Impact of board attributes on the firm dividend payout policy: evidence from Malaysia

• DOI: https://doi.org/10.1108/CG-03-2020-0091
• Pages: 919-937
• Published date: 29 June 2020
• Date: 29 June 2020
• Author: Hussain Tahir,Ridzuan Masri,Md Mahfuzur Rahman
• Subject Matter: Corporate governance,Strategy

Impact of board attributes on the f‌irm

dividend payout policy: evidence from

Malaysia

Hussain Tahir, Ridzuan Masri and Md Mahfuzur Rahman

Abstract

Purpose –This paper aims to examinethe extent to which corporate board attributesinfluence dividend

payoutpolicies.

Design/methodology/approach –A total number of 2,842 firm’s year-observations of Malaysian non-

financial firms representing from various industries. The firms were scrutinized over a period of 14

financial years coveringfrom 2005 to 2018. The data was in a panel form given the cross-sectionaland

time-series nature. The fixed effect is used as the main technique for analysis. The OLS and random

effectstechniques are used for robustness for this study.

Findings –The results revealed that the proportion of board independence, board tenure, board size

and CEO duality have a positive and statistically mixed effect on dividend pay-out. However, the

corporate board diversity and board member age had a negative association with dividend payouts.

Overall, the results suggest that firms with well-organized corporate board attributeaffect positively on

dividendpay-out policy.

Originality/value –This research contributes to a nuanced understanding of internal governance

mechanisms by presenting evidence of the substitution hypothesis in an emerging economy in which

firms operatewithin a unique regulatory frameworkand board composition.

Keywords Dividends, Board size, Board diversity, Board attributes, Board independent

Paper type Research paper

1. Introduction

As Lintner’s (1956) work on dividend payouts and the dividend irrelevance hypothesis of

Miller and Modigliani (1961), dividend payout policy has become a highly debated topic

and previous studies have strained to discover the key factors that affect dividend payout

policy. Therefore, dividend payout policy and corporate board attributes is a most

discussed topic in the financial management of emerging economies, especially ASEAN

countries because of their unique ownership structures. Most ASEAN firms are family-

owned and increasingly play an important role in most ASEAN economies, including

Malaysia. Different countries have different ownership structures in ASEAN. This study

specifically focuses on Malaysian firms, as Malaysia family-owned firms are a major part of

total stock exchange share. Malaysia has the seventh-highest numberof family-owned firms

in the world according to the Credit SuisseResearch Institute (CSRI). In total, 70% of Bursa

Malaysia listed companies are held by families and family members hold many corporate

board positions such as chief executive officer(CEO) and Chairman (Hirschey et al.,2010).

In spite of the importance of family-owned firms to the Malaysian and ASEAN economies,

there is a lack of empirical evidence regarding the impact of board mechanisms on

dividend payout policies in Bursa Malaysia (Al-Najjar and Kilincarslan, 2016;Byoun et al.,

2016;Pahi and Yadav, 2019).

Hussain Tahir and Ridzuan

Masri are both based at the

IUMW Business School,

International University of

Malaya-Wales, Kuala

Lumpur, Malaysia.

Md Mahfuzur Rahman is

based at the Faculty of

Business and

Accountancy, University of

Malaya, Kuala Lumpur,

Malaysia.

Received 22 July 2019

Revised 26 May 2020

Accepted 26 May 2020

DOI 10.1108/CG-03-2020-0091 VOL. 20 NO. 5 2020, pp. 919-937, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 919

The corporate board is the most effective body of management in corporate firms. The

Association for Board Diversity and the Association for Executive Leadership Council

Catalyst recognize the impact of board attributes influence on dividend payout policy. The

Hispanic Association on Corporate Responsibility discusses how diverse board of directors

brings independent, motivating and innovative philosophies to the board. The corporate

board body is responsible for the financial decision-making of the firm. The low investment

opportunities can spoil the effective allocation of internal funds and destroy firm value.

Malaysia is ranked 7th in the world in terms of family-owned business, according to CSRI.

Most of the board members of Malaysianfirms belong to families, which is reason corporate

board influence financial decision-making. Lintner (1956) reveals the announcement of high

ratio dividend is signaled and perception by management’s; the high profit. Signaling

theory suggests that owing to information failure, the dividend is a straightforward sign

about future profits, provided deliberately by management to the stockholders

(Bhattacharya, 1979;Miller and Rock, 1985). Therefore, the organization can select diverse

directors as tokenism (Baysingeret al.,1985).

In the modern organizations, the board of directors is the most important subgroup within

the top management (Bilimoria and Piderit, 1994; Ormiston and Wong, 2019; Soobaroyen

and Hanuman, 2012). Implementation of strategic functions including consulting, scrutiny,

discipline, incentives and compensation to managers and providing access to facilities

such as corporate agreements, contacts and financial matters (West and Van Wart, 2019;

Ferguson et al.,2019;Lincoln and Adedoyin, 2012;Triana et al.,2014;Wellage and Locke,

2013). Existing literature is mostly focuses on examining aspects of dividend payout policy,

highlighting the reasons why managers pay dividends (Arokiasamy et al., 2019; Ghasemi

et al., 2013). There are many factors may affect the dividend payout policy. Some of them,

such as corporate board attributes, R&D and financial leverage. The dividend payment

policy is the most important factor that can help in increment of investment opportunities

(Benlemlih, 2019).

The continuous public interestand discussions surrounding board mechanisms support the

idea that corporate board attributes may affect dividend payouts (Byoun et al.,2016;

Mansourinia et al., 2013;Pahi and Yadav, 2018). Firm’s board diversity, board size, board

tenure, board members age, board independence and CEO duality were analyzed as

background corporate boardattributes. This unique study performed a quantitative analysis

of big panel data from 2,842 firm’s year-observations in Bursa Malaysia periodfrom 2005 to

2018. To overcome the identified boundaries of the linear regression model and random

effect model was used for robustness and fixed effect (FE) is used as a main technique for

identification of relationship between corporate board attributes and dividend pay-out

policy (Woodside, 2013). This study revealed two noticeable landscapes, first, from a

procedural viewpoint, this research syndicated the use of three experiential methods.

Second, this examination offers some valuablesuggestions for practitioners and executives

concerning the debatable association between corporate board attributes and dividend

payout policy.

The academic discussion on the association between board attributes and dividend payout

policy is unsolved. For example, do weak firm board attributes negatively impact dividend

payout policies? Does corporate board attributes aect firm dividend payout policies? Some

researchers have proposed that board attributes and f‌irm dividend payout policies are

sophisticated (Kiet and Thuan, 2019;Sanan, 2019). Therefore, contain many inconsistent

associations, including independent directors that defend the benefits of shareholders,

regulatory and lawmaking bodies and board diversity benefits the dividend payout policy,

Srinidhi et al. (2011) revealed that firm boards have increased their focus on company

betterment and justifiable board attributes in recent years. Therefore, corporations have

continuously worked to cumulate board attributes and present different variants. Prior

studies have shown that corporate boardattributes are relevant to dividend payout policies,

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