Managerial share ownership, firm performance and dividends : Australian evidence
thesisposted on 19.01.2017 by Khan, Arifur Rahman
In order to distinguish essays and pre-prints from academic theses, we have a separate category. These are often much longer text based documents than a paper.
This thesis examines the relationship between managerial share ownership and firm performance as well as the relationship between managerial share ownership and dividends in Australia. Agency theory, more specifically two alternative theories – incentive alignment and managerial entrenchment theory – provides the theoretical framework that underpins this thesis. The three empirical studies in this thesis examine the top 300 Australian listed companies for the period 2000 to 2006 and the methodology is based on multivariate regression analysis. Most importantly, all of the studies consider the potential endogeneity of managerial share ownership as well as the simultaneity between managerial share ownership and performance, and managerial share ownership and dividends. There are several primary motivations for this thesis. First, it is argued that characteristics of the Australian legal system, ownership characteristics, market for corporate control, and other corporate governance features, mean that the Australian corporate governance system is markedly different from that of the US and the UK; these differences have the potential to impact the ownership-performance and ownership-dividends relationships examined. Second, much of the prior literature examines the relationship between managerial share ownership and performance using share ownership by all the directors, and does not distinguish between share ownership by the executive directors and by the non-executive directors, in particular, the independent directors. It is posited that executive directors and independent directors have different ownership-performance and ownership-dividends incentives and these are examined separately. Third, the Australian dividend imputation system has interesting implications for the ownership-dividends relationship this thesis examines. The first empirical study in this thesis investigates the relationship between managerial share ownership and performance measured by Tobin’s Q and earnings. This study finds a negative relationship followed by a positive relationship (U-shaped) between managerial share ownership and performance. It is also documented that the relationship is bidirectional, that is, performance also affects managerial ownership but only when it uses Tobin’s Q to measure performance. The study also documents a similar relationship for the executive directors’ share ownership as for managerial share ownership as a whole. As posited, it does not find any relationship between share ownership by the independent directors and performance. The second empirical study examines the relationship between managerial share ownership and discretionary accruals, as well as accrual adjusted earnings. The study finds a positive relationship followed by a negative relationship (inverse U-shaped) between managerial share ownership and the absolute value of discretionary accruals. It also finds that this relationship is driven by executive as opposed to independent directors’ share ownership. It then re-examines the relationship between managerial share ownership and performance measured by earnings adjusted for accruals. Once again a U-shaped relationship is documented between managerial share ownership and adjusted earnings. It is also documented that the relationship is bidirectional. The analysis for the executive directors reveals a similar relationship to that of managerial share ownership as a whole. Once again, no relationship is found between ownership by the independent directors and adjusted earnings. The third and final empirical study investigates the relationship between managerial share ownership and the likelihood of paying dividends as well as dividend payouts. It is found in this study that firms are more likely to pay dividends when managerial share ownership, as well as ownership by the executive directors, is high. Related to this is a positive relationship documented between managerial share ownership and dividend payouts as well as executive directors’ share ownership and dividend payouts. However, this study fails to find any significant relationship between ownership by the independent directors and dividends. Since the direction of causality may also be an issue, this study also investigates the simultaneous determination of managerial ownership and dividend payouts. It fails to find any simultaneous relationship between ownership by managers and dividend payouts. The thesis as a whole presents some unique and robust results relating to the ownership-performance and ownership-dividends relationships, which are argued to be a result of certain Australian institutional features that are clearly different to those in the US and the UK. The results also support the argument that executive directors and independent directors have different ownership-performance and ownership-dividends incentives, and suggest that independent directors may be immune to the theorised incentive alignment or entrenchment effects associated with share ownership.