Are institutional investors effective monitors in a country where closely held firms predominate? Insights from agency problem-driven dividend payouts

Abstract

Our paper provides evidence on the role institutional investors play as minority shareholders in shaping payout policies of their portfolio firms. Using a sample of companies listed on the Warsaw Stock Exchange, where institutional investors typically play the role of non-controlling shareholders, we show that long-term institutional ownership is positively associated with dividend payouts. This positive relation holds mostly for independent long-term institutional investors. Moreover, it is observed only in firms with relatively high needs for monitoring stemming from more severe agency problems, e.g., firms with above-average levels of free cash flow and “majority-controlled” firms (i.e., firms with insiders controlling at least 50 % of voting rights and using control-enhancing mechanisms). At the same time, we provide evidence that institutional ownership mitigates the over-investment problem and increases corporate transparency for the same groups of long-term institutional investors. All in all, our results indicate that long-term institutional investors can act as monitors and thus mitigate agency problems stemming from the conflicts of interest between majority and minority shareholders, which is typical for countries with concentrated ownership of public companies and weak investor protection.