International Journal of Economy, Management and Social Sciences, 2(6) June 2013, Pages: 237-241

TI Journals

International Journal of Economy, Management and Social Sciences

ISSN
2306-7276

www.tijournals.com

The Effect of Board Size, Board Independence and

CEO Duality on Dividend Policy of Companies:
Evidence from Tehran Stock Exchange
Elham Mansourinia*1 , Milad Emamgholipour 2, Esmail Abedi Rekabdarkolaei 3, Mahboobeh Hozoori 4
1,2

Young Researchers Club, Babol Branch, Islamic Azad University, Babol, Iran
Department of Public Administration, Qaemshahr Branch, Islamic Azad University, Qaemshahr, Iran
4
MA student, Department of Accounting, University College of Rouzbahan, Sari, Iran.
3

AR TIC LE INF O

AB STR AC T

Keywords:

Corporate governance as a mechanism and means of creating balance between shareholders and
management, cause to reduce agency problems and will reduce this probability that managers
pursue suboptimal dividend policy. Therefore, the main objective of the present study is to
investigate the effect of board size, board independence and CEO duality on the dividend policy of
listed companies in Tehran Stock Exchange. For this purpose, a sample of 140 companies over the
time span of 2006-2010 was chosen for this study. Using F-Limer and Hausman tests, among the
methods of common effects, fixed effects and random effects for model fitting and hypotheses
testing, the fixed effects method was chosen. The results have shown that there is significant and
positive relationship between board size and dividend policy. But significant relationship between
the variables of board independent and CEO duality with dividend policy of companies has not
been observed.

corporate governance
board size
board independence
CEO duality
dividend policy

2013 Int. j. econ. manag. soc. sci. All rights reserved for TI Journals.

1.

Introduction

Due to the extent of business relationships and therefore forming agency relationships, investors are skeptical that managers make decisions
which have best benefits for them. So the main reason to need for corporate governance is the necessity to restore investors confidence to
business operations through transparency, accountability and responsibility. Each country according to factors such as financial and legal
systems, corporate ownership structure, culture and economic situation of investors has unique corporate governance practices.
Corporate governance includes a set of relationships between a company's management, board, shareholders and other interested parties
which will determine the direction of companies movement. What is the most attention is the presence of an independent board with
professional knowledge in the organization. OECD principles explicitly and clearly stated that the board is final responsible for governance
and conduction of a company [11]. In fact, one of the objectives of corporate governance is having an effective and efficient board and
achieving this goal requires to assessment of the board's features. One of these features is the board size. According to the literature of
corporate governance, small board due to the lake of communication problems and also more coordination of members, are able to exercise
more effective control than large board [13].
One of the main pieces of corporate governance system are shareholders, they indirectly play a role in corporate decision-making by
choosing board members and can be effective in reducing agency costs. So in a good corporate governance system, directors are
accountable to the board and the board is accountable to shareholders and other interested parties [4].
Another feature of the board, that its evaluation is felt, is board independent. Board independence is an important feature to assess the
effectiveness of the board. So in the area of corporate governance, corporate board position as a leading institution that is responsible for
the care and monitoring of business executives is more important. According to the conducted research, separating the duties of CEO and
Chairman of the board is one of the items that help to more board independence [4]. Also duality of board responsibility arises when the
CEO is also the Chairman or Vice Chairman of the Board, in this case, due to increase CEO options and lack of separation of CEO and
Chairman of the Board duties, supervision role of the board is reduced and there is this probability that harm to the rights of shareholders
and interested parties.
Since shareholders are aware of this issue that interests of executives are not consistent with them, they also use other mechanism for
controlling managers. One of these mechanisms is paying a lot of interest. Therefore one way to reduce the cost of conflict of interests
between managers and owners is through increasing the dividend. It means that directors by increasing the dividend and pay it to owners
inform that they are moving in line with corporate goals and shareholders also gain more confidence about performance of the directors.
Thus, the dividend is a factor to reduce the cost of conflicts of interest and dividend payment or its increase will settle shareholders [9] and
* Corresponding author.
Email address: elham_man_23@yahoo.com, m_emamgholipour@yahoo.com

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Elham Mansourinia et al.

