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Sadaf Ehsan1, Muqaddas Khalid and Waheed Akhtar
Department of Management Sciences, COMSATS Institute of Information Technology, Lahore, Pakistan

ABSTRACT: This study tends to evaluate the effect of growth opportunities on dividend payout in the
presence of insider ownership concentration with a sample of 100 non-financial companies listed at
Pakistans KSE 100 index. The period selected for the study is of five years from 2007 to 2011 and
technique selected for the purpose is OLS (Ordinary Least Square) regression. Insider ownership and
growth opportunities; both are relevant in making decisions about dividend disbursements. Insiders
exercise their power to control the various policy decisions of firms including dividends. Results have
shown that high insider ownership leads to cuts in dividend payout in the Pakistani listed companies.
Moreover, if there is a growth opportunity, insiders prefer these investment opportunities over paying
dividends to minority shareholders.
Keywords: Growth Opportunities, Insider Ownership Concentration, Dividend policy and Pakistan.

Dividends are specifically described as distribution of firms
earnings among its equity holders in accordance with their
proportion of corporate shareholdings. Dividend payout
policy persisted as one of the most significant and addressed
topics in the field of managerial finance. Numerous
researchers have debated that dividend announcements are
conceived as good signals to financial growth and admired
by investors and analysts, however, on the other hand, quits
in dividend payout gives a bad signal to financial growth and
can cause financial distress. Bundle of theories have been
presented so far about dividend policy. The pioneer study of
Miller & Modigliani [1] mentioned that in the perfect state
of capital market, the value of the firms remain unaffected
by the corporate dividend decisions, thus neglecting the
general belief that firms value can be increased by payment
of dividends. On the contrary, Lintner [2] and Gordon [3]
indicated that in the world of imperfect capital market,
regular dividend payments increase the firms value because
most managers perceive that reduction in dividends gives
negative impact about the firm in the market. So in the light
of diverging views of theorists about dividend policy, the
dividend looks to be a Puzzle whose pieces have no
possibility of fitting together [4].
Ownership structure has a decisive role in heading the
dividend policy of a company. The ownership structure is
defined as the allocation of equity/shares with respect to
voting power which can be seen in the pattern of
shareholdings of a company. These structures identify the
equity owners of a company with regard to their voting
rights and controlling power. Ownership structure can be of
different types that are important in ascertaining the
corporate performance and managerial activities. For
instance, when ownership is not highly dispersed then there
will be a single group or family with voting and controlling
power to stress the management performance [5] and this
single group will be known as company block-holder who
holds major shareholding percentage in a firm.
The ownership structure, when associated with dividend
payout policy, is backed by Agency theory. Agency

relationship is a contract in which the principal (shareholder)

appoints another person (the agent/manager) to work and
perform for the sake of the former. The conflict of interest
arises normally when the agent is not performing in the
principals interests. The relation of shareholders and
managers of the firm confirms with the definition of agency
relationship [6]. Insider ownership is one of the tools to halt
mounting agency costs by aligning the interest of both the
parties (managers and shareholders) [7] but affects the
dividend payout policy in a sense that it gives rise to new
conflict of interest by reducing dividends or maintaining
payouts at lower level to minority shareholders and using
cash for their personal goals and benefits [8, 9].
Furthermore, dividend policy also works as a controlling and
monitoring instrument to overcome agency costs. When the
firm is not fully controlled and owners cannot actively
manage the firms operations, then high dividend payments
shrink the funds and resources under managerial control and
avoid them to invest these funds in unhealthy investment
projects which can lead towards lower agency cost [10].
In the same vein, growth opportunities can also affect a
firms dividend payout policy as has been discussed earlier
that the growth options are among the key factors which
influence the dividend policy, i.e., the firm tends to use
internal financing for some investment project, arising from
growth opportunity. The use of internal financing leads to
cuts in dividend or lower dividends. In other words, the firm
tends to reduce its dependency on high cost external
financing, this idea is very close to the Pecking Order
Theory; which mentions that the firms preferring to retain
the profits for financing capital nature of expenditures from
internal source pay lower dividends in comparison to the
firm who prefer to finance the capital expenditures from
external financing sources [11]. On the other side, the firm
with the low growth and with low investment opportunity
tends to disburse high amounts of dividend so that the
management can be kept away from overinvestment
problems and saves cash to mitigate the agency costs [12].
Since the ownership structure directly and indirectly related
to the growth of the firm, however, when ownership inclines


