THE RELATIONSHIP BETWEEN BOARD CHARACTERISTICS AND CORPORATE DIVIDEND POLICY: EVIDENCE FROM JORDAN

Abstract

This paper examines the impact of Board characteristics (board size, board independence, and board gender) on the corporate policy of dividend for a set of 128 firm-year listed companies of the manufacturing sector from Amman Stock Exchange between the years 2016-2018. The board directors have a great influence in handling the agency conflict. They approve any decision made by the executive manager before any decisions made in any manner. Also, dividends can be used as a tool of mitigating agency conflict. The paper uses panel data approach in analyzing the sample and the results show that there is a positive relationship between the Board of directors' characteristics (Board size, board diversity depicted as outside directors and board gender) and the corporate dividend policy. Our recommendations are that Jordanian manufacturing companies should comply with the Jordanian code of corporate governance and diversify their corporate boards of directors by appointing more outside directors and more female directors within their boards. This will also help to create a healthy relationship between the boards and the owners of the firms or the shareholders and minimize the agency conflict theory.

Keywords

• Corporate dividend policy
• board characteristics
• board diversity
• women on boards
• Amman stock Exchange

References

1. Abbadi, S. S., Hijazi, Q. F., & Al-Rahahleh, A. S. (2016). Corporate governance quality and earnings management: Evidence from Jordan. Australasian Accounting, Business and Finance Journal, 10(2), 54–75.
2. Abor, J., & Fiador, V. (2013). Does corporate governance explain dividend policy in Sub‐Saharan Africa? International Journal of Law and Management.
3. Adjaoud, F., & Ben‐Amar, W. (2010). Corporate governance and dividend policy: shareholders’ protection or expropriation? Journal of Business Finance & Accounting, 37(5‐6), 648–667.
4. Al-Najjar, B., & Kilincarslan, E. (2016). The effect of ownership structure on dividend policy: evidence from Turkey. Corporate Governance: The International Journal of Business in Society.
5. Barroso Casado, R., Burkert, M., Dávila, A., & Oyon, D. (2016). Shareholder protection: The role of multiple large shareholders. Corporate Governance: An International Review, 24(2), 105–129.
6. Belden, S., Fister, T., & Knapp, B. O. B. (2005). Dividends and directors: do outsiders reduce agency costs? Business and Society Review, 110(2), 171–180.
7. Benjamin, S. J., & Zain, M. M. (2015). Corporate governance and dividends payout: are they substitutes or complementary? Journal of Asia Business Studies.
8. Bokpin, G. A. (2011). Ownership structure, corporate governance and dividend performance on the Ghana Stock Exchange. Journal of Applied Accounting Research.