Int ernational Journal of Ec onomy, Mana ge me nt and Soci al Sc iences , 2(6) June 2013

corporate governance as a mechanism and means of creating balance between shareholders and management can be reduced agency
problems and will reduce this probability that managers pursue suboptimal dividend policy [5]. Therefore we expect that the index of
corporate governance has effect on dividend policy.
Given to the above theoretical bases, the main objective of this study is to investigate this issue whether board size, board independence,
duality of CEOs duty is effective on the dividend policy of listed companies in Tehran stock exchange?

2.

Literature review

Chen et al. [3] tested the relationship between the financial characteristics, corporate governance and the propensity to pay cash dividends
of Chinese Listed Companies. Their statistical sample consists of 1056 firm-year observations in the period 2001-2007. The results show
that there is significant and positive relationship between the board size and composition of senior management with the propensity of
companies to pay cash dividends. However another feature of corporate governance that is duality of CEOs duty has significant and
negative relationship with the propensity of companies to pay cash dividends.
Gill and Obradovich [6] in their research studied the effect of corporate governance, institutional ownership on the decision to pay the
amount of dividends. Statistical sample of this research has been formed from 296 U.S. companies listed in the New York Stock Exchange
during the years 2009-2011. The research findings showed that there is positive and significant relationship between board size and duality
of CEOs duty with dividend policy. And there is significant and negative relationship between institutional investors and dividend policy.
Bokpin [1] investigated the effect of ownership structure, corporate governance on dividend performance in Ghana companies. In this
study, a sample of 23 companies was selected during the time span 2002-2007. The results showed that there is significant and positive
relationship between board size and dividend and there is negative and significant relationship between financial leverage and dividend.
Subramaniam and Susela [14] in their study tested the effect of corporate governance on dividend policy over 300 listed companies in the
Malaysian Stock Exchange. Results from this theory support that high-growth of companies reduce interest payment and relationship
between investment opportunities and dividend policy is weaker for companies with larger board size. Thus, results indicate that there is
negative and significant relationship between growth opportunities, board size and composition of the board with dividend policy.
Kim and Lee [8] investigated the effect of corporate governance and external financing constraints on dividend policy in 4434 firm-years
observations during the 6 years of the years 1993, 1995, 1998, 2000, 2002 and 2004. In their research they reach to this conclusion that
companies with stronger corporate governance and higher external financing constraints pay lower dividend. While companies with weaker
corporate governance and lower external financing constraints pay more dividends.
Pornsit et al. [12] studied the relationship between corporate governance and dividend policy on a sample of 16013 firm-years observations
during the period 2001-2004. Research findings has shown that there is significant and positive relationship between corporate governance
and payouts policy and this result also does not change after controlling for firm characteristics such as firm size, profitability and growth
opportunities.
Mitton [10] in their study investigated the effect of corporate governance on dividend policy of 365 companies from 19 Asian countries.
Using the agency model he showed that companies with higher rate of corporate governance will be higher interest payment. The research
findings showed that in the companies with stronger corporate governance, there is negative and significant relationship between growth
opportunities and dividend policy.
Borokhovich et al. [2] studied the relationship between board independence and dividend policy on a sample of 192 U.S. companies over
the period 1992-1999. Research findings have shown that there is significant and negative relationship between board independence and
dividend policy.
Fakhari and Yosofalitabar [5] in their study investigated the relationship between dividend policy and corporate governance. This research
studied 125 companies among the listed companies in Tehran Stock Exchange during the years 2004-2007. Also indicators of corporate
governance in this study were calculated based on a list which was divided to eight categories disclosure, business ethics, training of legal
commitments observance, auditing, ownership, board structure, assets management and liquidity. The results suggest that there is negative
and significant relationship between indicators of corporate governance and dividend.

3.

Research methodology

3.1. Statistical Society and Sample

All companies listed in Tehran Stock Exchange constitute the statistical Society of present study. The time period of this study is five years
from 2006 to 2010. To select the statistical sample, the following conditions are considered:
1. In order to increase comparability, the end of their fiscal year lead up to December 31
2. In order to information homogeneity, activity of companies should be manufacturing.
3. Companies are listed in stock before the year 2006.
4. Their financial period has not changed during the studied fiscal year.
5. Needed financial information is available.
Thus, considering the above conditions, 140 companies are selected to test the research hypotheses.

