Lukas Setia-Atmaja

Dividend and debt policies of family controlled firms: The impact of board independence

Purpose - This papers aim is to examine whether board independence influences debt and dividend policies of family controlled firms. Design/methodology/approach - The paper examines panel data on a sample of Australian publicly-listed firms over the period 2000-2005 using panel (random effects) regression. Findings - Empirical test demonstrates that family controlled firms appear to have higher levels of leverage and dividend payout ratios than their non-family counterparts. More importantly, the result indicates that the positive impact of family control on dividend policy is due to the higher proportion of independent directors on family boards. This underlines the significant role that independent directors play in influencing firms dividend policies, especially for family controlled firms. The result also supports the notion that independent directors and dividends are complementary government mechanisms. This paper, however, finds little evidence that board independence moderates the relationship between family control and debt. Research limitations/implications - While not all family firms are the same, this research treats them as a homogeneous grouping (i.e. firms are delineated into family versus non-family). The fact that family firms are difficult to identify and define (reflected in the diversity of definitions in the literature) may also affect the validity of studies of family business. For policy makers, the finding could serve to justify initiatives to encourage more independent directors on boards, especially in family controlled firms. Originality/value - This paper provides evidence about the relationship between board independence, dividends and debt from a country with higher levels of private benefits of control, strong legal shareholder protection but less significant role of external governance mechanisms compared to the USA.

The Impact of Family Control on Dividend Policy: Evidence from Indonesia

S A R I P A T I Vol. 9 | No. 3 ISSN: 2089-6271 | e-ISSN: 2338-4565 9-3.indd 147 3/31/17 5:33 PM 148 International Research Journal of Business Studies vol. IX no. 03 (2016 2017) INTRODUCTION This paper examines how family control affects dividend policy using data from publicly listed firms in Indonesia traded over 2003 to 2009. The finance literature suggests that family control may have both positive and negative impact on firm dividend payouts. On one hand, classical agency theory posits that controlling families may choose to expropriate minority shareholder wealth by preserving firm cash flows that can be misused, thus paying lower dividends (expropriation hypothesis) (Easterbrook, 1984; Jensen, 1986; Faccio et al., 2001). On the other hand, controlling families may opt to build up a reputation of treating minority shareholder well by paying higher dividend payouts (reputation hypothesis) (Gomes, 2000; Myers, 2000). In addition, in general controlling families have a considerable amount of their wealth invested in their firm. Since controlling families do not want to reduce their shareholdings and lose their control, dividend payments are the only possible way for them to obtain an income (family income hypothesis) (Isakov and Weisskopf, 2015). Both arguments predict a positive impact of family control on dividend payouts. Extant studies which have examined the relationship between dividend policy and family control have produced mixed results. For example, Gugler (2003) find that family controlled by families in Austria do not engage in dividend smoothing, choose lower target payout levels, and are less reluctant to cut dividends compared to other firms. Villalonga and Amit (2006), using a sample of Fortune 500 firms, find that family firms in U.S. tend to have significantly lower dividend payout ratios. Faccio et al. (2001) find that East Asian firms have significantly lower dividends, compare to Western European firms. The authors claim that the results indicate that firms operating in countries with weak legal shareholder protection are more likely to exhibit expropriation by controlling families. In contrast, Setia-Atmaja (2010) report that family controlled firms in Australia pay higher dividends than non-family firms. Yoshikawa and Rasheed (2010) who study Japanese firms document higher dividend pay-outs for family firms. Pindado et al. (2012) who examine firms in nine Eurozone countries find that family firms tend to have higher dividend pay-outs and that they tend to smooth their dividends more. Schmid et al. (2010) who study German listed firms find that family firms have higher pay-outs and also a higher likelihood to pay dividends. Finally, Isakov and Weisskopf (2015) indicated that family firms in Swiss display significantly higher dividend pay-outs relative to companies with other ownership structures. Meanwhile, Silva et al. (2004) indicate that, family control in Germany has little impact on dividend policy. Similar result is also reported by Chen et al. (2005) who study firms in Hong Kong. There is a main reason why study of the impact of family control on dividend policy in Indonesia is important. Family controlled firms are prevalent in Indonesia (Claessens et al., 2000). Empirical studies on this issue have been mainly conducted in countries with strong legal shareholder lebih menyukai pembayaran dividen yang rendah dengan tujuan memperoleh arus kas yang bias mereka gunakan untuk kepentingan mereka (the expropriation hypothesis).

Governance mechanisms, simultaneity and firm value in Australia

This study examines whether firms determine governance mechanisms such as dividend, board independence, board size and debt simultaneously, and whether firm value is associated with these mechanisms. Using panel data on a sample of Australian publicly listed firms over the period 2000-2005 (1530 firm-year observations), the study finds that dividends, board independence, board size and debt are jointly determined. The research also finds that board independence is positively associated with firm value. In contrast, debt appears to be negatively associated with firm value, while dividend and board size are not significantly related to firm value. For policy makers, the findings could serve to justify initiatives to encourage more independent directors on boards.

The Impact of Family Control on Dividend Policy: Evidence from Indonesia (pp 147-156)

This paper examines the relationship between family control and dividend policy in Indonesia. There are three possible explanations for the relationship. The expropriation hypothesis predicts that family control has a negative impact on dividend payouts. Meanwhile the reputation hypothesis and the family income hypothesis predict that family control has a positive impact on dividend payouts. Using a panel data of Indonesian publicly listed firms in the period of 2003-2009, the results shows that family control has a significant negative impact on dividend payouts, dividend yields and likelyhood to pay dividends. The results control for other variables that may potentially affect dividend payments such as growth opportunity, debt, profitability, firm size and firm age. From agency theory perspective, the finding is consistent with the argument that family controlling shareholders prefer lower dividends, in order to preserve cash flows that they can potentially expropriate (the expropriation hypothesis). Keywords: Family Control, Dividends, Agency Theory

Wealth effects of private placements: evidence from Indonesia

This study examines the wealth effects of private placements undertaken by Indonesian publicly listed firms. It also determines the factors that affect the wealth creation based on two underlying hypotheses: asymmetric information and monitoring hypotheses. All private placements data of Indonesian publicly listed firms from 1996 to 2013 are used in this study. Wealth effects are measured using an event study methodology while cross-sectional regression analyses with Whites heteroskedasticity-corrected standard errors are conducted to evaluate the main determinants of the observed abnormal returns. This study finds that private placements create value to the issuing firms, and are generally induced by the mitigation of asymmetric information problems rather than by the increase of ownership concentration. Therefore, this study is able to prove asymmetric information hypothesis but fails to support the monitoring hypothesis. This result is consistent with similar studies on other Asian firms which generally have high ownership concentration.