influence of Independent-directors can provide benefits to

the firm. Family board representation that goes unchecked, however, increases conflicts between

family shareholders and outside shareholders over the distribution of firm wealth (Anderson et

al., 2003). According to Abbas et al. (2013) firm performance is significantly and positively

affected by large shareholders but the direction of this relationship reverses when block holding

exceeds fifty percents. The rationale behind this may be extractions of private benefits by block

holders for themselves. Therefore, we theorize a curvilinear relation (an inverted U shape)

between family ownership and firm’s value. At low levels of family concentration, we anticipate

a positive effect on firm performance. As family concentration continues to increase, we expect

to observe a negative effect on firm performance. According to Iturriaga and Crisóstomo (2010),

the expropriation of minority shareholders by dominant shareholders is more. So, we can expect

that chances of minority shareholders expropriation by family firms (Javid and Iqbal, 2008)

would be more in case of few or no growth opportunities because of free cash flows.

H0: There exists no relationship between family ownership concentration and firm’s value?

H3: There is a non-linear relationship between a firm’s value and family ownership

concentration. This relationship is positive initially and becomes negative when there is few or

no growth opportunity.

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CHAPTER # 3

RESEARCH METHODOLOGY

3.1 Chapter Introduction

This chapter is about the methodology of the study which shows the criteria of sample selection

from a given population. Data sources along with nature of firms are also mentioned. It includes

the time period as well for which the data has been collected. Furthermore, the Empirical Model

is given which shows the dependent, independent and control variables of the study. How these

variables are Operational zed, also comes under the umbrella of this chapter. This chapter also

exhibits the moderating role of growth opportunity e.g. how growth opportunity moderate the

relationships between leverage, dividend Payout, Family Ownership and Firm’s Value. It also

shows that why growth opportunity has been measured through a different way. Similarly, the

data nature of this study is panel so; a brief insight about panel data has also been explained. It

also shows the assumptions of Pooled OLS Regression and why pooled OLS regression has not

used for the interpretation of results. The Hausman Test has also run in order to show that

whether to use Random Effect Model or Fixed Effect Model .Additionally, Conceptual

Framework of the study has also been provided which shows that how growth opportunity works

as a moderator and moderates the relationship between explanatory variables and dependent

variable.

3.2 Empirical Model

The empirical model of this study is as follows.

SMBA=α+β1 (leverage)+β2(dividend payout)+β3(family ownership concentration)+β4(family

ownership concentration square)+β5(leverage) *Growth opportunities+β6(dividend

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payout)*Growth opportunities +β7(family ownership concentration)*Growth

opportunities+β8(family ownership concentration sqaure)*Growth opportunities +β9(Control

Variables)+μ

3.3 Panel Regression Model

SMBAit= β0+β1(LEVE) it+ β2 (DPR) it + β3 (FOC) it+ β4 (FOCS) ²

it +β5(LEVE) it*GOit+ β6 (DPR)

it*GOit+ β7(FOC) it*GOit+ β8(FOCS) ²

it*GOit+β9 (OCVS)it+ ηi + ηt+ εit

3.3.1 Model Specification

According to Allen (1997), Model specification refers to the determinations of which

independent variables need be included in the model or excluded from the regression equation.

The specification of regression models need to be premised primarily on theoretical

considerations instead of empirical or methodological ones. In the current study a multiple

regression model has been applied that show causal relationships between dependent variable

and independent variables. Specifications of the aforementioned model are as follows.

β0 = Intercept term

β = coefficient of independent variable

SMBA= Sectorial market to book asset ratio

LEVE = Leverage

DPR = Dividend Pay-out Ratio

FOC = Family Ownership Concentration

(FOC) ² =Square of Family Ownership Concentration

OCVS = Other Control Variables (Firm size, Profitability)

ηᵢ = Firms fixed -effect

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ηt =Time effect

ε = Error term

iis used for firm and t is used for time.

Panel data methodology has been used through which we can control unobservable heterogeneity

and fixed effects for firm’s characteristics that remain constant over period of time(Arellano

2003) which is denoted by fixed effect term, ηᵢ,. This fixed effect term is unobservable and

becomes the part of random component in the estimated model. The current study also controls

the effects of macroeconomics variables through the time effect. The random error term is for

controlling both the errors in the measurement of the variables and also the omissions of various

relevant explanatory variables.

Leverage, family ownership or dividends could be affected through the value of an organization

so for that purpose it becomes endogenous variables as enumerated by Demsetz and Villalonga

(2001).So in order to control for the potential endogeneity, in this study Generalized Method of

Moment (GMM) has been applied. The Generalized Method of Moments gives an efficient

estimation through controlling for both the endogeneity and unobservable heterogeneity

(Blundell and Bond 1998). The validity of the Generalized Method of Moments (GMM)

estimation depends on two conditions basically: one is the validity of variables which are used as

instruments, and the second is the lack of second order serial correlations among the residuals.

Therefore, this study incorporates the Sargan test which is a statistical test carried out for the

testing of over-identifying restrictions in the statistical model and the Arellano–Bond test for the

second-order Correlations. Furthermore, as noted by Barajas, Chami and Yousefi (2013), a rule

of thumb for avoiding the over-identification of the instruments is that, the number of

instruments be less than or equal to number of the groups in the regression.

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3.4 Research Design

3.4.1 Data and Sample Selection

The population size of the current study comprise of non financial firms which are listed at

Pakistan Stock Exchange. The total numbers of non-financial firms listed at Pakistan Stock

Exchange are 378 as per State Bank of Pakistan financial statement analysis report 2016.

Financial firms and firms with missing information during the study period are not the part of the

study (Gugler, 2001).The reason of not including financial firms like banks, insurance firms,

leasing companies etc is their different accounting standards (Khan, Kaleem and Nazir,2012).

Only those organizations are the part of final sample which fulfills the following criterion.

Firms must be remained in business for the whole study period.

Those firms that remained listed from 2005 to 2016.

Should not have merged due to any reason because then it will not capture the real

purpose of the study of the firms under consideration.

The firms that have leverage in their capital structure in the study period.

Family firms (defined in the introduction part) are included because there are chances of

expropriation of minority shareholders.

Those firms which market capitalization are above the average on Pakistan Stock

Exchange.

On the basis of the above mentioned criteria, this study employs annual panel data of a sample of

93 firms which are listed at Pakistan stock exchange during the year 2016.The numbers of firms

without growth opportunity are 65 while firms with growth opportunity are 28.The sample

consists of twelve sectors which include Textile ,Food ,Chemical and Pharmaceutical, Mineral

Products, Non Metallic Product, Motor Vehicle and Autoparts, Fuel & Energy, Information

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Communication & Transports, Coal & Refined Petroleum Product, Papers& Paperboard Product,

Electricity Machinery &Apparatus, and service Sectors. The details of selected firms are

exhibited at Annexure-I. Majority of the firms are from the Textile sector because the Textile

sector is capital intensive and builds up cash. Secondly, it lay in the cyclical-industries so they

need to maintain the extra cash in their reserves to ride-up in the cyclical downturns. Through

keeping extra cash in reserves makes this study more appealing for studying the conflict of

interest between majority shareholders (family) and minority shareholders. Data sources include

the official website of Pakistan stock exchange, annual reports from company’s websites and

financial statements analysis reports of State Bank of Pakistan.

Contribution of each Sector towards the selected sample is as under.

Table 3.1: Sectors Contribution

Sector Name Percentage

Textile 22%

Food Sector 15%

Chemicals, Chemical Products & Pharmaceuticals 11%

Manufacturing 3%

Non Metallic Minerals Products 13%

Motor-Vehicles, Trailer&Autoparts 9%

Fuel & Energy 11%

Information, Communication & Transport 4%

Coal & Refined Petroleum Products 6%

Paper, Paperboard & Products 4%

Electrical Machinery & Apparatus 5%

Services Activities 7%

Total 100%

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3.4.2 Dependent Variable

The main reason of this paper is measuring and identifying growth opportunity by giving a close

relationships between growth opportunity and value of firm .In past studies different kind of

measures have been used for measuring growth opportunity e.g. Price to earnings ratio, increase

in total sales, profitability and Market to Book Asset Ratios (MBA) is worth mentioning (The

details are given in table 3.1). According to Adam and Goyal (2008), investment opportunities

can be best captured through Market to Book Asset ratio due to its highest information content.

So therefore, we have taken into account a version of MBA ratio which is Sectorial Market to

Book Asset (SMBA).The reason of Sectorial Market to Book Asset is that past studies (King and

Santor, 2008) have underlined some Sectorial issues which have a significant impact on growth

opportunities .For example, different sectors have different risks and some sectors are dealing in

tangible assets while others in non-tangibles and some other factors too. So therefore, we use

Sector Adjusted Market to Book Asset Ratio for measuring growth opportunities which is the

main variable of our study. We have calculated Sectorial Adjusted Markets to Book Asset

(SMBA) by first calculating markets to book asset ratio which is equal tothe ratio of the market

value of a firm's assets to the book value of assets. Then calculate the average or mean value of

each sector. After calculating the mean value, then subtracted that mean value from the already

calculated market to book asset ratio for each specific company with specific year. So, on the

basis of this criteria, firms which have positive value are considered as growth opportunity firms

while firms which have negative value are considered as firms without growth opportunities.

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The following table shows the measurement of Growth Opportunity along with year and name of

Researchers e.g. what kind of proxies were used by the previous studies for the measurement of

Growth Opportunity.

Table 3.2: Measurement of Growth Opportunity in Context of Past Studies

S.No Researchers Year Measurement

1 Titman and Wessels 1988 Ratio of R&D expenses by sale revenues

2 Collins and Kothari 1989 Ratio of the MV of equity to the BV of equity

3 Chung and Charoenwong 1991 The earning to prices ratio (EPR)

4 Wald 1999 Sales Growth

5 Goyal, Lehn, and Racic 2001 The ratio of R&D expenditure to the BV of assets at

yearends

6 Bhaduri 2002 The ratio of capital expenditure to the BV of asset at

year’s end

7 Adam and Goyal 2004 The ratio of capital expenditure over the net BV of

plant property and equipment (PPE)

8 Chen 2004 Growth in real assets

9 Mahakud 2006 The ratio of the MV of an organization's assets to the

BV of its assets (MBA)*

10 Norvaisiene and Stankeviciene 2007 Growth in total assets

11 Farooq, Ahmed, Saleem 2015 Tobin’s Q*(defined as the ratio of the MV of assets

over the replacements value of asset)

*Perfect and Wiles (1994) show that Tobin’s q and the MBA ratio are highly correlated (the correlation coefficient

is about 0.96).

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3.4.3 Independent Variables

The explanatory or independent variables are leverage, dividend pay-out ratio and ownerships

structure. Debt is calculated in term of financial leverage ratio. There are two methods for

calculating leverage ratio. One method of calculating leverage ratio is dividing BV of debtsby

total asset. The second method of calculating leverage ratio is dividing total debt over equity

which is also called debt to equity ratio. In this paper debt to equity ratio has been used for

calculating leverage ratio. For high growth firms there is negative relationships between leverage

and corporate values while for low growth firm’s leverage and corporate value is positively

correlated (McConnell & Servaes, 1995). A number of studies have indicated positive relations

between capital structures and organization’s value (Roden & Lewellen, 1995; Brger and Patti,

2006) while other have found a negative relation between capital structure and firm performance

(Chakraborty, 2010; Huang and Song, 2006).

