The effect of ownership structure on dividend policy: evidence from Turkey

• DOI: https://doi.org/10.1108/CG-09-2015-0129
• Pages: 135-161
• Date: 01 February 2016
• Published date: 01 February 2016
• Author: Basil Al-Najjar,Erhan Kilincarslan
• Subject Matter: Strategy,Corporate governance

The effect of ownership structure on

dividend policy: evidence from Turkey

Basil Al-Najjar and Erhan Kilincarslan

Basil Al-Najjar and

Erhan Kilincarslan are

both based at the

Department of

Management, Birkbeck

University of London,

London, UK.

Abstract

Purpose –This paper aims to investigate the impact of ownership structure on dividend policy of listed

firms in Turkey. Particularly, it attempts to uncover the effects of family involvement (through ownership

and board representation), non-family blockholders (foreign investors, domestic financial institutions

and the state) and minority shareholders on dividend decisions in the post-2003 period as it witnesses

the major economic and structural reforms.

Design/methodology/approach –The paper uses alternative dividend policy measures (the

probability of paying dividends, dividend payout ratio and dividend yield) and uses appropriate

regression techniques (logit and tobit models) to test the research hypotheses, by focusing on a recent

large panel dataset of 264 Istanbul Stock Exchange-listed firms (non-financial and non-utility) over a

10-year period 2003-2012.

Findings –The empirical results show that foreign and state ownership are associated with a less

likelihood of paying dividends, while other ownership variables (family involvement, domestic financial

institutions and minority shareholders) are insignificant in affecting the probability of paying dividends.

However, all the ownership variables have a significantly negative impact on dividend payout ratio and

dividend yield. Hence, the paper presents consistent evidence that increasing ownership of foreign

investors and the state in general reduces the need for paying dividends in the Turkish market.

Research limitations/implications –Because of the absence of empirical research on how

ownership structure may affect dividend policy and the data unavailability for earlier periods in Turkey,

the paper cannot make comparison between the pre-and post-2003 periods. Nevertheless, this paper

can be a valuable benchmark for further research.

Practical implications –The paper reveals that cash dividends are not used as a monitoring

mechanism by investors in Turkey and the expropriation argument through dividends for Turkish

families is relatively weak. Accordingly, the findings of this paper may benefit policymakers, investors

and fellow researchers, who seek useful guidance from relevant literature.

Originality/value –To the best of the authors’ knowledge, this paper is the first to examine the link

between ownership structure and dividend policy in Turkey after the implementation of major reforms in

2003.

Keywords Financial management, Ownership

Paper type Research paper

1. Introduction

In their classic study, Berle and Means (1932) emphasised the predominance of widely

held corporations, where ownership structure is dispersed among small shareholders, but

the control is concentrated in the hands of managers. The image of Berle and Means’

widely held corporation is extensively accepted in finance literature as a common structural

form for large firms in the well-developed common law countries (such as the USA, UK,

Canada and Australia). In this respect, one of the most widely studied explanations for why

firms pay dividends is the agency cost theory, which derives from the problems involved

with the separation of management (the agent) and ownership (the principal) and the

differences in managerial and shareholder priorities, also known as the principal–agent

conflict (Jensen and Meckling, 1976). This theory argues that cash dividends can be used

Received 5 July 2015

Revised 29 September 2015

11 November 2015

Accepted 12 November 2015

DOI 10.1108/CG-09-2015-0129 VOL. 16 NO. 1 2016, pp. 135-161, © Emerald Group Publishing Limited, ISSN 1472-0701 CORPORATE GOVERNANCE PAGE 135

as a tool to mitigate agency problems in a company by reducing free cash flow and forcing

management to enter the capital market for financing, hence leading to induce monitoring

by the market (Rozeff, 1982;Easterbrook, 1984;Jensen, 1986). Prior research has paid

extensive amounts of attention to the principal–agency conflict and mostly focused on the

developed countries, where financial markets are well-regulated and relatively transparent;

mostly contain the publicly-held firms with dispersed ownership; and the control is in the

hands of professional managers.

In contrast, outside the developed countries, renowned cross-country studies have

provided evidence that concentrated ownership is the prevailing form of the ownership

structure in most developing economies. For instance, La Porta et al. (1999) examined the

ownership structures of large firms in 27 different countries and suggested that relatively a

few of these firms are widely held; rather, they are heavily concentrated and are commonly

controlled by families or the states. Claessens et al. (2000) reported that a single

shareholder controls more than two-thirds of publicly listed East Asian firms and families

dominate about 40 per cent of all listed companies. Furthermore, Faccio et al. (2001) found

that families, which often supplied a top manager, are the main players in East Asia and

Western Europe. According to Shleifer and Vishny (1997), family-owned firms govern a

majority of the developing economies in South America. Consequently, increasing

evidence reveals that ownership structure is heavily concentrated in developing

economies; mainly family-controlled firms are widespread around the world and engage a

growing importance in the economic globe.

Moreover, Shleifer and Vishny (1997) argued that when large shareholders, especially

family owners, hold almost full control, they tend to generate private benefits of control

(such as expending the companies’ cash flow, paying themselves extreme salaries,

providing top managerial positions and board seats to their family members). In these

cases, the prominent agency problem is, therefore, expropriation of the wealth of minority

owners by the controlling shareholders, which is the conflict between controlling

shareholders (principal) and minority shareholders (principal), in other words the principal–

principal conflict. Likewise, Villalonga and Amit (2006) stated that families tend to have

more motivation to expropriate minority shareholders’ wealth than any other controlling

large shareholders. Anderson and Reeb (2003) emphasised that family owners may act for

their own interests over the other investors, such as by lessening firm risk, enhancing their

control at the cost of minority owners and misusing internal resources by participating in

non-profitable projects that benefit them. In this respect, Daily et al. (2003) suggested that

agency cost theory may function differently in family-controlled publicly listed firms, and

that prior findings from widely held corporations may not readily generalise into this setting.

Accordingly, it is extremely important to consider ownership structure of companies in

developing (emerging) markets in understanding dividend policy related to the agency

problems in these markets.

As in many other emerging markets, the concentrated ownership structure (by large controlling

shareholders) has been the prevailing form in Turkey, where corporate ownership is characterised

by highly concentrated family ownership with the existence of other large shareholders such as

foreign, institutional and state ownerships (Gursoy and Aydogan, 1999;Yurtoglu, 2003;IIF, 2005;

Sevil et al., 2012). Prior studies (Ararat and Ugur, 2003;IIF, 2005;Aksu and Kosedag, 2006) pointed

out various corporate governance problems and the lack of efficient transparency and disclosure

practices experienced by Turkish firms until the early 2000s. These included the concentrated and

pyramidal ownership structures dominated by families, inconsistent and unclear accounting and

tax regulations and weak minority shareholders’ protection, which all create an environment that

may easily foster corruption, share dilution, assets stripping, tunnelling, insider trading and market

manipulation[1].

However, the new Turkish Government (following the November 2002 elections, which

resulted in a one-party government, the political uncertainty to some degree faded away)

signed a standby agreement with the International Monetary Fund (IMF) and began to

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