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to control the management through high dividend payouts, it

will not be in the best interest for the firm having high
growth opportunity.
1.1. Significance of the Study:
Researchers have focused in identifying the affect of insider
ownership structure on dividend payout strategy in Pakistan,
but till now no study has analyzed the affect of growth
opportunity on dividend payouts in the presence of high
insiders ownership. Current study, in turn, attempts to
examine how the growth opportunities impact the firms
financial decision in the presence of insiders ownership.
Remaining paper is structured as follows: Second part
provides framework of theoretical background, prior
research works and evidence based on relation between firm
financial decisions and firm value with respect to availability
of growth opportunities. Third part constructed for data and
methodology, while the fourth part would portray results and
statistical findings. Last part would be consisting of
discussion, conclusion and some recommendations.
2.1. Agency Cost and Ownership Structure
The inefficiency of agency relationship results in agency
cost [13]. [6] investigated the concept of agency cost and its
relationship with the issue of separation of ownership and
control. They explained agency cost as the monitoring
expenditures by the owner and the adhering expenditures by
the agent. They used the theory of agency cost to explain the
theory of ownership structure of the firm. They illustrated
that consistent payments to owners put the managers under
control and avoidance of over investment thus giving some
relaxation to owners responsibility to monitor the managers,
which depends upon firms ownership structure.
[14] tested the relationship between agency cost, ownership
structure and firms diversification strategies. They found
that equity ownership structure affects the extent of agency
problem because the ownership structure of the firm plays an
important role in devising firms diversification strategies.
These strategies were found to be one of the types of an
agency conflict as these strategies represents corporate
decisions of the firm in which basic conflict of interest arises
between management and owner. In contrast, [15], by using
different sub-samples of 511 US firms, during period of
1976-1980, empirically studied that ownership structure
varies accordingly with the firm facing different situations
regarding environmental stability, economic conditions and
regulations. They observed, if these ownership structures
(diffuse or concentrated) were the results of perfect market
for control then the relation between firms performance and
ownership structure would be eliminated. Their findings
show consistency with the idea that the board members
representing large outside investors do not have common
interest with the pure professional management. And this
diffuse ownership may certainly increase agency problems.
In Pakistan, mostly family oriented business structure exists.
Corporate governance system devised in the companies is
poor and legal protection of investors is lacking which
highlights the importance of impact of ownership
concentration on firms financial decisions [16] and


especially in presence of growth opportunities giving light to

agency costs problem. Previous literature has shown that
majority shareholders, unlike small shareholders, monitor
and control managers so that the firms market performance
improves [17, 18]. The influence of ownership structure
mainly depends on the institutional and legal setting.
Ownership concentration by large block of shareholders
comes into being as a result of insufficient protection of
shareholders rights [19]. In such an environment, the
benefits of large shareholders control are more significant.
The minority shareholders safety is at risk due to wealth
expropriation by strong controlling stockholders [20, 21].
When block-holders have a high enough percentage of
shares, they can entrench themselves and extract private
benefits at the cost of small shareholders[9].
2.2. Dividend and Growth Opportunity
The signaling theory is based upon asymmetric information
between managers and investors [22, 23]. Firms signal
growth opportunities by paying out dividends [24].
Therefore, a positive association between dividends and the
value of firms is expected. Second, financial distress theory
argues that corporations facing financial constraints cutoff
their dividend payments in order to raise funds for
investments in positive NPV projects [25] ), hence growth
oriented firms face financial problems and thus tend to pay
less dividends because the distribution of corporate earnings
among shareholders could harm investment projects.
According to the free cash flow (FCF) theory, higher
dividend policies reduce the funds under discretionary
managerial control. Thus, by distributing dividends, firms
with few or no growth opportunities can avoid the misuse of
scarce corporate resources [26]. Similarly, bonus shares are
another parameter used by the company to control free
riding problem of management by restricting free cash flow
and corporate resources in hands of managers. In such cases,
dividend payouts and bonus shares should increase the value
of the firm.
[10] researched on growth, beta and agency cost by taking
the sample from 64 different industries for the period 19741980 and argued that cost of agency conflicts and cost of
external financing both are associated with payout policy of
dividend. High dividends reduce the agency cost but
increase the cost of external financing because they stated
that optimal dividend policy could minimize the sum of
these two costs. Their empirical findings are consistent with
views of Jensen and Meckling [6] to some extent stating
future growth, investment and (managerial) insider
ownership have significant negative relation with dividend
payouts. [27] statistically examined the influence of
financial leverage on dividend payout decisions of 400 KSE
listed firms during 2002-2008. They found significant
negative relation of debt and dividend policy. They have
shown that low financial leveraged firms pay more
dividends as there is no high cost of external financing is
[28] explored the role of ownership structure in dividend
payout policy with the assumption of free cash flow by using
the sample of 986 observation of listed Japanese firms