The Effect of Board Size, Board Independence and CEO Duality on Dividend Policy of Companies: Evidence from Tehran

239

Internat ional Jour nal of Economy, Mana ge ment and Socia l Sciences , 2(6) June 2013

The data used in this study are the actual data from the site that has been extracted from the site of the Tehran Stock Exchange (Note 1) and
CDs of financial information of companies listed in Tehran Stock Exchange.
3.2. Research Hypotheses
To investigate the effect of board size, board independence and CEO duality on dividend policy, the following hypotheses are developed to
test:
H1: There is significant relationship between the board size and dividend policy of company.
H2: There is significant relationship between the board independence and dividend policy of company.
H3: There is significant relationship between the duality of CEO responsibility and dividend policy of company.
3.3. Methods of Data Analysis and Hypotheses Testing
The present study is application research in terms of purpose, and is descriptive in terms of nature. The statistical model used in this study
is multivariable regression model. To estimate the research models is used panel data method. In this method, time series and cross
sectional data are combined and it is used for those cases that cannot be investigated as a time series or cross-sectional. Integration crosssectional and time-series data and necessity to use it mostly is due to increase the number of observations, raising the degree of freedom,
reduce heteroscedasticity and reduce multicollinearity between variables [7].
In order to estimate efficiency of a regression model using panel data, it is necessary to choose one of the models of common effects, fixed
effects and random effects using appropriate tests. Therefore, first to choose between the common effects and fixed effects models is used
F-Limer test. If fixed effects model is selected, Hausman test is performed to choose between the fixed effects and random effects models.
If F-Limer test confirm using the common effects method, Hausman test is not need anymore and the model is estimated using common
effect method.
3.4. Research Variables and how they are calculated
In this study, the board size (BS), board independence (BI) and CEO duality (CD) are used as the independent variables; firm size (FS), the
return on assets (ROA), financial leverage (LEV) and net sales growth of firm (FG) are used as control variables and dividend policy
variable (DP) is used as the dependent variable.
Table 1. How to calculate each of the Variables
Variables Name

Symbol

How to Calculate

DP

Dividend per share to net income per share

Board Size

BS

Members existed in the board of company

CEO Duality

CD

If CEO is Chairman of the Board, its value is 1 and otherwise the value is zero.

Board Independent

BI

Unbound members to all members of board

Firm Size

FS

Natural logarithm of total assets

Return on Assets

ROA

Net income to total assets ratio

Financial Leverage

FL

Total debts to total assets ratio

Firm Growth

FG

(Sales of previous year minus sales of current year) to sales of previous year

Dependent variable
Dividend Policy (payment of dividends ratio)
Independent variables

Control variables

3.5. The Model used to test the Research Hypotheses

In this study to test the hypotheses, the following model is used:

DPit 0 1 BS it 2 BI it 3 CD it 4 FS it 5 ROAit 6 LEV it 7 FG it it

Which in this model:
DPit =Dividend policy of firm i in year t.
BSit = size board of firm i in year t.
BIit = independent board of firm i in year t.
CD it = CEO duality of firm i in year t.
FSit = firm size of i in year t.
ROAit = the return on the assets of firm i in year t.
LEVit =Financial leverage of firm i in year t.
FGit = net sales growth of firm i in year t.

it = residual component of model.

0 = constant coefficient (intercept) and 1

to

= coefficients of independent and control variables (explanatory).

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Int ernational Journal of Ec onomy, Mana ge me nt and Soci al Sc iences , 2(6) June 2013

4.

Research findings

4.1. Statistical Tests

As can be seen in the results of Table (2), p-value of F statistic is equal to 0.000. As a result, compilation data estimation method (common
effect method) is rejected. F-Limer test results showed that the common effect method for estimating the regression models is not suitable.
So Hausman test is done to select the appropriate method of estimation. P-value of Hausman statistics also show that fixed effects method
to estimate the model is more appropriate option.
Table 2. Results of F-Limer Test and Hausman Test
Test type

