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We study the importance of investor rights in payout policy determination in Asia, using a sample of up to 52,778 firm years. The listed Asian firms located in relatively high investor protection, common law countries, have a greater tendency to payout and, if they do so, they tend to pay out more. We also examine the importance of distinctive creditor and minority shareholder rights in respect to payout policy determination. In our study of a variety of payout events (decisions to pay out, to initiate or omit payout and to markedly increase or decrease payout), we show that this set of payout events is principally determined by competing creditor and minority shareholder rights, rather than managerial sought reputation related effects, to diminish the cost of capital. Our findings indicate that creditors exert significant and far reaching influence over corporate payout policy decision-making, however, the importance of the agency costs of equity predominates.

In this article, we study the principal-agent relation and associated agency conflicts in respect to corporate payout determination in Asia. In particular, we examine the importance of distinctive creditor and minority shareholder rights in respect to payout policy determination across a wide variety of investor protection environments present in the region. In a seminal contribution to the literature on international corporate governance, La Porta, Lopez-de Silanes, Shleifer, and Vishny (2000) find that higher dividends internationally are an ‘outcome’ of better minority shareholder protection regulation, at the country level, which enables these stakeholders to negotiate effectively with management and controlling shareholders. Over the last decade, several researchers have found corroborative evidence in favor of managers distributing more cash as dividends in countries with better minority shareholder protection regulation. For example, Dittmar, Mahrt-Smith, and Servaes (2003) find evidence that firms incorporated in stronger shareholder protection countries hold less cash. Further, Pinkowitz, Stulz, and Williamson (2006) find that cash is worth less to the minority shareholders invested in the firms in low-protection countries as a result of legal frameworks which facilitate the expropriation of this cash by the management and controlling shareholders. Kalcheva and Lins (2007) and Jiraporn, Kim, and Kim (2011) find that individual firm-level corporate governance quality also has a significant impact on its dividend policy. Kalcheva and Lins (2007) simultaneously control for minority shareholder protection both at the firm- and the country-level, and find that firms with weak minority shareholder protection, which are incorporated in countries that permit weak minority shareholder rights, hold more cash. Jiraporn et al. (2011) show that stronger governance at firm-level not only leads to a higher propensity to pay but also to higher payout amounts. In addition, Brockman and Unlu (2011), indicate that the firm's disclosure environment plays a significant role in dividend payout policy determination through its effect on agency costs. Although it is therefore evident that both firm- and country-level measures of potential agency conflicts have been found to determine corporate payouts, Harford, Mansi, and Maxwell (2008) show that a firm's cash holding is principally influenced by the country-level minority shareholder protection rather than firm-level protection. Taken together, these international studies establish a pronounced linkage between minority shareholder rights at the firm- and country-level and cash holding as well as the disbursement of dividends at the firm-level. These studies suggest that in low-protection countries, management can stockpile cash while in high-protection countries legal frameworks enable minority shareholders to obligate the management to distribute cash and this manifests itself in the form of higher payout ratios in these countries. In a complementary strand of the literature, researchers have turned to examining the importance of distinctive creditor and minority shareholder rights in respect to payout policy determination.1Brockman and Unlu (2009) use country-level creditor rights indices to document that creditors can strongly influence the management to adopt a more restrictive payout policy as a ‘substitute’ mechanism for weak creditor rights to minimize the firm's agency cost of debt. In fact, they report that the agency costs of debt play a more influential role in dividend policies internationally than the agency costs of equity. In a similar vein, Chae, Kim, and Lee (2009) find international evidence that firms with higher external financing costs undertake a more restrictive payout policy in order to maximize the value of the firm. In this article, we adopt logit and Tobit regression model specifications, together with the Fama and MacBeth (1973) hypothesis testing methodology, to build on the findings presented in Brockman and Unlu (2009), in respect to the impact of creditor and minority shareholder protection regulation on firm dividend policies. Unlike in the extant literature, which generally has a dominance of civil law countries in its sample (Brockman and Unlu, 2009, Brockman and Unlu, 2011, La Porta et al., 2000 and von Eije and Megginson, 2008), our Asian sample of ten developing countries includes an approximately balanced dataset of five common law and five civil law countries. This allows a potentially insightful investigation of the impact of common and civil law regulatory frameworks on dividend policies in respect to emerging economies exclusively. In addition, our measurements of country level creditor and minority shareholder rights are preferred to those which are adopted in Brockman and Unlu (2009). Specifically, while we adopt a dynamic measurement, 2005 through to 2009, of creditor and minority shareholder rights indices, Brockman and Unlu (2009) avail of a static measurement of these rights.2 In our