Dividend Pay-Outs and Leverage in Japanese Firms
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Dividend Pay-Outs and Leverage in Japanese Firms Sophie Nivoix Faculte´ de Droit et Sciences Sociales de Poitiers, 93, avenue du recteur Pineau, 86022 Poitiers cedex, France. E-mail: [email protected]
Through an analysis of the use of leverage and dividend policy by Japanese companies, we came to the conclusion that the strategy that directed them regarding the agency theory cost levels incurred was not neutral. The theoretical implications of the agency theory allowed us to express several hypotheses that we tested on a wide sample of Japanese firms listed on the Tokyo Stock Exchange. Owing to considerable restructuring in Japan at that time, the difference between keiretsu and non-keiretsu firms was also investigated. In the empirical part of this paper, we show some clear differences between firms located within the influence area of the horizontal groups (keiretsu) and those outside it. Indeed, the outside companies showed a leverage rate significantly lower than the others, and a slightly lower pay-out ratio. As for firms belonging to keiretsu, no difference regarding leverage levels was noted, but there was a slight tendency for firms belonging to former zaibatsu heirs to pay lower dividends than companies belonging to other horizontal groups. Moreover, leverage and dividend policy appeared to be ways of reducing agency costs. Evidence showed that these means were more substitutive than complementary, since our results showed a negative relationship between leverage and pay-out ratio. Asian Business & Management (2005) 4, 185–203. doi:10.1057/palgrave.abm.9200129 Keywords: dividend; leverage; agency theory; keiretsu; Japan
Introduction The main characteristics of a firm’s financial policy are directly connected to items such as shareholder structure, company size and relationships with main economic partners. The agency theory provides an interesting view of the links between factors that may influence financial strategy. Thus, in the case of Japanese companies, the fact that a firm belongs to the influence area of a diversified horizontal group (keiretsu) leads to many organizational and
Received 6 December 2003; revised 9 December 2004; accepted 13 December 2004
Sophie Nivoix Dividend Pay-Outs and Leverage in Japanese Firms
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financial implications. This is all the more perceptible since the end of the 1990s, when Japanese industry started experiencing significant developments. The first section of this paper concentrates on elements that influence the financing policy of firms with relation to the agency theory, and more particularly dividends and leverage. We will also give details about recent changes that are affecting the economic and financial context that Japanese firms live in. The second section will tackle the hypotheses tested in the empirical analysis as well as all the results obtained by the study of a large sample of companies.
Factors Influencing Financing Policy within the Scope of Agency Theory Agency relationship and its implications Since the founding work of Jensen
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