Dividend pay-out ratio is calculated through total dividends over shareholder’s equity. The value

of a firm can be determined through free cash flow and signaling theory when there is growth

opportunity and when there is not (Lang and Litzenberger, 1989). According to DeAngelo et al.

(2000) dividend payment gives a signals to shareholders that the firm has growth opportunities

which shows that the firm has positive net present value projects. So therefore, a positive

relationship is expected between dividends and firm’s value. But according to Iturriaga and

Crisóstomo (2010) the relationship between paying dividend and firm’s value is uncertain in case

of growth opportunities. They further added that the relationship between paying dividend and

firm’s value is positive when there are no or few growth opportunities.

This study follows Blondel, Rowell and Heyden (2002) for determining whether an organization

is family or non family owned. A family firm according to the methodology used by the Blondel

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et al. (2002) is an organization where one or several families or individuals are the ultimate

owners and represents the largest block of shares. The block holder is defined as any director,

individual, family, foreign investor, and financial institution or associated company which has 10

percent or more shareholding. The idea behind the 10 percent of shares is that the passage of

special resolutions under the Pakistan Companies ordinance of 1984, as a result of which

alterations in an organization’s activities can be made only through the 75 percent majority vote

of shareholders in the favor of such resolution. Only the 10 percent class of shareholders has the

ability to block the member’s special resolution that is necessary to make important changes. The

informations about an organization’s ownership structure can be obtained from the

organization’s annual reports which are required by the Company Ordinance, 1984 in the form

34 and Code of Corporate Governance under clause XIX (i).

Based on the aforementioned definition, the family ownership is measured through number of

shares owned by the family/blockholders divided by total number of shares. Similarly ,the Non

family owned organizations are those firms in which no family, sets of families, individual or set

of individuals can be recognized as the ultimate owners possessing the largest shareholding block

Corstjens, Heyden and Maxwell (2004). The definition of family ownership of this study is

stricter than the definition which was used by Anderson and Reeb (2003). They defined a firm as

family owned if the founding family members own shares in the organization or the founding

family members are included in the board.

One particularity of Pakistani firms is their complex chain of ownerships. According to Javid and

Iqbal (2008), the control in Pakistani firms is attained through complex pyramid-structure, cross

shareholdings, interlock directorships, dual class voting shares and or voting pacts that allows the

final owners to sustain control, while owning small fractions of the ownership. Pyramids

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structures are a specific form of inter-firm shareholding arrangements in which organization-A

holds a stake in organization-B, which holds a stake in organization-C. The unique feature of

pyramid arrangement is that organization-A attempts to exercise its control over organization-C

while minimizing its financial investments in organization-C, either indirectly or directly.

Crossholdings means when firm-X directly or indirectly control its own-stock. Inter-lock

directorship means that when an organization’s employees sit on other organization’s board, and

that organization’s employees sit on the first organization’s board. These employees are usually

Chief Executives Officers or other person who have a high position in the management of their

respective organization.

According to Javid and Iqbal (2008), closely held firms (family) in most developing countries

including Pakistan control the economics landscape. Here the chief problem is not of conflict

between manager and shareholders, but rather the expropriation’ of minority shareholders by

majority/controlling shareholders (family) where all the costs are beard by the minority

shareholders. Therefore, this study also intends to capture any non-linear effect of family

ownership-concentration which has been measured through squares of family ownership-

concentration. According to Abbas et al. (2013) firm performance is significantly and positively

affected by large shareholders but the direction of this relationship reverses when block holding

goes beyond 50 percent. Concentrated ownership becomes a cost when large shareholders are in

a position to influence the decisions which result in maximization of their own benefits and

deprive minority shareholders of their deserved income (Kuznetsov and Muravyev, 2001).

According to Ituriaga and Crisóstomo (2010), there is a positive relationships between firm value

and ownership concentration due to close monitoring of manager and negative relationship due

to expropriation effect.

87

The study has also incorporated two firm’s level control variable which are Profitability and

Size. Log of market capitalization has been used for measuring Size of firm instead of total

assets because total assets is not a good measure of a firm’s size (Blease, Kaen and Etebari,

2010), and the second reason is problem of multicolinerity with return on assets. So, that’s why

market capitalization has been taken as a proxy for the measurement of Size. The second control

variable is Profitability which is measured through Return on Assets (ROA).

The sample of this study has been divided into two sub groups e.g. firms with growth

opportunities and firms without growth opportunities for analyzing the impact of growth

opportunities. The distribution criteria is that firms which have a positive Sectorial Market to

Book Asset value , have been considered that they have growth opportunities in the future while

those which have a negative Sectorial Market to Book Asset value , have been considered that

they have no or poor growth opportunities in the future .

The following table shows the measurement of Independent Variables.

Table 3.3: Measurement of Independent Variables

S.No Variables Measurement of Variables

1 Leverage Book Value of Long term Debt /BV of all Assets

2 Dividend Pay-out Ratio Total Dividends/Shareholders Equity

3 Family Ownership Concentration Number of Shares Owned by Family/Total Shares

4 Square of Family Ownership

Concentration

(Number of Shares Owned by Family/Total

Shares)2

5 Firm size Log of Market Capitalization

6 Profitability Return on Assets

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3.5 Conceptual Framework

Moderator

Independent Variables

Dependent Variable

Source: Author’s developed

3.6 Theoretical Perspective of the Study

Capital structure of a company is composed of debt and equity that how much debt and what

portion of equity financing have been use for financing a project. Different theories were

developed with the passage of time and they proposed alternative capital structures for a firm.

The effect of capital structure on value of a firm was first introduced by Modigliani and Miller

(1958).The most recognized theory in this context was Static trade-off theory of Modigliani and

Miller (1963) which explains the capital structure formulation process. According to Statics trade

Growth

Opportunities

Leverage

Dividend

Payout

Firm Value

Family

Ownership

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of theory, optimal capital structure can be formulated through a trade-off between debt and

equity where the cost and benefits of both debt and equity are analyzed. According to Kims

(1978) insolvency is the main expenditure of debt while the benefit includes tax deductibility of

interest. Jensen and Mecklling (1976) and Myers (1977) included agency cost as one of the cost

associated with debt. Myers (1977) argued that when too much debt is used then it affects

manager and they work not in greatest interests of shareholders by ignoring projects which have

positives NPV. This phenomenon was label as underinvestment problem of the debt financing.

That is, organizations which have development prospects, debts affect the value of firms

negatively. While on the other hand it was proposed by Jensem (1986) that organizations that

have excess free cash then positive NPV projects. In such cases presence of debts positively

influence the value of organization .The reason because the managers will have to payouts funds

to debts providers due to which managers will be unable to do the misuse of cash resources.

However, recently studies are more focusing on picking order theory as compare to tradeoff

theory (Mazur, 2007).No targeted capital structures id assumed by Pecking order theory. It

enumerates that organization’s management has more informations regarding organization than

others and have a set of preference while financing a project. The firm first use internal finance

because it is an easy access source. When internal resources are not sufficient the firm goes for

debt financing due to taxes deduction of interests .Last resort of financing a project is through

equity financing.

After Modigliani and Miler’s (1958) seminal work, many other studies were carried out in the

context of dividend policy and capital structures when market is imperfect. The theoretical

principle underlying the organization's dividend policy could clarify either in terms of

informations asymmetry or tax-adjusted theory. The informations asymmetries cover various

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elements; include the signaling model, the costs of organization and the hypotheses of free cash

flows. Akerlof (1970) identified signaling impact as particular and unique signaling equilibriums

in that potential employers are signaled by work seekers for their quality. Although , this

situation is used in the labor market, but it has been used by researcher to make economic

choices. The signaling-theory suggests that corporation dividends policy is use as source of

placing the qualities messages crossways, have least expenses than the others alternative. It

shows usage of dividend as signaling imply the other substitute method of signaling aren’t the

perfect substitute (see Rodrigez, 1992). The Agency-theory seek to describe the corporation

capitals structures as an outcome of attempt for reduce expenditures attached to separations of

control and ownerships. The organizational cost is lowered in organizations which have higher

managerial- ownership stake, because of the reason that it has good alignments to managerial

end shareholders control (Jensen and Mecklling, 1976), and organizations which have big blocks

holders who are placed at superior position to check the managers activity (Shlefer & Vishney

1986). A possible transport of assets forms the bond-holders to stock-holders is an additional

agency-issue attached with the information’s asymmetry. The possible share-holders and bond-

holders conflicts can be reduced through the covenant, governing the claim priorities. According

to Fama & Jensen (1983), conflicts could b bypassed through huge dividends payments to the

stock-holders. Debt-covenant to ease the divide imbursement is useful for stopping bond-

holder’s assets transfer to the shareholder (Johns and Kaley, 1982). In others ways the dividends

policies could affect the organizational cost through increasing the monitor by the capital

markets. With the free cashflows hypotheses, Jensen (1986) asserted that the fund remained after

funding all the projects with positives net presents values causes conflict of interests among

shareholder and manager. Debt, interests’ payments end Dividends payments decreases the frees

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cashflow accessible to the manager for investing in marginal NPV project and managers perk

consumptions.

The signaling explanation and market timings theories, as discussed earlier, are of the view that

organizations is expected to initiate debts instead of equities once it is undervalue due to high

informations cost associated with equity offering e.g. .in form of the expected dilution. The

pecking order model is even of an extreme view by suggesting that the information cost related

with the risky securities are so much high that most of the organizations would not issue equity

until their debt capacity is completely exhausted. Both the signaling and market timing theories

are suggesting that an organization’s financing decisions are influenced by the management that

whether they perceive the organization as overvalued or undervalued. According to Barclay and

smith (2005), the pecking order model is at more extreme which states that there is no target

capital structure for an organization and the leverage ratio of an organization will be determined

through the difference between investment requirement over time and operating cash flows.

Therefore, the pecking theory forecasts the organizations with persistent higher earnings and

moderate funding requirement tend for having low leverage ratio. It is mainly because of the

reason that outside capital is not needed by these organizations. Organizations with Low Profits

and those with high financing requirement will have high leverage ratio because of manager’s

resistance to issue the equity. According to Driffield et al. (2006), High leverage and high

dividends are somewhat complementary strategies which are driven by similar consideration and

common factors. They have suggested that organizations select rational package of finance

policy e.g. the small and higher growths organizations are trying low leverage and not

complicated capitals structure but also have low dividends pay-outs and considerable stock based

perks and compensations for the senior executive. On the other hand, large and mature

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organizations are trying to have more complicated capital structure and broad series of debts

priority, high leverage, less incentive compensations e.g. great usage of earning base bonus then

stocks base compensations plan(smith and watts,1992), higher dividends and more long term

debts. Therefore, dividend, compensation policies and corporate financings are driven through

same basic considerations, for example, an organization’s investment opportunity and to a less

extent by its size.

