The Effect of Institutional Ownership Stability on Cash Dividend Policy: Evidence from Taiwan

This study examines whether investment horizons among institutional investors affect cash dividend payout policies among firms. We use institutional ownership volatility and persistence to measure institutional ownership stability. We find that cash dividend payout ratios are negatively correlated to volatility and positively correlated to persistence. The results suggest that firms with stable institutional investors encourage managers to pay cash dividends rather than invest in suboptimal projects or perquisite consumption. Furthermore, this study tests whether the impact of institutional ownership stability on cash dividend policy matters in firms with greater agency costs. This study finds that stable institutional ownership increases cash dividends for firms with severe or slight agency problems. These findings suggest that institutional ownership stability plays an important role in monitoring and hence in determining cash dividends.