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during the period 1992 to 2000. They found positive relation

between FCF and dividend payments and observed that it is
high for firms with low growth and small for firms with high
growth. Putting differently, there is a negative relation of
dividend payments with the high growth seeking firms.
Their empirical framework indicated that managerial and
bank ownerships in non-growth oriented firms have positive
impact on dividend payouts. This view is not consistent with
the idea that managerial ownership (high control) lessens the
need for dividends in mitigating agency conflict and shows
consistency with the notion that bonuses of directors and
executives are positively interconnected with dividend
policy [29]. [30] argued that the growth strategy of any firm
is closely related to the exposure to corporate risk of that
firm and the degree of risk taken by the owners. The
ownership structure may determine the companys growth
strategy. For instance, family controlling owners avoid
corporate risk as their stake in equity ownership increases.
Dcamps and Villeneuve [31] analyzed the linkage of
dividend and investment policy in a liquidity constrained
growth oriented firm. They proved that if there is a growth
opportunity and the projected profit is greater from the
investment plan, then the managers would be reluctant to
pay dividends so that high cash could be retained to invest
into optimal growth opportunity. Furthermore, if there is
excessive cash left, managers go for distribution of
dividends then. Their findings depicted that dividend policy
significantly negatively related to the optimal growth
opportunity which is similar to the study of [28]. [28] stated
that dividend payments are dependent on the liquidity
position either in growth oriented firm or non-growth
oriented firm.
2.3. Hypotheses
On the basis of above discussion on review of different
studies we can formulate the following hypothesis:
Hypothesis 1: Firms with high insider ownership pay fewer
cash dividends.
Hypothesis 2: High growth firms are intended to pay fewer
Hypothesis 3: Growth opportunity has negative impact on
dividend payouts in the presence of insider ownership
Hypothesis 4: The firm with high earnings pays high
Hypothesis 5: There exists a negative linkage between
leverage and dividend payouts.
Hypothesis 6: Large sized firms pay high dividends due to
more cash flows.
3.1. Sample Size and Data Collection for Research
To find out the impact of determinants (insider ownership,
growth, leverage, profitability and size) on dividend payouts
under the context of Pakistan, the sample of 100 nonfinancial firms listed at KSE-100 index have been selected
during the period from 2007 to 2011. The sample has been
taken from different industries like Telecommunication,
Textile, Chemical, Cement Transportation, Refinery and
Food industry etc. The companies have been taken either