A tax-adjusted model assumes investors require high anticipated returns on dividend-paying

stocks and safeguard them. The impact of theory of tax-adjusted is the partition of investor in

dividends taxes clienteles. Modiglani (1982) asserted changes in portfolio compositions are

accountable for the cliental impacts. They concluded as taxes liabilities decrease (increase), the

dividends payments increases (decrease) at the same time as earning reinvestments decreases

(increase).Taxes-adjust model too suppose investor increase after taxes revenue. Individuals’

investor chooses the quantity of private and organizational leverage as well as whether to obtain

organizational distribution as a dividend or capitals gains, according to Farrar and Selwyn

(1967). Auerbach (1979) has created a model that maximizes shareholders ' capital. Auerbac

clarified if is a difference in dividends taxes or capital gain then maximization of assets no longer

means maximization of organizational markets values. The theory of tax adjustment is

objectionable in a sense as it is inconsistent with cognitive behaviors. Dividends payout may b

seen as corporate socio-economic repercussions. Frankfuter and Lanes (1992) disclosed that

informations asymmetry among shareholders an executives leads to the payment of dividends to

enhance the inclination towards equity issuance. According to Michael (1979), when

determining dividend pay-out rates, systematic relationships among dividends policies and

industries types indicate that executives are influenced by competitive organizations executive

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behavior. Managers may boost or pays dividend to make happy buyers, if the realize the

shareholder want the dividend. Frankfuter and Lanes (1992) argued dividend payment is partly

traditional, partly a way to disperse the worry of shareholders. Dividends payment to shareholder

must serves as reminder regarding connection between proprietor and manager, and thus helps to

increase organization's stability.

Similarly ,the family involvement’s effects on dividends policy with some level of level of

disperse ownership in closely held organization was discussed by González et al. (2014).Their

main argument was related to demand of minority shareholders for demand which increases the

likelihood of dividends payment and prevention of misuse of assets by insiders. They found that

in such agency conflicts the type of family involvements have a great impact .They found four

things. First , no significant impacts were found regarding family involvement in managements

in explaining that dividends policy will be used as a means for decreasing the agency-conflicts. It

shows that family Chief Executives Officers neither worsen-nor-alleviate the agency problems

which exists among minority shareholder and majority shareholders .Second, involvement of

family in ownership increases the supervision on the chief Executive Officers which decreases

the chances of opportunistic behavior which try to create shared- benefits of controls for the

minority-shareholders. Moreover, such benefit increases other agency-costs which is created by

the concentration of ownership. Consistent with this idea they found that family involvement in

ownerships had an important and negative impact on the dividends policy of an organization.

Third, they originate that dividend policy is negatively affected by family involvement in the

control through pyramidal structures. Albeit pyramids structures which are used as a controlling

enhance mechanisms might let family get private benefits of pecuniary and non-pecuniary

nature, contestability among minority shareholders and majority shareholders within pyramids

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structures might decrease the agency problem, counter balancing the negative effect. The

shareholders (minority) in the closely help organizations are usually very sophisticate- investor

e.g. prosperous families, international investors, large private organizations, equity and pension

funds etc .Finally, they bring into being that Family involvement in control by disproportionate

family representations in board-of-directors increase likelihood and amount of dividends

payments considerably. Such type of involvement could cause the adverse effect which is

correlated with pure-control improving mechanisms (Villallonga and Amit, 2009); hence, the

minority shareholders are trying to limit the Chief Executive Officer approach for using cash-

flows which are free in order to avoid misuse of funds or wealth expropriation.

Family involvement in control is happened when different kind of control enhancing mechanism

are used by families which enables the families to increase its voting power which exceeds its

cash flows right. These structure includes disproportionate board representation, pyramids,

multiple share classes, voting agreements and cross holdings etc (Villalonga and Amit, 2009).

Many studies (Sacristán-Navarro and Gómez-Ansón, 2007) have noted that such mechanisms are

used by family organizations .Pyramid structure allows the shareholders to control an

organization through one or more intermediates organizations which they don’t own fully

because Pyramid structures are organized which helps to put into effect the controlling-power

which exceed cash-flows rights are common in family organizations (Almeida and Wolfanzon,

2006). It allows family to get pecuniary and non-pecuniary private benefit e.g. appointment of

family member to the managerial position, high compensation, empire building, related- party

transactions, recognition as successful entrepreneurs, social status and societal power (Bjuggren

and Palmberg, 2010). Many studies which are summarize by Morck, Yeung and Wolfenzon,

(2005) show the problems of governance within pyramid business groups. If the pyramid

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increases the conflicts among shareholders (majority and minority)as enumerated by Bebchuks,

Kraakma, and Triantus (2000), the shareholders (minority) need to demand for additional

dividend in order to decreases assets expropriations.

It is argued by Villallonga and Amit (2009) that pyramids may serve aims other than just to have

control enhancement, so therefore, its impact on the value is not always negative e,g. the

privately held intermediate organizations may be used as investments vehicle for the

sophisticate-investor like pensions fund, institutional investors, private equity funds. A

monitoring role is played by such investors regarding the founding family and who are enough

vigilant to prevent the tunneling (Almeida and Wolfenzon, 2006). The other shareholders ,who

have large number of shares, in pyramids may monitor the managers and moderate the influence

of the family and reduce the expropriation of wealth by them (Maury & Pajuste, 2005).The

pyramidal family structures are common in Spain where potential extraction of private benefits

can be counter balanced by presence of an additional significant shareholder(Sacristáns-Navarro,

et. al., 2011).The potential benefits related to family board representation include better

management supervision, less managerial myopia, long-term’ perspective or long investment-

horizon etc (Sciascias & Mazzola, 2008).The representation of family can also produce shared

advantages and may reduce the organizational conflict with the shareholders (minority) through

developing longs term relationship with capital providers, supplier , customers (Andersons,

Mansi, & Reeb. 2003).However, a pure control enhancing mechanism can be affected badly

through family disproportionate-representations e.g. when the family member’s percentage on

board exceeds the cash flow rights(James, 1999).

Green et al. (1993) examined the theories regarding dividend payments and probed the

relationships between future earnings of investments, financing decision and dividends. Their

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findings exhibited that dividend’s pay-outs level is not completely decided after an

organization’s financing an investment decisions are made. Dividend’ decisions are gotten along-

with financing and investment decision. Their result did not favor the findings of Miler and

Modigliani (1961). Partington, (1983) carried out a study where he found that organization’s use

of target pay-out ratio, organizations motive for paying the dividend and the extents to which the

divided are calculated, are independents of the investment’s policy. Higgen(1981) exposed

directs links among financing and growth need. Fast emerging organizations needs externals

funding, as the working capitals need generally go beyond incremental cashflow form news sale.

Higgens (1972) showed pay-out ratio are negatively co-related to an organization’s requirements

for financing its growth-opportunities. Colins et. al. (1996), showed negatives but not

insignificant relationships-among dividends pay-out an historical sales growth. DSouza (1999),

nevertheless, showed positives but not significantly relation in the case of growths and a negative

but not significant relation in the case of market to book value. Alwi (2009) investigated

empirically the effect of dividend as an inner organizational system which affects the

performances of organization. Two hundred organizations listed at the Indonesian Stocks

exchanges overid the periods 2000 to 2006 were examined by him. It was examined that in

period of higher organizational costs which are, when cash flows are increasing and there is no

investment opportunity, dividends declaration are welcomed by shareholders. Therefore,

dividend acts as important governance mechanisms for reducing agency costs between minority

shareholders and majority shareholders within a low or high concentrated ownership structures

which increases the performance of an organization.

Ben-David (2010) added that different behavioral theories are considering managerial biases,

investor’s biases and market inefficiency (investor sentiments) as the key determinants of why

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organizations are paying dividends. The catering theory of dividend proposes that organizations

are initiating dividends when investors start valuing the organizations which are paying

dividends more highly. The mental accounting , self-control and bird in hand theories are

motivating dividend payments by stating that investor favors dividend because of the behavioral

biases ,for example, narrow framing, regret avoidance and lack of understanding. There are also

some varied empirical evidences regarding the links between dividend payouts and managerial

biases. Some studies found that overconfident or optimistic managers are less prone towards

payment of dividend while others stated that managers would commit to pay the dividends based

on the private signal. Finally, there are two theories which are suggesting dividend is the results

of socio process in populations of organization an investor .One theory states that among the

populations of mature organizations the payment of dividend becomes a social norms. The

second suggests that albeit the dividends payment don’t convey any information about the future,

investors are putting pressures on organizations for the payment of dividends because it is

traditionally use as valuation tools. Albeit behavioral finance might explain’ many aspect of the

dividend-payments but the question of why organizations are paying dividends remain open. The

reviews of literatures favor a strong supports or the life cycles theory because a lot of authors

favors that matures organizations with stables cash flow are trying to distributing dividend.

However, this theory doesn’t explain that why mature organizations are choosing to distribute

the dividend and not go for repurchasing its shares.

The discussion on the relationships between ownership-structure and organization’s value was

first explored by Berle and Means (1932). Berle and Mean’s (1932) argument was challenged by

Demsetz and Lehm (1985).The enumerated that no relationships .among ownerships structure an

accounting profits exist. From their results no evidence was found between ownership and

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control separation. Hill and Snell (1989) conducted a study which was meant expose the effect of

ownership-structure on productivity of a firm. Results revealed that a firm’s stance towards

diversification and investment strategy is influence by ownership-structure which results in

productivity of firm. Their study was different from the previous studies as they have taken

productivity into account instead of profitability. They said that productivity is less perplexed

measure of efficiency as compare to profitability .Based on Berle and Mean’s claim, Hassen

(2008) suggested that if corporate officers are involved in promoting their self interest at expense

of equity holders then there is a remedy to it. He suggested that shareholders encouragement for

active participation is the key to its remedy. This active participation would rise in the form of

nominating and electing the directors through indulgence in the selection process of officers who

runs the reign of the company. But on the other hand Jensen and Mecklling (1976) argued that

these agencies problem could be mitigation through making managers shareholder as well.

Through this the interests of both manager and shareholder will align. They further added that

separations of controls and ownerships aren’t a good choice because of monitoring cost which

reduces the value of a firm and may cause managers to involve in activities which are

detrimental to firm’s performance. However, maintain separation between ownership and control

are in greatest interests of organization’s value as this brings efficiency regarding decision

making and risk bearing function. Due to this dispersed ownership is better because the gains

from efficiency are greater than agency costs Fama & Jensen 1983).According to Feinberg

(1975) organizations where control and ownership are combined in that case there are chances

that they may made an exchange of profits and other benefits where they prefer other benefits

over profits for example on jobs no financial consumptions (Demsetez, 1983) and preferring

current consumptions over future consumptions (Fama and Jensen, 1985).

