DOES CORPORATE GOVERNANCE AFFECT THE CRITICAL CORPORATE POLICIES SUCH AS DIVIDEND POLICY?
International Journal of Economics and Financial Issues
This study examines the influence of corporate governance on dividend policy based on a sample of Canadian firms listed on the S&P/TSX composite index during 2009-2012. The results show that firms with better governance quality, measured by the governance index provided by The Globe and Mail, have larger payouts and have a higher propensity to pay dividends. In terms of four dimensions of corporate governance index, the shareholding and compensation index is the most important determinant of
... t determinant of dividend payouts. Our results support the complementary role of corporate governance and dividend policy of the firms. The implication from this study is that managers and board of directors should make dividend payout decisions in a big picture of corporate governance. Two theories propose a relationship between dividend policy and corporate governance. The first theory (i.e., the outcome model) argues that better corporate governance quality is associated with higher dividend payouts. The reason is that distributing available cash to shareholders can reduce the conflict of interests between managers and shareholders and thereby lower the agency costs. The second theory (i.e., the substitute model) proposes an inverse relationship between corporate governance quality and dividend payouts. The substitute model proposes that in firms with low governance quality, managers have greater opportunities to exploit This Journal is licensed under a Creative Commons Attribution 4.0 International License