Ownership Concentration, Agency Conflicts, and Dividend Policy in Japan

We examine the dividend policy of Japanese firms and find that dividend payout is negatively related to ownership concentration. This result contradicts the argument that dividends are substitute for shareholder monitoring, but supports the assumption that controlling shareholders extract private benefits at the expense of minority shareholders. Consistent with their lower payout, firms with dominant shareholders are less likely to increase dividends when profitability increases and more likely to omit dividends when investment opportunities improve. On the other hand, they are more likely to increase dividend when debt is high and less likely to omit dividends when debt increases, which is tantamount to a wealth transfer from debtholders. Overall, ownership concentration appears to play a critical role in corporate decisions, mainly due to the way it intensifies the agency conflicts between majority and minority shareholders.