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But the Stewardship theory states that family firms which are closely held and outside

representation or influence is also less might exhibit focuses on non financial objective and

organizational service cultures. Families organizations for ensuring its firm control over firm

may make hard control and ownership stakes for outside members (Nyman & Silbert- son,

1978).Similarly shares will also be limited to those kinship members whose interests are similar

with the family agendas and they are not only interested in the financial performance (Howorth

&Westhead,2006).The autonomy of controlling shareholders and private dealings of shares are

the detrimental features of the families organizations (La Porta et al., 1999) that had bad effect

on the performances of organization which may ultimately retard the performances of families

organizations. Agency problem is created due to honest incompetence because of restricting the

pool of shareholders (Chrisman, Chua, & Litz, 2004).Nevertheless, survival and development of

the business are key factors which compels the family firms to offer ordinary shares to outsiders

e.g. informal investors and financial institution but these share are not offered from the

controlling family groups who own-businesses (Meshra and McConaghy, 1999).According to

Dyer (2006), when owners and directors are siblings, the costs of the organization is decreased in

family relationships. For instance, owners that might have their siblings, children, sisters and any

other close relatives functioning as the agents need not bear the costs of monitoring their agents

while owners of non-family companies have to incur costs to monitor their agents. Similarly, in

family-owned organisations, the top management team is more cohesive comparable with no

family organization while families organizations has strong confidence, common objectives and

shared values(Ensley & Pearson,2005 ).McConaughy (2000) conducted a study regarding CEOs

family-owned organizations and no family organizations, and compared their compensation. He

concluded that family owned firms have to pay high to non family CEOs in order to get what

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families CEOs would do. Gomez- Mejia, Makri and Larraza-Kintana (2003) also confirmed the

same results where professional CEOs were paid significantly high as compared to family CEOs.

Families are controlling their related mangers through normative-controls (shared values) which

will in turn cause fewer-costs than outside managers who are controlled through high financial

incentives in order to get comparable performance (Dyer, 2006).It is cleared from the

aforementioned studies that in family controlled firms the agency costs are reduced which

enhance the performances of an organization.

Although there are perceptions that family firms have reduced organizational cost because

alignment of goals of manager and owners but still there are other perspectives which highlight

those family firms are breeding grounds for conflicts (Kaye, 1991; Lansberg, 1999).There may

be competing values and goals in family owned firms which may arise from family dynamics

and complex conflicts due to families psycho-social history (Dyer&Hilburt- Davis, 2003).For

example, the differences in views and perspectives regarding roles and responsibilities, risk and

compensation and similarly distribution of ownership within a family compel members of the

family to compete with one another and may make the organization a battle ground. When

ownership of family owned firms is dispersed then it creates a wedge; connecting the interest of

controlling family-members who leads a family and other family-members (Schulzi,Lubatkiin &

Deno 2003).All the member of families are not equally contributing to performance of the firms.

Some are contributing a lot while others are free riders and some are fighting for their own

interest. Due to this fact family firms may have significant agency costs.

An additional factor which may be accounts for high agency cost is Altruism which makes

accountability and monitoring of family members difficult who works in the family owned

organizations. According to Schulze, Dino, Lubatkin and Buchholtz (2001), such altruism leads a

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firm to poor performance. They studied 1376 firms and noted down that firms which have a

formal governance system against altruism perform better than those firms which are without

such formal system. In another study Gomez- Mejia et al. (2001) studied Spanish family

organizations and found that Spanish firms shows hesitation to fire out family CEO as compared

to non family CEO. But when family CEOs were replaced by outside CEOs the firms performed

better that those firms which had family owned CEOs. It was due to the reason that family

owners due to altruism were unable to discipline and monitor family owned CEOs .It causes

family firms to wait too long to make a change in the leadership until the firm performance fall

badly. As compared to family owned firms, a nonfamily firm feels no hesitation in monitoring of

CEOs and replaces them whenever the performance of the firm deemed unacceptable.

Resource based view also criticize the family firms performance (Sirmon & Hitt, 2003).It is

suggested by resources base viewed that firm’s asset are non-substitutable, inimitable, rare and

valuable which can help in the creation of competitive advantages (Barney, 1991).According to

Dyer (2006), the question arises that are families able to bring unique assets to the firms with

these assets which will help in the creation of competitive advantage? He further described three

types of assets or capitals which are linked with family firm’s performance. The first one is

human capital. The second one is social capital and the last one is physical/financial capital.

There are some arguments which supports that family can bring competitive advantage with

these capitals while other arguments opposes and are of the observation that families

organizations are unable to bring competitive advantage with these assets. Due the the small

team of skill full employees the families firms might not be talented for handling process

efficiently and effectively until and unless recruits professionals from outside the family. But

hiring outsiders for performing the key operations of the family business would be very difficult

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for family firms because they are reluctant to the integration of outside managers (

Dyer,1989).But if the nepotism prevails in the family organization the family firms may place

family members on the key positions which will affect the performance of the firm badly. Thus

family relations would stop family members to hire best professionals managers in order to run

the organization effectively which shows a competitive disadvantage on the part of human

capital in family firms.

It was asserted by Shleifer and Vishny (1997) and La-Porta et al. (1999), that there is a dispute

among shareholders (minority and majority) due to concentration of ownership .When

companies are effectively controlled by block holders then they start framing policies which

cause expropriations of shareholder(minority) .Such blockholders gain remuneration at the costs

of minorities shareholder ( Claesens et al., 1999).So, when there is least concentrated ownership

it results in positives relations between firm’s value and concentrated ownership due to

monitoring hypothesis ( Arosa et al.,2013 ).She further added that the relationship between

organization’s performance and concentrated ownerships become negative when there is

concentrated ownership due to expropriation hypothesis. According to Ituriaga and Crisóstomo

(2010), there is positive relationships between organization value an ownerships concentration

due to close monitoring of manager and negative relationship due to expropriation effect.

According to Iturriaga and Crisóstomo (2010) when there are new projects then the exploitation

of minorities shareholder by dominant shareholder is more. So, when there are more growth

opportunities then chances of minority shareholders expropriation by dominant shareholders

would be more. (Iturriaga and Crisóstomo,2010).

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3.7 Empirical Methods

Panel data are the repeated observations of same cross sections, basically of firms or individuals

which are carried out for several time periods. Repeated data and longitudinal data are also the

alternative terms used for panel data. According to Kennedy (2008) these are observations of the

same units which are for several different time periods in longitudinal data. Panel data may have

time effect, individuals effects or both that can be examined through random effect model and/or

fixed effects models. Panel data is basically short term oriented, meaning a large cross sections is

studied for a short span of time rather than studying a large cross sections for a long time period.

According to Baltagi (2001) panel data gives high informative data, minimal colinearity amongst

variables, high variability, more efficiency and high degree of freedom. When panel data is well

organized then panel data models are appealing because it deals heterogeneity problems

efficiently and also examine random and/or fixed effects. But, processing of panel data isn’t as

easy as it might sound. The problems of panel data basically come from modeling process, panel

data themselves and presentation and interpretation of results (Park, 2011).

The main benefit of using panel data is accuracy in estimations. It increases precision in

estimations .This is because of the reason that several cross sections data are pooled for several

time period for each individual .But ,for valid statistical inference there is a great need of

controlling correlation of regression models error which may occur over time for given

individuals .When Pooled OLS regression is used it normally overstate the precisions gain which

leads to underestimate standards-error and t-statistic (Cameron& Trivedi, 2009).Panel data also

result in consistent estimation by using fixed effect models that allow for capturing unobserved

individual heterogeneities which might be correlated with regress or .Such unobserved

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heterogeneities cause omitted variable biases which might be ameliorated through instrumental

variable method by using only single cross section. But practically it is hard to get suitable

instruments.

OLS have five core assumptions (See Greene, 2008; Kennedy, 2008).

1. Linearity states that dependent variable is formulated as linear function of the set of

independent variables and error (disturbance) term.

2. Exogeneity says that expected value of disturbance is zero or disturbance is not correlated

with any regressors.

3. Disturbance has the same variance (homoskedasticity) and is not related with one another

(non-autocorrelation).

4. The observation on the independent variables is not stochastic but fixed in a repeated sample

without measurement errors.

5. Full rank assumption states that there is no perfect linear relationship among independent

variables e.g. nomulticolinerity.

If in longitudinal data, the individual effect is not zero then heterogeneity may affect assumption

2 and 3.In such cases disturbance may not have same variance and may be different across

individuals (heteroskedasticity) and may be related with each other which will arise problem of

autocorrelation .So therefore ,OLS is not a best unbiased linear estimator .While on the other

hand, fixed effect model analyzes individual differences in intercept and assumes same slopes

and constant variance for each individual (Park, 2011). Random effect model assumes by stating

that regresses and individual effects (heterogeneity) are not correlated. Random effect models

also estimate error variance specific to group or times.

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The current study implies Hausman test (1978).The purpose of using Hausman test in this study

is to determine that whet hers to employ the fixed or random effect model. If null hypothesis

e.g.no correlation between individual effect and others regressor are not rejected then random

effect model is preferred over fixed effect model. On the other hand, if the results are significant

after running Hausman test for fixed and random effect models then fixed effect model issued.

The decision is based on the value of Chi-Square statistics. If the value of Chi-Square is

significant then fixed effect model is used but if the value of Chi-Square is insignificant then

Random effect model is preferred .When we run the Hausman test, the value of Chi-Square was

significant which is depicted in the Regression results table. So, fixed-effect model in the current

study has been used for result’s interpretation.

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CHAPTER # 4

RESULTS AND INTERPRETATION

4.1 Chapter Introduction

The results and interpretation part include descriptive statistics, matrix correlation, and

regression of performance of organizations. The regression for firm performance is estimated

under two conditions. The first condition is when there are growth opportunities then what would

be the impact of leverage, dividends and family ownership concentration on the firm’s

performance. While the second time regression has estimated for firms with no investment or

growth opportunities that when there is no growth opportunity then what would be the impact of

leverage, dividend and family ownership structure on the performance of a firm. The study has

also captured the impact of leverage, family ownership structure and dividends on firm’s

performance when sample is not divided into two sub-groups e.g. firm’s which have investment/

growth opportunities and firms which have no or few investment/ growth opportunities.

Furthermore, Comparison of Mean test has also been carried out in order to find that whether

there exists significant impact among variables based on growth opportunity. For the purpose of

conducting Comparison of Mean test two proxies have been taken which is Market to Book

Value ratio and Sector Adjusted Market to Book Value ratio. Based on these two proxies, almost

all explanatory variables are showing a significant impact on the performance of firms. Some

other tests like Generalize Method of Moments (GMM) has also been conducted in order to find

out that there exist the problem of endogeneity among variables or not .Similarly, Variance

Inflation Factor (VIF) test for multicolinerity has also been carried out in the current study for

detecting possibility of multicolinerity among the explanatory variables.

