Impact of board characteristics on firm dividends: evidence from India

• DOI: https://doi.org/10.1108/CG-12-2018-0383
• Pages: 1204-1215
• Date: 27 September 2019
• Published date: 27 September 2019
• Author: Neeti Khetarpal Sanan
• Subject Matter: Strategy

Impact of board characteristics on f‌irm

dividends: evidence from India

Neeti Khetarpal Sanan

Abstract

Purpose –This study examined the impactof board size, independence and gender diversity on firm

dividend payout. Furthermore, it examined whether the board characteristic–dividend payout

relationshipwas moderated by free cash flowsin the firm.

Design/methodology/approach –A total of 118 Indian firms representing multiple industries were

examined for a period of four financial years from 2013 to 2016. The data are in panel form given the

cross-sectionaland time series nature of thestudy. Random effects specificationwas used for analysis

Findings –Results of the study indicatedthat the proportion of independent directors andproportion of

female directors on the boardhave a negative and significant effect on dividend payout. In addition, the

results showed a negative and significant moderating role of free cash flows, which implied that the

magnitudeof the impact of the proportion of independent directorsand the proportion of female directors

on the board on dividend payout is significantly greater in firms with high free cash flows. Overall, the

results suggested that firms whose board characteristics signaled strong governance paid lower

dividends.

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

mechanisms by presenting evidenceof the substitution hypothesis from an emerging economy, one in

which firmsoperate within a unique regulatoryframework of board composition.

Keywords Dividends, Corporate Governance, Board Size, IndependentDirectors, Gender Diversity

Paper type Research paper

1. Introduction

Why do firms pay dividends? What role do dividends play? The dividend puzzle (Black,

1976) is not easy to comprehend. Modigliani and Miller (MM) postulated that under perfect

market assumption, dividends are irrelevant to the value of the firm. However, under

imperfect market conditions, two key theories describe the role that dividends play, the

signaling theory which postulatesthat dividends signal financial robustness and the agency

theory which expounds their role in firm corporategovernance. Research on the relationship

between firm governance and dividends has drawn samples from developed economies

and studies on weak institutional environments in emerging economies are scarce

(O’Connor, 2013). Emerging economies are worthy of standalone exploration as country

specific institutional environment impact governance mechanisms (La Porta et al., 2000),

therefore ‘finer grained’ research into prevalent systems of corporate governance (Young

et al.,2008

) is warranted. Different emerging economies have been combined into a single

group because of similarities they possess, one such similarity being that poor institutional

protection of minority shareholders leads to conflict with controlling shareholders (Young

et al.,2008

). Appropriation of value from minority shareholders to controlling shareholders

takes place by influencing board level decisions(Su et al.,2008). A characteristic of such a

conflict is lower levels of dividend payout (La Porta et al.,2000). According to Hermalin and

Weisbach (2003), an effectiveboard of directors is one of the solutions to conflicts within the

firm; both size and composition of the board impacting quality of its decision-making.

Neeti Khetarpal Sanan is

based at the Department of

Finance and Accounting,

Indian Institute of

Management Udaipur,

Udaipur, India.

Received 14 December 2018

Revised 14 March 2019

1 May 2019

8 June 2019

Accepted 10 June 2019

PAGE 1204 jCORPORATE GOVERNANCE jVOL. 19 NO. 6 2019, pp. 1204-1215, ©EmeraldPublishing Limited, ISSN 1472-0701 DOI 10.1108/CG-12-2018-0383