Examining the effect of institutional shareholders and free cash flow on cash dividends in companies listed in Tehran Stock Exchange

Author Name(s): Nasim Vafaeeinezhad, Shahrokh Esmi*
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Abstract

The goal of this study is to examine the influence of institutional shareholders and free cash flow on cash dividends. In order to achieve this goal, 125 companies listed in Tehran Stock Exchange during 2010-2014 were examined. Multivariate regression of least squares method along panel data were used to test the hypotheses. The results show that there is a significant positive relationship between the percentage of institutional investors and free cash flow with cash dividend, meaning that with increase in the percentage of institutional shareholders’ ownership as well as free cash flow, willingness to pay dividend increases.

Keywords

cash dividends, free cash flow, institutional shareholders, dividend, ownership structure

Introduction

Different models have been used to explain the dividend policy in financial literature. Messaging pattern, considered as one of the important patterns in financial discussions, shows that managers, compared to the outsiders to the organization, have more information about the companies’ future cash flows and have the required incentive to transmit this information to other people and users of financial information. According to this concept, unexpected changes in dividend policy are used as a means to reduce information asymmetry between managers and owners. Dividend discussion is also debatable from agency theory perspective. In agency model, dividend policy is used as a means for aligning the interests of managers and shareholders, because by paying dividends to shareholders, on one hand, free cash flows and the possibility of investment in non-optimal investment projects reduce. Moreover, on the other hand, managers are subject to ongoing monitoring by the capital market (Rouhi et al., 2011).

Conclusion

The objective of this study is to investigate the effect of institutional shareholders and free cash flow on cash dividends. To achieve this goal, 125 companies listed in Tehran Stock Exchange during 2010-2014 were studied. Multivariate regression with least squares method along panel data were used to test the hypotheses. The results show a significant positive relationship between institutional investors and free cash flow with cash dividend, meaning that by increase in the percentage of institutional shareholders’ ownership and free cash flow, cash dividend among shareholders increases.

The researcher’s understanding of the obtained results is that in the companies studied, the percentage of institutional shareholders’ ownership is one of the factors affecting cash dividends. In fact, it could be argued that the desire to receive earnings in institutional shareholders may be the cause.

Moreover, when the company has free cash flow, motivation to receive cash earnings by institutional shareholders increases and this can be the reason for confirming the significant relationship between percentage of institutional shareholder and free cash flow with cash dividend.

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