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Table 4.1: Descriptive Statistics

Variables Observations Mean Std. Dev. Min Max

SMBA 930 -1.3 10 -28.1 175.1

LEVE 930 2.2 19.1 -292.3 331.4

DPR 930 0.05 0.1 -0.5 2.5

FOC 930 0.51 0.2 0.1 0.93

FOCS 930 0.31 0.2 0.01 0.86

ROA 930 7.4 16 -99.2 205.2

LCAP 930 7.3 2.1 0.3 13.8

Notes: observation,Mean, standard deviations, minimum and maximum values for main variables. Sector adjusted

market to book asset (SMBA) is the proxy for the presence of growth opportunities. LEVE is leverage, calculated as

debt over equity; DPR is dividend pay-outs ratio which is calculated as total dividend over shareholder’s equity; FOC is

family ownership concentration which is voting capital in hand of the family shareholders; FOCS is square of family

ownership concentration; ROA is return on assets which is a proxy for the profitability; and LCAP is log of market

capitalizations, a proxy used for the firm size.

The above table illustrate the descriptive statistics of dependent variable i.e. SMBA (Sector

adjusted market to book asset) which is a measure for organization performance and others

independent variableand controlled variables. The independent variable are

Lev(leverage),DPR(dividend Pay-out ratio) ,FOC(family ownership-concentration) and

FOCS(family ownership-concentration square).The control variables are two which are ROA

(Returns on asset) which is a measure for profitability and LCAP (log of Market capitalization)

,a measure for firm size.

The results clearly depicts that average organizations under consideration show bad performance

as the value of SMBA is negative(-1.35) which is a proxy for firm performance. According to

Morcks et al. (1988), when the value of Tobin’s Q (a measure for firms performances), is high it

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shows the probability that organization will issues more shares in coming years for increasing its

revenue and asset values of the organization. The only difference of the current study with that of

Morck et al.’s study is that they have measured the Tobin’s Q in ratios form while we have first

calculated the MBA ratio and then subtracted the average value of the each sectors from the

relevant companies’ MBA ratio which results in SMBA. After calculating the SMBA, we set the

criteria that firms which have positive SMBA will have more growth opportunities as compared

to negative SMBA’s firms which have poor growth opportunities (Lang, Stulz and Ofek, 1996).

So, that’s why the value of SMBA is not in ratio form otherwise value of MBA ratio is always

positive.

The mean value of leverage is 2.27 which mean that firms mostly depend on debt as compare to

using its internal sources of finance for financing a project. It also partly support the pecking

order theory that organizations has first inclination for using retain earnings(internal sources of

finance) and if retained earnings aren’t enough then go for debt financing when there are positive

NPV projects . The average value of Dividend is 0.05 which shows that the paying tendency of

firms under consideration is small. The average value of ownership is 0.51 which depicts that on

average 51 percent of shares are held by family shareholders due to which they have a

controlling impact on the performance of the organization.

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Table 4.2: Matrix of Correlation

1 2 3 4 5

Leverage 1

Dividend

Payout Ratio -0.015 1

Family

Ownership -0.032 0.096 1

Return on

Assets -0.022 0.407 0.118 1

Market

Capitalization -0.06 0.354 0.24 0.42 1

Notes: 1 is for leverage, calculated as debt over equity; 2 is for dividend pay-out ratio, calculated as total dividends over

shareholder’s equity; 3 is for family ownership which is voting capital in the hands of the family shareholders; 4 is for return

on assets which is a proxy for profitability; and 5 is formarket capitalization, a proxy used for the firm size.

The Pearson correlation matrix shows the correlation among explanatory variables. The co-

relation among variables are slightly high in two case e.g. first between Return on asset and

Dividend pay-out ratio(0.407) and second time between Market Capitalization and Return on

assets (0.42).But in both cases the correlation among variables are not that much high which

could cause a serious problem of multicolinerity. Besides the two aforementioned cases, the

results of Pearson correlation matrix exhibit no high correlation among variables which shows

that there is no problem of multicolinerity. In order to further confirm that there exist problem of

multicolinerity or not, the current study has also incorporated variance inflation factor (VIF) test.

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The results of VIF test are as follows.

Table 4.3: Results of VIF Test

Variables VIF 1/VIF

Leverage 1 0.996

Dividend Payout Ratio 1.26 0.793

Family Ownership 1.06 0.941

Return on Assets 1.34 0.747

Market Capitalization 1.34 0.748

Mean VIF 1.2

One of the most significant problems in the application of a multiple regression analysis has the

possibility of collinearity among the independent variables .Colinearity is a statistical condition

in which there is close to near perfect linear relationships among various independent variables

in a specific regression model. One of the methods of measuring the collinearity uses the

variance inflation factor (VIF) test for each of variables under consideration. In this method, if

the value of VIF is greater than 10, then there is high correlation between inputs variable

(Marquart, 1980). In the current study, VIF for all independent variables are less than 10 as

shown in the above table which means that there is no reason to suspect any sort of collinearity

among the variables.

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Table 4.4: Pooled OLS

Variables Full sample Presence of

growth

opportunities

Absence of

growth

opportunities

SMBA SMBA SMBA

LEVE 0.19** 0.22* 0.07***

(0.09) (0.12) (0.006)

DPR 1.003 2.70 -3.36

(1.88) (2.13) (2.55)

FOC 0.34 -25.78 14.51**

(7.64) (20.01) (4.89)

FOCS 0.51 36.56 -18.19**

(8.89) (23.37) (4.98)

ROA -0.005 -0.26** 0.042**

(0.02) (0.12) (0.01)

LCAP 0.84*** 2.21*** 0.09

(0.20) (0.72) (0.14)

Constant -8.32*** -11.48** -6.15***

(1.40) (3.80) (1.67)

Observations 930 279 651

R-squared 0.16 0.30 0.08

Robust standard errors in parentheses

*** p<0.01, ** p<0.05, * p<0.1 Notes: The table presents sample which is divided by sector adjusted market to book asset (SMBA), defined as the difference

between the firm’s market to book asset ratio and median of the sector. The table reports result for the full sample, sub-group of

companies with most growth opportunities and for sub-groups of firms which are without profitable investments projects. The

dependent variable is SMBA. LEVE is leverage, calculated as debt over equity; DPR is dividend pay-outs ratio, calculated as

total dividends over shareholder’s equity; FOC is family ownership concentration which is voting capital in the hands of the

family shareholder; FOCS is square of family ownership concentration;ROA is returns on asset which is a proxy for profitability;

and LCAP is log of market capitalization ,a proxy used for the firm size.

The pooled OLS results show that leverage has a significant and positive impact on the

dependent variable which is sector adjusted market to book asset (SMBA) in full sample.

However, the study also reveals the positive impact of leverage on SMBA in both cases e.g.

when there is growth opportunity and when there is no growth opportunity. The results for

dividend are insignificant. Family ownership-concentration shows a significant and positive

impact on SMBA when there is no growth opportunity. But the relationship between family

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ownership concentration and SMBA is insignificant in case of full sample and when there is

growth opportunity. Return on assets and market capitalization also shows a significant impact

on the value of the firms. However, due to the reasons mentioned in empirical methods of

methodology, the pooled OLS is least favorable when the real model is fixed effect model. From

the table it is also evident that the value of R-square is low but according to Draper (1984), the

value of R-square is misleading in a data set where there are replicate data points. Healy (1984)

also commented that R-square is an unsatisfactory measure of OLS regression relationships

while Willet and Singer (1988) stated that heavy reliance on R-square statistics could lead to

overly optimistic interpretations of results. Similarly, Knaub (2007) is of the view that R-square

is not highly informative in panel data and more focus need to be made on the individual

significance of variables and overall significance of the models. Furthermore, in the current

study VCE (Robust) has been applied which accounts for the problem of autocorrelations and

heteroskedasticity (Mileva, 2007).

Table 4.5: Moderation Regression

Variables

β

Coefficient

Significance

(p-value)

R-

square

R-square

Change

Step 1st

Leverage 0.889 0.003

Dividend Payout 0.073 0.053 63%

Family Ownership concentration 1.875 0.004

Step 2nd

15%

Leverage 0.795 0.005

Dividend Payout 0.12 0.041

Family Ownership concentration 1.72 0.002

Leverage*GOP 0.241 0.021 48%

Dividend Payout*GOP -0.111 0

Family Ownership

concentration*GOP 0.275 0.0485

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In the above table it has been examined that whether the growth opportunity plays a role as

moderator or not between leverage, dividend payout, family ownership and firm’s value.For

analyzing the impact of growth opportunity as a moderator, Andrew method of moderation has

been carried out. For finding the impact of growth opportunity, first it is needed to check the

impact of independent variables over the dependent variable. In the second step, the impact of

moderator is checked over the dependent variable and in the third step a combined impact of

both independent variables and moderator are checked over the dependent variable where

interaction terms are created for fulfilling the stated purpose. From the results, it is cleared that

all the interacting terms have a significant impact over the dependent variable which shows that

growth opportunity plays its role as a moderator.

Table 4.6: Comparison of Means Test

Groups SMBA

MBA

Mean P-value Mean P-value

SMBA

With growth opportunities 3.7166 0.000

-1.1653 0.0154

Without growth opportunities -3.5634 -4.8602

MBA

With growth opportunities 5.604 0.0000

2.46175 0.0249

Without growth opportunities 0.85813 -0.7619

LEVE

With growth opportunities 5.08871 0.0029

2.95977 0.0000

Without growth opportunities 1.0309 -11.073

DPR

With growth opportunities 0.09628 0.0000

0.05681 0.0007

Without growth opportunities 0.03451 -0.014

FOC

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With growth opportunities 0.52283 0.0127

0.5049 0.0155

Without growth opportunities 0.50289 0.58696

ROA

With growth opportunities 13.498 0.0000

-1.5096 0.0001

Without growth opportunities 4.77794 7.89671

LCAP

With growth opportunities 8.50324 0.0000

7.42474 0.0000

Without growth opportunities 6.79295 5.17359

Notes: Sector adjusted market to book asset ratio (SMBA) and market to book asset ratio (MBA) are the proxies for the

availability of growth opportunity. LEVE is leverage which is calculated through debt to equity ratio total; DPR is dividend

payout ratio calculated through total dividend over shareholders equity; FOC is family ownership concentration which is voting

capital in the hands of the family shareholder; ROA is returns on asset which is a proxy for profitability; and LCAP is log of

market capitalization, a proxy used for the firm size. The Mean value of each groups are shown in the table, as well as the p-value

for the t-test of the different mean values hypothesis.

Before demonstrating the output of regression analysis, the study incorporates comparisons of

mean tests between both subs-sample (organizations with growth opportunity and organizations

with few or no growth opportunity) according to the criteria based on MBA ratio and SMBA

ratio. As the Table exhibits that there exist statistically significant difference in the leverage,

dividend policy, and the family ownerships concentrations across the firms which are

conditioned to growth opportunity.

It is clear from the results that growth opportunity play an essential role in relationships between

leverage, dividend payouts ratio, family ownerships and organization’s future value creation

process which suggests that the growth opportunity crucially affect the influence of the financial

and family ownerships structure on the value and performance of a firm.