investigation of the impact of investor rights on firms' dividend policies we follow Brockman and Unlu (2009) in controlling for firm maturity, leverage, profitability, growth opportunities, size and cash holdings. In addition, we extend this set of control variables to include the ownership concentration (Chemmanur et al., 2010 and Faccio et al., 2001), earnings reporting frequency (von Eije & Megginson, 2008), stock market liquidity and market capitalization (Pinkowitz et al., 2006) as well as income risk (von Eije & Megginson, 2008) and privatization (Megginson et al., 1994 and von Eije and Megginson, 2008) variables. Finally, following Brockman and Unlu (2009), in respect to the determination of dividend policies, we consider the determination of dividend omissions but we also consider the determination of dividend initiations, large dividend increases and large dividend reductions. Our main findings can be summarized as follows. First, using a sample of up to 52,778 firm years and allowing for traditional payout determination variables, the Asian firms located in relatively high investor protection, common law countries, have a greater tendency to pay out and, if they do so, they tend to pay out more. Second, we also examine the importance of distinctive creditor and minority shareholder rights in respect to payout policy determination. The amount of payout, and the decisions to initiate dividends and distribute a large increase in the dividends, are determined by the balance of these ‘stakeholders' rights’ and the corresponding capacities of these stakeholders to influence insiders to retain or disgorge cash, respectively. Albeit, the decision to pay out (excluding the decision to initiate the payout of dividends), is conducted to promote, from the perspectives of creditors and minority shareholders, the reputation of the firm. Finally, our findings indicate that creditors exert significant and far reaching influence over corporate payout policy decision-making, however, in Asia the importance of the agency costs of equity predominates. These findings are robust to an extensive set of control variables and model specifications. The remainder of this article is organized as follows. In Section 2, our dataset is outlined and the constructed proxy explanatory variables are described with a particular focus on creditor and minority shareholder investor protection regulation variables. In Section 3, we present summary statistics at the firm-, country- and industry-levels. In Section 4, we present our empirical findings. Finally, a summary and concluding remarks are presented in the last section.

In this article, we study the principal-agent relation and associated agency conflicts in respect to corporate payout determination in Asia. In particular, we examine the relative importance of distinctive creditor and minority shareholder rights in respect to payout policy determination across a variety of investor protection environments present in the region. Our study of the effects of the principal-agent relation on firm payout policy is conducted with considerable novelty. In this study, we examine the Asian markets, availing of a dynamic measurement, 2005 through to 2009, of creditor and minority shareholder rights. In contrast, Brockman and Unlu (2009) avail of a static measurement of creditor rights over time. Furthermore, we account for additional effects on the dividend decisions studied, relative to those effects accounted for in Brockman and Unlu (2009). In particular, we extend the set of control variables used by these authors to also account for the effects of ownership concentration (Chemmanur et al., 2010 and Faccio et al., 2001), earnings reporting frequency (von Eije & Megginson, 2008), stock market liquidity and market capitalization (Pinkowitz et al., 2006) as well the effects of income risk (von Eije & Megginson, 2008) and privatization (Megginson et al., 1994 and von Eije and Megginson, 2008) on firm payout policy. Finally, following Brockman and Unlu (2009), in respect to the determination of dividend policies, we consider the determination of dividend omissions but we also consider the determination of dividend initiations, large dividend increases and large dividend reductions. Several of our main findings are consistent with the findings reported in earlier studies. We find, in line with La Porta et al. (2000) and Harford et al. (2008), that the Asian firms located in relatively high investor protection, common law countries, have a greater tendency to pay out and, if they do so, they tend to pay out more. Second, we examine the importance of distinctive creditor and minority shareholder rights in respect to payout policy determination. Consistent with reported findings of Brockman and Unlu (2009) and Chae et al. (2009), we show that the ongoing decision to pay out (exclusive of the dividend initiation decision) is conducted to promote, from the perspectives of creditors and minority shareholders, the reputation of the firm. Concurrently, we do show, however, that the amount of payout of firms in Asia is principally determined by the balance of the ‘stakeholders' rights’ and the corresponding capacities of debt and equity claimants to influence firm dividend policy. This veritable confrontation, between creditor and minority shareholder entitlements, is pre-eminent in influencing insiders to retain or disgorge amounts of cash (small and large) as well as the decision to initiate cash dividends. Finally, unlike in the extant literature we find a different relative importance of the agency costs of debt and equity on firm payout policy determination. In Brockman and Unlu (2009), a conclusion is drawn in regard to the decisive role of the agency costs of debt in determining dividend policies relative to that of the reported agency costs of equity. In contrast, our findings indicate that creditors exert significant and far reaching influence over corporate payout policy decision-making, however, in Asia at least, the importance of the agency costs of equity predominates.