9. Boone, A. L., Field, L. C., Karpoff, J. M., & Raheja, C. G. (2007). The determinants of corporate board size and composition: An empirical analysis. Journal of Financial Economics, 85(1), 66–101.
10. Byoun, S., Chang, K., & Kim, Y. S. (2016). Does corporate board diversity affect corporate payout policy? Asia‐Pacific Journal of Financial Studies, 45(1), 48–101.
11. Certo, S. T. (2003). Influencing initial public offering investors with prestige: Signaling with board structures. Academy of Management Review, 28(3), 432–446.
12. Dalton, D. R., Daily, C. M., Johnson, J. L., & Ellstrand, A. E. (1999). Number of directors and financial performance: A meta-analysis. Academy of Management Journal, 42(6), 674–686.
13. De Villiers, C., Naiker, V., & Van Staden, C. J. (2011). The effect of board characteristics on firm environmental performance. Journal of Management, 37(6), 1636–1663.
14. Easterbrook, F. H. (1984). Two agency-cost explanations of dividends. The American Economic Review, 74(4), 650–659.
15. Fama, E. F., & French, K. R. (2001). Disappearing dividends: changing firm characteristics or lower propensity to pay? Journal of Financial Economics, 60(1), 3–43.
16. Fama, E. F., & Jensen, M. C. (1983). Separation of ownership and control. Journal of Law and Economics, 301–325.
17. Fatemi, A., & Bildik, R. (2012). Yes, dividends are disappearing: Worldwide evidence. Journal of Banking & Finance, 36(3), 662–677.
18. Fernández, C., & Arrondo, R. (2005). Alternative internal controls as substitutes of the board of directors. Corporate Governance: An International Review, 13(6), 856–866.
19. Guest, P. M. (2008). The determinants of board size and composition: Evidence from the UK. Journal of Corporate Finance, 14(1), 51–72.
20. Hillman, A. J., Cannella, A. A., & Harris, I. C. (2002). Women and racial minorities in the boardroom: how do directors differ? Journal of Management, 28(6), 747–763.
21. Hu, A., & Kumar, P. (2004). Managerial entrenchment and payout policy. Journal of Financial and Quantitative Analysis, 39(4), 759–790.
22. Ittonen, K., Miettinen, J., & Vähämaa, S. (2010). Does female representation on audit committees affect audit fees? Quarterly Journal of Finance and Accounting, 113–139.
23. Jaara, B., Alashhab, H., & Jaara, O. O. (2018). The determinants of dividend policy for non-financial companies in Jordan. International Journal of Economics and Financial Issues, 8(2), 198.
24. Jensen, M. C. (1986). Agency costs of free cash flow, corporate finance, and takeovers. The American Economic Review, 76(2), 323–329.
25. Jensen, M. C. (1993). The modern industrial revolution, exit, and the failure of internal control systems. The Journal of Finance, 48(3), 831–880.
26. Jensen, M. C., & Meckling, W. H. (1979). Theory of the firm: Managerial behavior, agency costs, and ownership structure. In Journal of financial economics (Vol. 3, Issue 4). Springer.
27. Jiraporn, P., Kim, J., & Kim, Y. S. (2011). Dividend payouts and corporate governance quality: An empirical investigation. Financial Review, 46(2), 251–279.
28. Jurkus, A. F., Park, J. C., & Woodard, L. S. (2011). Women in top management and agency costs. Journal of Business Research, 64(2), 180–186.
29. Kim, I., & Kim, T. (2013). Changing Dividend Policy in Korea: Explanations Based on Catering, Risk, and the Firm’s Lifecycle. Asia‐Pacific Journal of Financial Studies, 42(6), 880–912.
30. La Porta, R., Lopez‐de‐Silanes, F., Shleifer, A., & Vishny, R. W. (2000). Agency problems and dividend policies around the world. The Journal of Finance, 55(1), 1–33.
31. Larkin, M. B., Bernardi, R. A., & Bosco, S. M. (2013). Does female representation on boards of directors associate with increased transparency and ethical behavior? Accounting and the Public Interest, 13(1), 132–150.
32. Latif, R. A., Kamardin, H., Mohd, K. N. T., & Adam, N. C. (2013). Multiple directorships, board characteristics and firm performance in Malaysia. Management, 3(2), 105–111.
33. Linck, J. S., Netter, J. M., & Yang, T. (2008). The determinants of board structure. Journal of Financial Economics, 87(2), 308–328.
34. Litai, C., Chuan, L. I. N., & Kim, Y. (2011). Financial characteristics, corporate governance and the propensity to pay cash dividends of Chinese listed companies. International Business and Management, 3(1), 176–188.
35. Mustafa, A., Che-Ahmad, A., Chandren, & Sitraselvi. (2017). Board diversity and audit quality: Evidence from Turkey. Journal of Advanced Research in Business and Management Studies, 6(1), 50–60.
36. Okafor, C. A., & Chijoke-Mgbame, A. M. (2011). Dividend policy and share price volatility in Nigeria. Jorind, 9(1), 202–210.
37. Pfeffer, J., & Salancik, G. R. (2003). The external control of organizations: A resource dependence perspective. Stanford University Press.
38. Pucheta-Martínez, M. C., & Bel-Oms, I. (2016). The board of directors and dividend policy: The effect of gender diversity. Industrial and Corporate Change, 25(3), 523–547.
39. Rozeff, M. S. (1982). Growth, beta and agency costs as determinants of dividend payout ratios. Journal of Financial Research, 5(3), 249–259.
40. Setia‐Atmaja, L. Y. (2009). Governance mechanisms and firm value: The impact of ownership concentration and dividends. Corporate Governance: An International Review, 17(6), 694–709.
41. Sharma, V. (2011). Independent directors and the propensity to pay dividends. Journal of Corporate Finance, 17(4), 1001–1015.
42. Short, H., Zhang, H., & Keasey, K. (2002). The link between dividend policy and institutional ownership. Journal of Corporate Finance, 8(2), 105–122.
43. Stendardi, E. J., Graham, J. F., & O’Reilly, M. (2006). The impact of gender on the personal financial planning process. Humanomics.
44. Terjesen, S., Sealy, R., & Singh, V. (2009). Women directors on corporate boards: A review and research agenda. Corporate Governance: An International Review, 17(3), 320–337.
45. Uwalomwa, U., Olamide, O., & Francis, I. (2015). The effects of corporate governance mechanisms on firms dividend payout policy in Nigeria. Journal of Accounting and Auditing, 2015, 1.
46. Yarram, S. R., & Dollery, B. (2015). Corporate governance and financial policies. Managerial Finance.
47. Yermack, D. (1996). Higher market valuation of companies with a small board of directors. Journal of Financial Economics, 40(2), 185–211.