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Table 4.7: Regression results of MBA Ratio

Full

Sample

Full

Sample

Growth

Opportunity

Growth

Opportunity

No Growth

Opportunity

No Growth

Opportunity

Fixed Random Fixed Random Fixed Random

VARIABLES MBA MBA MBA MBA MBA MBA

LEVE 0.202* 0.194* 0.245* 0.243 0.0354*** 0.0344***

(0.111) (0.112) (0.147) (0.148) (0.000398) (0.000819)

DPR 2.031* 2.096 1.137 1.044 -2.065 9.028***

(1.214) (1.402) (0.804) (0.792) (5.100) (0.244)

FOC 7.700 -6.577 8.321 -9.612 -18.07*** -6.600**

(15.71) (9.514) (16.36) (17.67) (2.750) (2.957)

FOCS -3.326 11.76 -3.171 17.81 15.13*** 5.219**

(13.41) (10.88) (15.26) (20.21) (2.129) (2.302)

ROA -0.0114 -0.0312 -0.0326* -0.0457* 0.000252 -0.00178

(0.0121) (0.0205) (0.0175) (0.0264) (0.000967) (0.00111)

MA 2.012** 1.018*** 2.185** 1.809*** -0.462*** -0.0327

(0.834) (0.349) (0.874) (0.670) (0.0947) (0.0332)

Constant -15.79** -5.755** -17.53** -11.33** 6.912*** 1.823**

(6.299) (2.316) (7.004) (4.565) (0.407) (0.925)

Observations 930 930 884 884 46 46

R-squared 0.206 0.270 0.952

Number of comp 93 93 92 92 11 11

Robust standard errors in parentheses

*** p<0.01, ** p<0.05, * p<0.1

Table 4.7 shows the regression output which depicts a close relationship between dependents

variable (MBA ratio) and independents variables which are leverage, dividend payout ratio,

family ownership, profitability and firms size. The regression result regarding MBA ratio has

been divided into full sample and sub-sample e.g. when there is growth opportunity what is the

impact of independents variable on the dependent variable and when there is few or no growth

opportunity then how explanatory variables are affecting the dependent variable. After running

the Hausman test for Fixed and Random effect model, the value of chi square is significant due

to which results interpretation is based on the fixed effect model. As the results depict, the

leverage shows a significant and positive impact on the dependent variable in all cases e.g. in full

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sample as well as in sub-samples. It shows that if there are growth opportunities or not, taking

debt will influence the value of an organization positively. Similarly, the dividend payout ratio

shows a positive impact on the value of firms in full sample while an insignificant impact in the

case of sub-samples. Furthermore, family ownership and firm’s value is significantly and

positively associated in the case of no growth opportunity while shows an insignificant

relationship in the case of full sample and when there are growth opportunities. The same goes

for the square of family ownership concentration which is for detecting reverse impact of family

ownership concentration.

Albeit the aforementioned results are based on the MBA ratio which is a measure of firm

performance but we are more interested in the results of SMBA which is a version of MBA ratio.

The regression output of SMBA ratio are shown below but before going to interpret those

results, the results of Generalize Methods of Moment(GMM) model are important which are

explained as follows.

Table 4.8: Results of GMM Model

Dynamic Panel-data estimation,one step system GMM

Group Variable : Company

No. of Groups = 93

SMBA Coef. Std.Err. Z P>|Z|

SMBA L1. -0.16 0.26 -0.6154 0.517

LEVE 0.5 0.43 1.16279 0.249

DPR -170 153 -1.1111 0.267

FOC 102 99 1.0303 0.301

ROA 2.86 2.59 1.10425 0.27

LMC 2.68 13.02 0.20584 0.837

_Cons -86.03 106.85 -0.8051 0.421

Instruments for first differences equation

L2. (SMBA LEVE DPR FOC) collapsed

Arellano-Bond test for AR(1) in first differences: z = -0.91 Pr>z = 0.361

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Arellano-Bond test for AR(2) in first differences: z = -1.24 Pr>z = 0.214

Sargan test of overid.restriction: chi2 (2) = 0.95 Prob > chi2 =0.621

The table 4.8 shows the output of Generalize Method of Moments (GMM). The Generalized

Methods of Moment gives an efficient estimation through controlling for both the endogeneity

and unobservable heterogeneity (Blundell and Bond, 1998). The validity of the Generalized

Methods of Moments (GMM) estimation premised on two condition basically: one is the validity

of variables which are used as instruments, and the second is the lack of second order serial

correlations among the residuals. In the current study, GMM model has been carried out through

Stata. By default the Stata reports 3 additional tests which are Sargan test, Auto-Regressive, AR

(1) and Auto-Regressive, AR (2) tests.

The null hypothesis of Sargan test is that the instruments as a groups are exogenous. So,

therefore, a higher p-value of Sargan statistics is preferable. Similarly, the Arellano – Bond tests

for the autocorrelations which have a null hypothesis of no autocorrelation, and is applied for the

differenced residuals. The Arellano – Bond test for Auto-Regressive (1) process in the first

differences usually rejects null hypothesis but it doesn’t happen always. Therefore, the test for

Auto-Regressive (2) in first difference is more important for detecting the autocorrelation. That’s

why; a second lag is required because it is not correlated with current error terms while the first

lag is. Generally, one can use a second or deeper lags in order to find good instruments but using

deeper lags may reduce the sample size. Furthermore, it is also worth mentioning that in both

cases e.g. Sargan test and AR (1) and AR (2) a higher p-value is preferable in order to accept the

null-hypothesis.

From the table 4.8, it is cleared P-value for AR (1) and AR (2) is 0.361 and 0.214, respectively.

It shows that both the values are greater than 0.05 which indicates the rejection of alternate

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hypothesis and acceptance of null hypothesis. Similarly, the value of Chi2 for the Sargan test of

over-identification of restriction is also greater than 0.05 which shows the acceptance of null

hypothesis of no autocorrelation in residuals. Due to the small numbers of groups, a large

number of instruments may cause the Sargan test to be weak. Therefore, the rule of thumb is to

restrict the number of instruments less or equal to the numbers of groups (Mileva, 2007). The

Stata warns about this at the top of output table.

Table 4.9: Regression results of SMBA

Full sample Full sample Growth

opportuniti

es

Growth

opportunities

Without

Growth

opportunities

Without

Growth

opportunities

Fixed Random Fixed Random Fixed Random

VARIABLES SMBA SMBA SMBA SMBA SMBA SMBA

LEVE 0.20* 0.19* 0.29** 0.28** 0.036*** 0.036***

(0.11) (0.11) (0.13) (0.14) (0.002) (0.002)

DPR 2.04* 1.49 1.74 1.22 3.41*** 3.38***

(1.22) (1.10) (1.23) (1.03) (1.14) (1.14)

FOC 7.05 2.96 74.4 21.6 -7.30* -6.04

(15.9) (10.2) (69.7) (62.8) (4.16) (4.15)

FOCS -2.62 -1.81 -54.0 5.32 6.47* 4.83

(13.7) (10.4) (71.6) (66.2) (3.55) (3.64)

ROA -0.01 -0.01 -0.06* -0.07** -0.004 -0.004

(0.01) (0.01) (0.03) (0.03) (0.003) (0.003)

LCAP 2.01** 1.15*** 4.03** 3.40** 0.46*** 0.43***

(0.83) (0.39) (1.72) (1.42) (0.07) (0.07)

Constant -19.31*** -11.21*** -52.58** -36.50* -5.13*** -4.42***

(6.25) (3.27) (24.0) (18.78) (1.20) (1.26)

Observations 930 930 283 283 647 647

R-squared

Chow Test

(F-statistics P-value)

0.598

0.000

0.28

Hausman test

Prob>chi 2

0.011 0.008

Robust standard errors in parentheses

*** p<0.01, ** p<0.05, * p<0.1 Notes:The table presents sample which is divided by sector adjusted market to book asset (SMBA), defined as the difference

between the firm’s market to book asset ratio and median of the sector. The table reports result for the full sample, sub-group of

companies with most growth opportunities and for sub-groups of firms which are without profitable investments projects. The

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dependent variable is SMBA. LEVE is leverage, calculated as debt over equity; DPR is dividend pay-outs ratio, calculated as

total dividends over shareholder’s equity; FOC is family ownership concentration which is voting capital in the hands of the

family shareholder; FOCS is square of family ownership concentration; ROA is returns on asset which is a proxy for

profitability; and LCAP is log of market capitalization, a proxy used for the firm size.

The study shows the regression results of firm performance under two situations. First regression

is run for all firms where no distribution of firms has made between firms with growth

opportunities and firms without growth opportunities. The second time Sample is split in two sub

groups e.g. firms with growth opportunities and firms without growth opportunities and run

regression for both group of firms which have growth opportunities and firms which haven’t. In

the current study chow test has been used which is applied for deciding whether to use pooled

model or panel model. The null hypothesis is about invisible individual effects which states that

invisible individual effects are not present in model and also error terms are only comprise of the

residual error term. The alternate hypothesis is based on the presence of individual effects. As

the results shows that the P-value for the F-statistic is significant, so alternate hypothesis is

accepted and hull hypothesis is rejected. Furthermore, it is tested that whether these individual

effect are correlated with the model explanatory factors or not. In this regard, the Hausman test is

used. This test is premised on the presence or absence of relationships between the estimated

regression errors and model independent variables. If such relationships exist, then model has a

fixed effect and if it isn’t, then model has a random effect. As the results of Hausman test are

significant so, Fixed effect model is preferred over Random effect model.

4.2 Leverage and Firm Performance

The result indicates that leverage have a significant impact on firms performances in all cases

e.g. when there is full sample and when the sample is divided into two sub-groups on the basis of

growth opportunities .Though the results of full sample are also significant but we are more

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interested in finding its impact in presence or absence of growth opportunities as it’s the premise

of our hypotheses. From results it is clear that when there are growth opportunities then leverage

has a significant and positive impact on firm’s performance. It denies the rational of

underinvestment problem mentioned by Myers in 1977.

Results also indicate that debt has a significant and positive impact on the performance of an

organization when there are poor or no growth opportunities. It may be due to overinvestment

problem (Jensen, 1986). When organizations have more internally generated cash flows than

positive net present value projects then the managers may invest them in a negative net present

value projects because they are rewarded for expanding the scale of a firm. The other reasons

may include that they may use this free cash for fulfilling their private benefits. So therefore,

when firms have taken debt and there are no growth-opportunities as well than debt can have a

positive impact on performance of a firm. Because the managers will have to first fulfill the

obligations of debt providers due to which managers will not be in a position to invest it in a

negative net present value projects or make misuse of funds.

4.2.1 Relevance and Contradiction with Previous Literature

Pandya (2018) explored the relationships between leverage and Market Value Added which is a

measure for the value creation. It is a cumulative measures of the corporate performance. Firms’

performance (Market Values Added) was measured through taking the differences of BV of

equity and market values of equity. Following Ordinary Least Square method, uni-variate and

multiple linear regressions had applied to examine the relation between independents and

dependents variables. It was established that, when analyzed uni-variately; all the three measure

of financial leverage which were debts ratio, debts to equity ratio and interest cover was

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significantly correlated to the markets value added. But on the other side, when used jointly in

the multiple regressions, only the interest cover was found statistically significant.