ending financial in a month of June or December. Audited

annual financial reports of the companies are the main
source of secondary data which include statement of
financial position, pattern of shareholdings and statement of
comprehensive income. KSE annual reports have been
considered to study the trends in dividends by listed
companies and Economic survey of Pakistan (2011) is taken
under study to check the influence of macroeconomic
3.2. Methodology
We have put upon panel data which is believed to be the
most efficient analytical technique [32]. In order to choose
between the OLS (Ordinary Least Square) and panel
regressions (Generalized Least Square Regression) we have
performed F-Test and result of F-Test is insignificant which
showed that best methodology according to our data type is
OLS (Ordinary Least Square) regression technique.
Therefore, OLS (Ordinary Least Square) has been adopted
to see the variability among dependent and independent
variables (see [8]; [33].
3.3. Defining Variables in Study
3.4. Dependent Variable
Dividend Payout
Many researchers used dividend payouts as a mean of
corporate dividend policy. Dividend payout is computed as
cash dividend per share (DPS) divided by earning per share
3.5. Independent variables:
Insider ownership:
Insider ownership has been taken as an independent variable.
The sum of section of shares held by managers, board of
directors, executives and their spouse and minor children to
the sum number of shares held is taken as a measure of this
insider ownership [7].
Growth Opportunity:
The growth opportunity is measured in terms of percentage
change (increase or decrease) in total assets as compared to
previous year. If the firm wants to acquire more assets to
expand its operation or generate more revenue through sale
then the firm must retain some funds. In this situation the
firm is unable to pay high cash dividends, [31;10].
3.6. Control variables:
Profitability is a control variable, used by many researchers
(see for example [8, 34]. Return on equity (ROE) is used as
proxy (substitute) for profitability which is computed by
dividing net income (NI) to total shareholders equity.
Leverage is ratio of long term debts to total assets.
Shareholders wealth can be increased by using long term
debt but more use of it leads to financial risk in which firms
dividend policy may affect due to fixed interest charges
which reduces FCF available to managers [35].
Size of the firm:
The size is measured in terms of assets by taking the log of
total assets. Mostly, in large sized firms, the cash flows are
stable due to diversified strategy of these firms, so its
connection with dividend payout policy should be positive


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Dividend payout

DPS / Earning per share


Insider ownership



% of shares held by managers, directors, executives and their spouse and minor
Percentage increase in total assets as compared to previous year.
Net income/total shareholders equity


Long term debt/ total assets

Log of total assets


as these large sized firms are capable of paying more

dividends [34]
Three empirical models have been developed in the study
using OLS (Ordinary Least square) regression. Model 1 is
developed to describe the affect of insider ownership on
dividend policy with other variables such as size (SIZE),
leverage (LEVR) and profitability (ROE). Similarly, model
2 is developed to determine the relation between growth as a
predictor variable and dividend payout with other control
variables. GRWT is used as proxy for growth in model 2.
Finally, model 3 has been developed to check the combined
effect of insider and growth opportunity on dividend policy
with control variables used in model 1 and model 2. Model 3
finds out the impact of growth opportunity on dividends of
the firm in the presence of high insider ownership
Model 1:
DPO it = 0 + 1 INSD it + 2 ROE it + 3 LEVR it + 4SIZE it
it (1)
Model 2:
DPO it = 0 +1 GRWT it + 2 ROE it + 3LEVR it + 4SIZE it
it (2)
Model 3:
Dependent variable: Dividend

DPO it = 0 +1 GRWT it + 2INSDit+ 3 ROE it +

4LEVR it + 5SIZE it it (3)
Results in table 1 show negative (-0.669) and significant
relationship (p<0.001) between insider ownership and
dividend payouts justifying the negative relationship of
insider ownership and dividend payouts. It demonstrates that
insider ownership which includes managers, executives and
directors as firm owners are reluctant to pay high cash
dividends. Control variable such as profitability (ROE)
shows positive (0.408) and significant (p<0.001) relation
with dividend payouts, which indicates that firms with high
profitability tends to pay high cash dividends. Leverage
(LEVR) is significantly (p<0.05) and negatively (-0.338)
related to dividend payouts. When the firms are obligated to
pay fixed interest amount on their loans, they retain more
cash for this purpose and decide to pay fewer dividends. Size
of the firm shows insignificant and positive relationship
(5.439) with dividends. The insignificant relation indicates
that size is not a good measure of dividend payout policy of
the firms in Pakistan. In model 1, the R2 is 43.4 % which
shows that the independent variables cause 43.4% change in
the dependent variable. F-value in this model is significant
(p<0.001) which is reasonable

Table 1
Model 1
Independent variable

Control variables
T- statistics
= 43.4 %
Adjusted R2 = 42.3 %
= 41.948*** (P < 0.001)
*** Significant at level (P < 0.001) ** significant at level (P < 0.010) * significant at level (P < 0.05)




