Corporate governance and dividend pay-out policy in UK listed SMEs. The effects of corporate board characteristics

• Date: 02 October 2017
• Pages: 459-483
• Published date: 02 October 2017
• DOI: https://doi.org/10.1108/IJAIM-02-2017-0020
• Author: Mohamed H. Elmagrhi,Collins G. Ntim,Richard M. Crossley,John K. Malagila,Samuel Fosu,Tien V. Vu
• Subject Matter: Accounting & Finance,Accounting/accountancy,Accounting methods/systems

Corporate governance and

dividend pay-out policy in UK

listed SMEs

The effects of corporate board characteristics

Mohamed H. Elmagrhi

University of East London, London, UK

Collins G. Ntim

Department of Accounting, University of Southampton, Southampton, UK

Richard M. Crossley

Accountancy, Finance and Economics, University of Huddersf‌ield,

Huddersf‌ield, UK

John K. Malagila

Department of Accounting, University of Southampton, Southampton, UK

Samuel Fosu

Birmingham Business School, University of Birmingham, Birmingham, UK, and

Tien V. Vu

University of Huddersf‌ield Business School, University of Huddersf‌ield,

Huddersf‌ield, UK

Abstract

Purpose –The purpose of this paper is to examine the extent to which corporate board characteristics

inf‌luence the level of dividendpay-out ratio using a sample of UK small- and medium-sized enterprises from

2010 to 2013 listedon the Alternative Investment Market.

Design/methodology/approach –The data are analysed by employing multivariate regression

techniques,including estimating f‌ixed effects, lagged effectsand two-stage least squares regressions.

Findings –The results show that board size,the frequency of board meetings, board gender diversity and

audit committee size have a signif‌icantrelationship with the level of dividend pay-out. Auditcommittee size

and board size have a positive association with the level of dividendpay-out, whilst the frequency of board

meetings and board gender diversityhave a signif‌icant negative relationship with the level of dividend pay-

out. By contrast, the f‌indings suggest that board independence and CEO role duality do not have any

signif‌icanteffect on the level of dividend pay-out.

Originality/value –This is one of the f‌irst attempts at examining the relationship between corporate

governance and dividendpolicyintheUK’s Alternative Investment Market, with the analysis

distinctively informed by agency theoretical insights drawn from the outcome and substitution

hypotheses.

Keywords Corporate governance, Corporate board characteristics, Dividend pay-out policy,

Outcome versus substitution hypothesis, UK-listed SMEs

Paper type Research paper

The ef‌fects of

corporate

board

characteristics

459

Received19 February 2017

Revised3 March 2017

Accepted21 March 2017

InternationalJournal of

Accounting& Information

Management

Vol.25 No. 4, 2017

pp. 459-483

© Emerald Publishing Limited

1834-7649

DOI 10.1108/IJAIM-02-2017-0020

The current issue and full text archive of this journal is available on Emerald Insight at:

www.emeraldinsight.com/1834-7649.htm

1. Introduction

Small- and medium-sized enterprises (SMEs) have played, and are increasingly playing, an

important role in most economiesaround the world, including in the UK. For example, in the

UK, SMEs contribute upto 60 per cent of total private sector employment. They accountfor

about 99 per cent of all private sector businesses and 47 per cent of total private sector

turnover (White, 2016), witha small number of them listed on the London Stock Exchange’s

Alternative Investment Market (AIM). Thus, failure of SMEs can lead to signif‌icant

reputational damage to the sector, as well as the UK economy (Herbane, 2013). Despite the

importance of SMEs to UK and worldwide economy, there seems to be a lack of empirical

evidence regarding the impact of board mechanisms on dividend pay-out policies of SMEs

(Belghitar and Khan, 2013). Meanwhile the continuous public interest and discussions

surrounding board mechanisms support the idea that corporate board features may affect

dividend pay-out (Hu and Kumar, 2004;Ozkan and Mancinelli, 2006;Ghosh and Sirmans,

2006;How et al.,2008;Al-Najjar and Hussainey, 2009;Al-Matari et al., 2012;Karim et al.,

2013;Mansourinia et al.,2013;Ghasemi et al., 2013;Hao et al., 2014;Ntimet al., 2015a,2015b;

Khan et al.,2016;Ntim et al.,2017). Specif‌ically, and given the diversity of, and fast-paced

changes in, corporate dividend policies in the post-2007/2008 period, it has become

important to understand the central drivers of corporate dividend policy in the UK.

Therefore, in this paper, we seek to contribute to the extant literature by investigating the

association between corporate governance and dividend policy of UK-listed SMEs in the

post-2007/2008 global f‌inancial crisis era. Specially, we examine the extent to which

corporate board characteristicsinf‌luence dividend pay-out ratio using a sample of UK-listed

SMEs from 2010 to 2013.

Agency-inspired theoretical literature has suggested several monitoring mechanisms

(e.g. good governancepractices and dividends) that can be used to mitigate potentialconf‌lict

of interest problems, includingreducing the amount of free cash f‌low available to managers

(DeAngelo et al., 2006;Easterbrook, 1984;Jensen, 1986). Meanwhile, prior studies which

examined the association between corporate governance quality and dividend pay-out

policy have used two agency theoretical perspectives: the outcome and substitution

hypotheses (Al-Najjar and Hussainey, 2009;Jiraporn et al.,2011;La-Porta et al., 2000;

Sawicki, 2009). Brief‌ly, the outcomehypothesis suggests that the payment of dividends is a

result of corporate governance regime, where managers in well-governed f‌irms are less

likely to retain cash within the f‌irms in the absence of positive net present value (NPV)

investments, and hence, managers in well-governed f‌irms tend to pay large dividends to

signal shareholders theircommitment to treat them fairly by improving the returns on their

investments (La-Porta et al.,2000;Sawicki, 2009). By contrast, the substitution hypothesis

assumes that dividends are a substitute for corporate governance quality, where poorly

governed f‌irms are expected to pay larger dividends to maintain a good relationship with

shareholders (Johnand Knyazeva, 2006;La-Porta et al., 2000).

Due to the numerous reasons explaining why managers pay dividends to their

shareholders, a plethora of studies have investigated the determinants of dividend policy

(Litai et al., 2011;Gill and Obradovich, 2012;Mansourinia et al.,2013;Ghasemi et al.,2013),

albeit with a number of observable limitations.First, the f‌indings of existing studies relating

to the determinants of dividend policy are largely mixed (Osobov and Denis, 2008;Banga

and Gupta, 2010;Nnadi et al.,2013;Maldajian and El Khoury, 2014;Brunzell et al., 2014).

Second, existing studies have investigated largely how general f‌irm-level characteristics,

such as cash f‌low (Travlos et al., 2001;Famaand French, 2001), f‌irm size (Al-Malkawi, 2007;

Al-Kuwari,2009, 2010;Jiraporn et al., 2011), leverage (Al-Shubiri, 2011;Afza and Mirza,

2011;Raf‌ique, 2012;Emamalizadeh et al., 2013) and return on assets (Amidu, 2007;Adil

IJAIM

25,4

460