Adetunji, Akinyemi and Rasheed (2016) tried to explore the relationships between financial

leverage and organization’s value. The OLS statistic all techniques were applied for the data

investigation and testing of hypothesis. It was observed that high leverage ratios have a negative

impact on the value of an organization which makes low profits, therefore, the investors will

receive no or little earning. Investor’s faith in both companies and capital market will be shaken

due to which market-value of organization’s share will fall the same way as its value. This study

has, however constructed both positives and negative relationships between financial leverage

and firm’s value.

Fosu, Danso, Ahmad and Coffie (2016) found that leverage is not positively linked with the

firms’ value, and also found that the marginal effects of the leverage is low for the informations

asymmetries firm in the presence of growth opportunities which were measures through sale

growth rate of the firm. They also employed two steps GMM for the potential possibility of

endogeneity between the organization’s value and leverage.

4.3 Dividend and Firm Performance

It is clear from the results that dividend has an insignificant impact on the value of a firm in full

sample. But it doesn’t mean that dividend is not again factor regarding firm performance. When

we divide firms on the basis of growth opportunities it becomes clear that when there are poor or

no growth opportunities then dividend has significant and positive impact on the performances of

a firm. It means that when there is no growth opportunity then paying dividend is in best interest

of the shareholders and also causes an increase in the value of firm. According to Free cash flow

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theory, when a firm pays high dividends it mitigates the misuse of fund under discretionary

managerial-control. So therefore, firms which have no growth opportunities or few growth

opportunities can reduce the misuse of corporate scarce resources and paying dividends can

increase the value of a firm.

On the other hand, the results of dividend payments are insignificant when there are growth

opportunities which also support our second hypothesis. According to Iturriaga and Crisóstomo

(2010), when a firm has growth opportunities and still it pays dividends then how it can affect

the value of a firm positively, is uncertain. Because new investments requires more funds and

when a firm pays the generated cash flows through paying dividends then it may face problems

regarding raising funds in the future.

4.3.1 Relevance and Contradiction with Previous Literature

Budagaga (2017) looked at the connection between dividend payments and the value of Istanbul

Stock Exchange listed organization. The research was conducted according to the Ohlson

valuation model and applied the residual income approach. The fixed effect was implemented on

panel data by testing multiple statistical techniques. The output showed a significant and positive

relationships between the dividend payments and value of firms. On the other side Jakata and

Nyamugnre (2015) enumerated that dividends policy which was measured through dividend

yield, does not affect the stock price and has insignificant influence on the value of an

organization.

Nguyen, Bui and Do (2019) applied fixed effect model after thorough checking of endogeneity,

causality problems and multicolinerity of the dataset. They used both dividend payout ratio and

dividend yield collectively and checked its impact on the share price volatility which indirectly

123

affect the value of an organization. They found statistically significant and negative impact of

both variable on the share price volatility which also causing a decrease in the value of an

organization. They also enumerated that most of the big organizations are trying to stabilize their

growth rates, so for that purpose that are paying high dividends instead of reinvesting in new

projects. Similarly, Khan et al. (2016) examined the impact of dividend payout ratio on firm

performance through using OLS technique. They found significant and negative impact of

dividend payout on the firm performance which was measured through return on equity.

4.4 Family Ownership and Firm Performance

The results also indicate that concentrated family ownerships has not a significant impact on

organization’s performance in full sample .But the impact of family ownership becomes

significant when there are few or no growth opportunities. In the case of no growth

opportunities, family ownership concentration affects the value of firm significantly and

negatively, as the result reveals. When

the family ownership structure is not very entrenched then it has a negative impact on the

performance of a firm but when it becomes highly entrenched then reverse impact on firm

performance gets started as the results indicate. The results also show that when family

ownership is highly entrenched then expropriation of minority shareholders doesn’t occur as

depicted in the regression output.

4.4.1 Relevance and Contradiction with Previous Literature

Castro, Aguilera and Crespí-Cladera (2016) explored the influences of the family ownership on

firm’s performance in term of noncompliance (a dependents variable which was used for the

organization performances).The noncompliance was operationalzed through economic outcomes

which was measure by ROA and Tobin Q. The output showed an inverted U-shaped influence of

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the family ownerships on organizational performances. The results also showed that when

organizations have excess cash, then it increases the chances for the opportunistic behaviors by

family owner in which the family utility maximization prevails over the shareholder’s value

maximization. Similarly the codes compliance entails strengthening the protections of the right

of minority shareholder and mitigating severity of agency problems. They also exhibited that

when there are few investment opportunities and plenty of cash, then, family shareholders will be

less prone to complies with the practices of corporate governance which will unfavorably affect

the organizations performance. Zattoni, Gnan and Huse (2015) tried to investigate the

relationship between family ownership and firm value but they found this relationship through

incorporating the mediating role of board process which includes use of knowledge & skills,

effort norms and cognitive conflicts, and board tasks which includes control and strategy. They

applied structural equation model and found that (a) family involvements in business has a

positive impact on the effort norms and use of knowledge & skills, and a negative one on the

cognitive conflicts (b) board processes had a positive influence on the board task performance

and (c) board strategy tasks performance were positively influencing the firm’s financial

performance while board control tasks had no significant impact.

Yeh and Liao (2018) tried to explore the relationships between family organizations and

organization’s value on terms of Tax burden. The results revealed positives impact on

organization’s value as a result of reduction in that axes burden of the controlling families. It

provided an insight into the effect of tax policy changes on the controlling structures of family

organizations and the subsequent benefits on firm’s value.

Nekhilia, Nagatib, Chtiouic and Rebolledo (2017)investigated the moderating roles of the family

involvements in the relationships among CSR reporting’s and firm’s market values .They

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showed family organizations report less information on their CSR duties as compared to non

family organizations .Market based financial performance was used for the organizational value

that was measure thorough Tobin .The findings showed positive relations between CSR and

firms value for the family organizations and negative relationship for the non family

organizations. Similarly, Zraiq and Fadzil (2018) attempted and examined the associations

among ownerships structures and organizational performances of the Jordanian organizations.

OLS regression had been applied to test the relationships among independent variables (foreign

firms) and dependent variable (Family firms).The results showed significant and positive

relationships between ownership structure e.g. family and foreign and firm performance.

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CHAPTER # 5

Conclusion, Recommendations and Limitations

5.1 Chapter Introduction

This chapter is about Conclusion, Recommendations and Limitations of the current study. In the

conclusion part, the relationship among variables has been enumerated which are conditioned to

presence and absence of growth opportunities premised on relevant theories. This chapter also

presents the summary of all hypothesis of the study and also shows the acceptance and rejection

of hypothesis based on the results. Besides this, recommendations for different stakeholders;

Government, Security and Exchange Commission of Pakistan, Academicians, Managers etc are

also described .Similarly, implementation of different strategies for the protection of minority

shareholders has also been discussed in order to minimize the expropriation of them which will

improve the structure and performance of corporate sector. Furthermore ,in the last a brief insight

about the Limitations of the study has been provided in order to show that which type of firms

are not included and what are the other constraints which this study is confronting.

5.2 Conclusion

The importance and role of leverage and dividend can be understood from the fact that still it is a

debatable topic since Modigliani and Miller’s (1958) irrelevancy proposition. Discussing the

value of firms without leverage and dividend policy is incomplete. Besides dividend and

leverage, ownership structure is also worth mentioning in this regard. Keeping the importance

and key role of leverage, dividend and family ownership structure, this study examines the

impact of these variables on the value of firms in context of Pakistan. This study has taken into

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account 93 firms which are listed at Pakistan Stock-Exchange for the period ranging from 2005

to 2016.

The first finding of this study reveals that debt has a significant and positive impact on

performance of a firm .In context of Pakistan, debt shows a significant and positive impact on

firm’s performance in both cases e.g. when there are growth opportunities and when there are

few or no growth opportunities. The results partly endorse the first hypothesis and partly doesn’t.

It exhibits that in case of Pakistan under-investment problem doesn’t exist when there are growth

opportunities. It shows that the management is always working in the best interest of all

stakeholders rather than giving more priority to only family shareholders. It may be because of

the reason that as family owners are the main shareholders or blockholders of the organization so

they keep an eye on operations of management and control them through different mechanisms

e.g. issuing debt or giving performance based bonuses etc. The second most important reason

may be that the key positions of the management are also held by the family members so they are

interested in the prosperity and perpetuity of their organizations.

The positive impact of debt on the value of firm in case of poor growth opportunities may be due

to over-investment problem. Over-investment problem arises when firms have more internally

generated cash flows as compared to profitable projects then managers have incentives to invest

it in projects which are leading towards bad performance or they may use it for their private

benefits. According to Jensen (1986), when firms have more free cash than positive net present

value projects, in such cases presence of debt positively affects the value of a firm .The reason is,

because the managers will have to pay out funds to debt providers due to which managers will be

unable to do a misuse of cash resources. If debt was not taken in such cases then the free-cash

may be used in negative net-present value’s investment opportunities. The overinvestment

128

problem can be mitigated through payout excess funds in order to service debt if debt is taken by

the firm. The overinvestment problem basically arises because of separation between

management and equity ownership. This problem can be reduced through making managers

shareholders as well due to which the interest of both shareholders and managers will align. So,

the positive impact of debt on firms performance (when there are growth opportunities) is not in-

line with the first part of hypothesis (H1a) while the second part (H1b) of our first hypothesis is

according to the results. Hence, first hypothesis is partly accepted and partly rejected.

The results of this study support our second hypothesis which is about positive relationships

between dividend and firm’s value, is uncertain when there are growth opportunities. While in

case of no or few growth-opportunities the relationship between paying dividends and firm’s

value is positive. Dividend policy also plays a very crucial role in the value of a firm. On one

side, paying dividend doesn’t let the shareholders to claim against the management and its

functioning while on the other side it makes managers disciplinary. This statement needs a little

elaboration. When a firm is paying dividends then shareholders are satisfied in a scene that their

investments are earning something for them. There are individuals as well as institutions which

are wholly dependent upon the dividend payments of their concerned companies. So when the

company is not paying dividends then it gives them a chance to raise their grudges in the form of

complaints against the management. The idea behind the disciplinary role of dividends lies in

free-cash flow theory. When a firm is paying dividends when there is no growth opportunities

then it decrease the level of funds under discretionary control of management. Due to which they

are unable to employ the funds in a negative present value projects and also decreases the

avenues of misuse of scarce resources of a corporation.

129

The findings of this study also partly support our third hypothesis which is about the impact of

family ownership concentration on the value of a firm. When family ownership concentration is

not at extreme then it causes a negative impact on the value of an organization. It might be

because of conflict of interest due to diffused ownership structure because different members of

the family or shareholders have different set of priorities. All shareholders are seldom on one

page. According to Berle and Means (1932), when ownership structure is dispersed and everyone

is a minority shareholder then such case may lead to bad performance because of managers

discretionary powers. Managers may pursue their own interest at the expense of shareholders.

When ownership concentration goes beyond a critical threshold level it starts a positive impact

on the performance of a firm. It may be because of the reason that in Pakistan firms are mostly

held by family blockholders and they are the majority share-holders and are not involved in the

expropriation of the minority-shareholders because they also want the prosperity of minority

shareholders as well. This indirectly and positively affects the performance of organization due

to least agency costs.