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Table 2
Dependent Variable: Dividend
Independent variable
Coefficie -78.555
= .350 %
Adjusted R2 = .338 %
= 29.570*** (P < 0.001)


Model 2
Control variables



*** Significant at level (P < 0.001) ** significant at level (P < 0.010) * significant at level (P < 0.05)

.The OLS regression results in model 2 presents negative

impact of growth on dividend payouts and supported second
hypothesis. Similar results were reported by [10, 36]. They
found that when there is growth opportunity and the
projected earnings are higher from this opportunity then
family owned companies prefer to retain earnings instead of
giving dividends. In model 2, the results reveal significant
relations of all control variables with payouts. ROE remains
positive with coefficient 0.609 at p<0.001 level of
significance. Leverage shows high significance at p<0.001
as compared to model 1 with coefficient -0.655. The
negative and highly significant relation of leverage indicates
that high growth firms are directly related to high cost of
financing which has its negative impacts on dividend
disbursements. Table 3 reveals regression results of model 3
in which growth GRWT and insider ownership INSD used
as independent variables with other control variables, ROE,
LEVR, and SIZE, used in previous models. This table
explains the relationship of independent variables (growth
and ownership structure) with dividend payouts of the firm.
The combined model of growth and insider ownership in
table 3 shows negative impact of growth on dividend payout
policy which shows that firms with high insider ownership
structure retain more cash for reinvestment purpose and pay
less cash dividends if there is a growth opportunity which is
consistent with third hypothesis. Our results indicates that in
Pakistan under the presence of high insider ownership
among other financial decisions, growth options remained
influential in effecting dividend policy of firms during the
period 2007-2011. ROE and Leverage showed consistency
in results as these remained same which indicate the
robustness of their impact on dividends. Overall strength of
relationship R2 of model 3 is 45.5 %. The F value is 36.46
which is significant at (p<0.001).
In Pakistan, majority of firms are family owned and it is
natural in family owned enterprises that managers and
directors do not give high cash dividends because it reduces
retained earnings and increases the external financing cost
for reinvestment. Further, the need to declare high cash
dividends to overcome agency cost declines because interest
of shareholders and management is already aligned with
increased insider ownership. KSE 100 index represents the
companies with high market capitalization and high potential
growth. In emerging economies like Pakistan, it is a

common phenomenon that firms with high capitalization

primarily seize markets and prefer growth opportunities over
dividend payment in case there is a chance to grow
The regression results show negative and significant impact
of growth opportunity on dividend payouts in the presence
of high insider ownership where managers and directors
control the firm decisions. The current findings are in line
with the study of [37-39]). The firms earnings are used for
other purposes rather than paying cash dividend when
managers retain voting and controlling power in the firm.
Insider managers use the resources for their own benefits or
for the growth their company. When insiders increase their
power in the firm, they try to expropriate the wealth under
their control and pay fewer dividends to minority
shareholders. In case of Pakistan, the majority of the firms
are family owned where element of favoritism is common in
appointing directors and executives with lack of experience,
skill and qualifications that ensues in capturing inappropriate
growth opportunities and overinvestment problems which in
turn shrink the earnings of the firms and then it becomes
difficult to pay large cash dividends [40]. However, both
cash dividends and insider ownership structure are ancillary
in minimizing the agency conflict. The asymmetry in
information decreases as interest of shareholders and
management is aligned with the shareholders interest [41].
High cash dividend disbursement reduces the cost of agency
issues because these payments limit the availability of
earnings to the management of the firm that may otherwise
be violated in personal benefits of the mangers. In this sense,
in insider ownership structure, there is no need to disburse
high dividends to mitigate agency conflict [38]. The negative
relation of insider ownership and dividend policy is also due
to our study period 2007-2011. Growth strategies of most of
the companies remained disturbed during this period. High
inflation, cuts in GDP and high government borrowings
forced the State Bank of Pakistan to enter into IMF
agreements, demanded high policy rate environment due to
high inflation. The corporate environment of the country
effected by these measures as loan became too expensive for
capital budgeting projects and large family owned firms of
Pakistan comprising of insider ownership structure forced to


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invest from high cost financing. For this reason, these firms
retained profit for future investment projects.


