Investigation of dividend policy, corporate governance and agency costs on the Johannesburg stock exchange

Abstract

Dividend policy has been an issue of much financial, economic and literature analysis for many years, and remains one of the most debated topics in the field of corporate finance to date. This study attempts to investigate the impact of dividend payments on the agency costs of companies listed on the Johannesburg Stock Exchange. It further explores the role of ownership structure and corporate governance in mitigating agency costs in such publicly listed firms. The study uses a sample of 179 firms during the period 2005-2016, collected from Inet BFA and company websites. The regression explores the different market conditions, that is, during the 2008-2009 global financial crisis and outside of the financial crisis. Three agency cost proxies are used, namely; Asset Turnover Ratio, Free Cash Flow and Sales & Management Expense Ratio. The explanatory variables for ownership structure are the largest shareholder and institutional ownership and corporate governance mechanisms and are measured by board composition, board size, and director remuneration. Dividends are found to be significant in reducing agency costs when both Free Cash Flow and Sales & Management Expense Ratio measures are used. A positive but non-significant relationship is observed between dividends and the Asset Turnover Ratio. Institutional ownership is found to be significantly related to lower agency costs under only two agency cost measures: Asset Turnover Ratio and Free Cash Flow. In analysing the impact of corporate governance mechanisms on their efficacy in mitigating agency costs, only director remuneration is found to mitigate agency costs when regressed on the Asset Turnover Ratio. When dividends are used in conjunction with corporate governance mechanisms, dividends then tend to mitigate agency costs across all the different proxies used.