According to Dyer (2006), agency costs are reduced in familial relationships when owners and

managers are relatives e.g. owners who may have their brothers, sons, daughters or other family

member working as their agents, do not need to incur cost of monitoring their agents. But in non

family firms owners have to incur the cost of monitoring their agents. Similarly the top

management team is more cohesive in family owned firms as compared to non family firms

(Ensley & Pearson,2005) because family have high trust, common objectives and shared values.

The alignment effect provides that the founding family organizations are less prone to engage in

opportunistic behavior because it could damage the family’s wealth, reputation, and long term

organization performance. Similarly Andersona, Mansib and Reeb (2003) are also of the view

130

that family organizations are interested in long term survival of the business and reputation of

family or organization. Casson (1999) and Chami (1999) proposed that founding families

perceives their organization as an asset to bequeath it to family members or descendents rather

than as the wealth to consume during their lifetime. Specifically, the interests of family lies in

passing the organization as a going concern to her heirs rather than just passing its wealth.

Survival of organization is thus an important concern for family, suggesting that relative to other

large shareholders they are more likely to maximize the organization value.

Table 5.1: Summary of Hypothesis Acceptance and Rejection

Null and Alternative Hypothesis Status

H1a Leverage and firm’s value are negatively co-related when there are growth opportunities. Rejected

H1b Leverage and firm’s value are positively co-related when there are no growth

opportunities. Accepted

H2 The relationship between a firm’s value and dividends is uncertain when there are growth

opportunities. But paying dividend has a positive impact on firm’s value when a firm has

few or no growth opportunity. Accepted

H3

There is a non-linear relationship between a firm’s value and family ownership

concentration. This relationship is positive initially and becomes negative when there is

few or no growth opportunity.

Partially

Accepted

5.3 Future Recommendations

The role of ownership structure in the performance of organizations is undeniable .In Pakistan

concentrated family ownership is the dominated ownerships structure which is mostly composed

of closely held members .The shareholders who have bulk of shares mostly hold the

organizations and control the overall operations of the organization. According to Ibrahim

131

(2006), the legal system of Pakistan is alike the Anglos American models (ownerships and

controls are separated e.g. Berle & Means model), but in reality ownership structure is not

dispersed as it is in the case of Anglo-American structure .This difference is also ignored by the

Corporate Governance Code (2002) and gets advantages through United Kingdom and South

Africans reforms initiative. The concentrated ownerships structures governance disputes might

not be ameliorated through Governance mechanisms which are framed for markets with

dispersed ownership structures. If East Asian reform steps are taken into account then the effect

of regulatory response will be more powerful. For example, Regulatory assessment of family

ownership structures on South Korean, Hong Kong and Japan's capital markets may provide

insights into comparable governance problems resulting from a focused family ownership

framework, which may be useful in framing better alternatives.

A minimum threshold for seeking a remedy from Court, under the Companies Ordinance, 1984,

against oppression and mismanagement require that at least 20 % of the shareholder can lodge

complaints while Share holder having at least 10 % but less than 20 % of firm’s shares can

submit an application to Security and Exchanges Commission of Pakistan to employ an inspector

for investigating the organization’s affair. Both the Company Ordinance, 1984 and Corporate

Governance Codes (2002) do not acknowledges shareholder that have less than 10 percents of

the origination’s share e.g. minorities shareholder, there are no equivalent provisions present for

them. The Minority shareholders could impose its claim in the civil- case through charging for

tortuous losses. Claimants are routinely seeking interims and the managers. Interim relief is

invariably granted till final adjudication of the matter which causes a hindrance in an

organization’s business. Therefore, to give minorities’ shareholder with an efficient and

effective’s remedies while decreasing the intervention of the organization’s business affairs, an

132

internal grievances and redresses mechanisms ought to be consider for the listed organizations of

Pakistan. The Security and Exchange Commission of Pakistan should institute a ―grievance and

redress committee‖ which will composed of executives and independents director, and will

frame a list of suitable grievances.

In addition, SECP can also extend quasi-judicial function of stocks exchanges through giving the

shareholder (minority) appellate remedied before frontlines regulators and after that to the

Security and Exchange Commission of Pakistan. Similarly, to formulate report and disclosures

highly authentic, the Security and Exchange Commission of Pakistan need to give courage the

shareholders (especially minority) to report any non-compliance openly to an audit committee

and concerned stock exchanges. Pakistan’s Legislature also needs to provide Legal protections to

whistleblowers which would helps in establishing an extra monitoring-system over controlling

majorities (Family owned firms).

Financial reform and institutionals developments have positives effect on the dividends

payments of organization as evident from the Reform of 1990’s in financial sectors. According

to the annual report of Karachi Stock Exchange (2008), the ratio of dividend paying

organizations has been decreased to forty percent in 2007 while it was forty six percent in 2005.

Monetary authorities are advised to concentrate on policies to further liberalize Pakistan's

economic industries. Moreover, as leverage has a negative relationship as the results indicate, it

is recommended that regulatory institutions need to develop approaches to make capital markets

highly effectives and readily approachable in order to make it easier to move from debt to equity

market. These will improve the organizations ' leverage positions and allow them to pay high

dividend.

133

To enhance and develop Pakistan's financial markets, various financial market shareholders are

required to work together to create policies to depress profit retention. This goal can be

accomplished if Pakistan's Securities and Exchange Commission (SECP) sets minimum dividend

payout ratio requirements to promote dividend payments. Additionally, Government of Pakistan

is required to frame a tax incentive policy for firms which are paying dividend regularly which

will persuade other organization too to pay dividends. Similarly, foreign investors must given

high legal’s protection and incentive, in order to freely and without any hesitation invest in these

listed organizations of Pakistan.

The better performance of an organization also depends upon Independent Non-Executives

Director, because Independents Non-Executives Director are catering the interest of all

shareholders without any influence and pressure from controlling shareholders. In developed-

countries handsomer remuneration are been paid to Independent Non-Executive Directors, so

they are highly motivated towards their organizations, but the core problem in Pakistan is most

of organizations are family-owned and majority of the share are held by one persons. So, they are

not in favor of hiring INEDs, because their personnel interests could be suffered. Therefore, most

of the time these Independent Non-Executive Directors in Pakistan organizations are hired on

relations basis just to fulfill the criteria. So, how it’s possible that they would work without the

influence of controlling shareholders (family).Similarly, very minimal salary is paid to them and

their salaries are also dependent on number of meetings attended by them. These main hurdles

need a suitable policy at SECP level which needs to be followed in letter and spirit.

The current study has been carried out in finding the impact of leverage, dividend payouts and

family ownership concentration on the value of a firm. It is suggested that further studies need to

be carried out in context of determining impact of managerial and institutional ownership

134

structure on firm’s performance conditioned to growth opportunities. However, these

recommendations are only suggested for carrying out further studies in the context of Pakistan.

Furthermore, comparative analysis of various South Asian countries needs to be carried out for

finding its impact in different economies.

5.4 Limitations of the Study

1. Financial firms like banks, insurance firms, leasing companies are excluded from the

study.

2. In non-financial firms, firms with missing information during the study period i.e.

2005 to 2016 are also not the part of the study.

3. Only those firms are selected which are capital intensive, have highest market

capitalization and are listed at Pakistan stock exchange.

4. As there is no authentic database for the collection of dividend’s data, so, the data is

taken from Financial Statement Analysis (FSA) reports of state Bank of Pakistan.

135

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Annexure-I List of Sectors and Companies

Textile Sector: Spinning, Weaving, Finishing of Textile

Ellcot Spining

Dewan Textile Mils

Allawasaya Textile and Finishing Mills

Faisal Spinning Mills Ltd.

Gulistan Spinning Mills Ltd.

Prosperity Weaving Mills Ltd

Icc Textile Ltd

Shahtaj Textile Ltd

Samin Textle Mills

Crescent Textile Mills Limited

Kohinoor Textile mills

Sapphire Fibers

Nishat (Chunian) Ltd.

Fateh Sports Wear Ltd.

Gul Ahmed Textile Mills Ltd.

Liberty Mills Ltd.

Moonlite (Pak) Ltd.

Cresent Jute Products Limited

National Silk & Rayon Mills Ltd

Bannu Woolen Mills Ltd.

Food Sector

Dewan Sugar Mills Limited

Shakarganj Sugar Mills Limited

Haseeb Waqas Sugar Mills Ltd

Al - Noor Sugar Mills Limited

Al - Abbas Sugar Mills Limited

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Habib Sugar Mills Ltd.

Shahmurad Sugar Mills Limited

Nestle Milkpak Limited

Rafhan Maize Product

Murree Berwery Company Limited

Ismail Industries Limited

Shezan Int.

National Foods Limited

Mitchell's Fruit Farms Limited

Chemicals, Chemical Products & Pharmaceuticals Sector

Abbott Laboratories Pakistan Limited

Sanofi-Aventis Pakistan Limited

Highnoon Laboratories Limited

Wyeth Pakistan Limited

Dewan Salman Fibre Ltd.

Engro Chemical Pakistan Ltd.= engro corporation

Ittehad Chemicals Ltd.

Sitara Chemicals

Fauji Fertilizer Pakistan Ltd

Berger Paints Pakistan Ltd

Manufacturing Sector

International Industries Limited

Khyber Tobacco Co. Ltd.

Bata Pakistan Ltd.

D. G. Khan Cement Company Ltd

Maple Leaf Cement Factory Ltd

Fauji Cement

Bestway Cement Limited

Lucky Cement

Pioneer Cement Limited

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Dadabohy Cement Industries Limited

Gharibwal Cement Limited

Cherat Cement Company Limited

Fecto Cement Limited

Baluchistan Glass Ltd.

Ghani Glass Ltd.

Motor Vehicles, Trailers & Autoparts Sector

Dewan Farooque Motors Ltd.

Indus Motor Company Limited

Al - Ghazi Tractors Ltd

Atlas Honda Limited

General Tyre & Rubber Company

Honda Atlas Cars Pakistan Ltd

Hinopak Motors Limited

Ghandhara Industries Limited

Coal & Refined Petroleum Products Sector

Pakistan Refinery Limited

Pakistan Petroleum Limited

Attock Petroleum Limited

Attock Refinery Ltd

National Refinery Limited

Oil & Gas Development

Fuel & Energy Sector

Mari Petroleum Company Ltd. (Formerly Mari Gas Company)

Other Services Activities Sector

Dream world Ltd.

Gammon Pakistan Ltd.

Haydari Construction Co. Ltd.

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Javedan Corporation Ltd. (Formerly Javedan Cement Ltd.)

Pakistan Hotels Developers Ltd.

Shifa International Hospitals Ltd.

Information, Comm. & Transport Sector

Pakistan Int.Container

Pak International Airlines

Pakistan National Shippng

WorldCall Communications Ltd.

Paper, Paperboard & Products Sector

Packages Limited

Century Paper & Board Mills Ltd

Security Paper Limited

Merit Packaging Limited

Electrical Machinery & Apparatus Sector

Siemens Pakistan Engineering

Singer Pakistan Limited

Pakistan Cables Limited

Climax Engineering Company Limited

Pak Telephone Cables Limited