Test statistic

Degrees of freedom

p-value

Test result

F-Limer

98.661400

139.553

0.0000

fixed effects method

Hausman

27.013150

0.0003

fixed effects method

4.2. Results of Research Hypotheses Testing

Results of research hypotheses testing for the whole investigated sample over the period 2006-2010 are presented in Table (2) based on the
fixed effects estimation method.
The first research hypothesis states that there is significant relationship between board size and dividend policy of companies. As can be
seen in the results of Table (3), there is significant and positive relationship between board size (BS) and dividend policy of companies
(DP) at error level less than 5%. Consequently, the first hypothesis is confirmed.
The second research hypothesis tested the relationship between board independence and dividend policy of companies. The results show
that there is no significant relationship between board independence (BI) and dividend policy of companies (DP). Therefore, the second
research hypothesis is rejected.
The third research hypothesis states that there is significant relationship between CEO duality and dividend policy of companies. The
results show that there is no significant relationship between CEO duality (CD) and dividend policy of companies (DP). Therefore, the third
research hypothesis is also rejected.
Among the research control variables, significant and positive relationship between the variables of firm size (FS) and return on assets ratio
(ROA) and net sales growth of firm (FG) was observed with dividend policy at error level less than 1%. While control variable of financial
leverage (LEV) has negative and significant relationship with dividend policy at error level less than 1%.

Table 3. Results of Research Hypotheses Testing

Variables

Coefficient

t-statistics

Sign.

Constant

-1.076046

-2.601841

0.0095

BS

0.157375

2.449094

0.0146

BI

-0.024896

-0.932493

0.3515

CD

-0.007563

-0.127898

0.8983

FS

0.070939

3.840712

0.0001

ROA

0.069653

4.333425

0.0000

LEV

-0.071124

-2.602564

0.0095

FG

0.022828

4.524399

0.0000

Adjusted R2

0.968

F-Statistics

145.6407

Prob(F-statistic)

0.0000

Durbin-Watson

2.1199

Given to the adjusted R2 value in Table (3) can be claimed that about 97% of changes in dividend policy of companies (as dependent
variable) are explained by variables of board size (BS) and board independence (BI) and CEO duality (CD) (as independent variables) and
control variables of the study. P-value of F-Fisher statistic for the research regression model is equal to 0.0000 and indicates that the
regression model generally is significant. Durbin-Watson statistic for the present study is equal to 2.1199 and since this value is between
1.5 and 2.5, can be expressed that the residual component of model in studied course are independent. In other words, the values of residual
component of models are random and existence of autocorrelation assumption between variables is rejected.

The Effect of Board Size, Board Independence and CEO Duality on Dividend Policy of Companies: Evidence from Tehran

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Internat ional Jour nal of Economy, Mana ge ment and Socia l Sciences , 2(6) June 2013

5.

Conclusion

The present study investigates the effect of board size, board independence, CEO duality on dividend policy of companies. The statistical
universe of this study is all companies that are listed in the Tehran Stock Exchange from the beginning of 2006. Among member companies
of statistical Society, 140 companies which were eligible for the study were chosen randomly as statistical sample to test the hypotheses.
In the present study, variables of board size (BS) and board independence (BI) and CEO duality (CD) are considered as independent
variables and dividend policy is considered as dependent variable. To determine the appropriate method for estimating regression model
and hypotheses testing was used F-Limer test and Hausman test that in both tests the fixed effects method was chosen to estimation of
model.
The first research hypothesis test results indicate that there is significant and positive relationship between board size (BS) and dividend
policy of companies (DP). It means whatever the number of board members is greater, companies pursue more payout policies. The
obtained results are consistent with the research results of Chen et al. [3], and Gill and Obradovich [6] and Bokpin [1]. But they are
contrary to the research results of Subramaniam and Susela [14]. But in the survey of the second research hypothesis test, no significant
relationship is not observed between board independence (BI) and dividend policy (DP) and indicates that existence of executive and
unbound manager among board members of companies has no effect on the cash or non-cash dividend payments to shareholders. The
obtained results do not match with the research results of Borokhovich et al. [2].
The results of the third research hypothesis testing indicates that there is no significant relationship between CEO duality and dividend
policy and indicates that existence of CEO and chairman of the board posts for one person in companies has no effect on dividend. The
obtained results do not match with the research results of Chen et al. [3] and Gill and Obradovich [6].

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Notes
Note 1. www.irbourse.com.