Table 3:
Model 3
Independent variables





Dependent Variable: Dividend

Control variables

T- statistics




= .455%
Adjusted R2 = .443%
= 36.46*** (P < 0.001)
*** Significant at level (P < 0.001) ** significant at level (P < 0.010) * significant at level (P < 0.05)

There are three control variables in each model. ROE shows

significant positive relation with payouts supported forth
hypothesis. This result is consistent with the studies of [12,
42]. It has been normally seen that higher you earn, the more
you will distribute. The results reveal significant and
negative impact of leverage on dividend payouts in each
model supports our fifth hypothesis. These results are
consistent with the study of [8, 37] and contradictory to
Ahmed and Javid [32]. In Pakistan, the firm with high debt
is reluctant to pay cash dividends because of financial risk
and obligation to pay fixed interest payments [27].
Moreover, the Pakistani debt market is not so mature and
firms seeking external financing for future growth are not
easily accessible to debt market unless having a good credit
rating records and socio-political relations. In such
circumstances, the growth oriented firms with high debt
decide to pay less or no dividends and accumulate more cash
trying to maintain credit rating position and good sociopolitical relations with financial institutions to extend further
future financing at low cost.
The results show that the size of the firm is insignificantly
related to the firms payout ratio. There are different
arguments of the researchers, for example Al-Malkawi [43]
found positive significant relation. The negative relation
might be due to the reason that large sized firms in Pakistan
with high debt liabilities tried to accumulate more funds to
figure up their cash reserves after the great depression of
2008 in expectations of further deteriorations in the future.
The positive impact of size on dividend payout policy
noticeably shows that large sized firms with large cash flows
pay more dividends as compared to small sized firms. The
insignificant and uncertain relationship of size and dividends
show that size of the firm is not a good predictor of dividend
payout in Pakistan see [34].
In recent years, financial economists have debated the
importance of financial decisions mainly regarding dividend
policy of the firm. A key factor in this process is the growth
opportunities available to the firms. As the literature has
shown that the functioning of corporate control mechanisms

and financial decisions strongly depends on the investment

projects the firm can undertake. In addition to the investment
opportunities, other variables such as the ownership
structure, leverage and profitability affect the dividend
decisions of the Pakistani listed firms.
The results for a sample of 100 non-financial Pakistani firms
listed between 2007-2011 supports the impact of insider
ownership structure on dividend payouts conditional on
growth opportunities. Growth illustrated a negative impact
on dividend payouts in the presence of insider ownership.
Insiders use funds for their own benefits and for the growth
of their firm. They keep high cash reserves and force their
discretionary power on the wealth for further investment
plans, so they try to keep more earning for future growth
opportunities and pay small amount of dividends. Profitable
firms pay high dividend which is the evidence of more
reliance of dividend policy on the higher earnings of the
firm. High debt financing leave the firm with low cash
available as dividend for common shareholders as priority of
interest bearing loan comes first in corporate environment.
Size remained unpredictable in defining dividend payout
decisions of firms. Finally, our results suggest that
ownership structure has dual impact that is insider
ownership initially improves the value of most of the firms
by aligning the interest of shareholders and managers.
However, in firms with growth opportunities, the risk
increases that large block-holders expropriate wealth at the
cost of minority shareholders.
This paper gives important implications for researchers,
professionals and practitioners. For researchers, it widens the
theoretical framework of ownership structure by giving
insights about relation between growth opportunities and
other important financial decisions. For professionals and
practitioners, it helps to consider that how several financial
decisions can have impact on the firms earnings available to
shareholders and for investment opportunities under certain
circumstances. For practitioners, it also gives some
knowledge about the conflict that may arise due to the
decisions taken under specific ownership structure inside the


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The results can further be clarified and justified by extending
the sample size and time period of the current study. There is
need of an exceptional work related to legal environment
available for the protection of shareholders rights. This study
can be extended further by including other forms of
ownership structure to value the growth opportunities
available to the firms.



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