Dividends and institutional Investors activism: Pressure resistant or pressure sensitive?

Abstract

This paper provides new international evidence on the relationship between dividend policy and institutional ownership by analysing a sample of US and UK and Irish firms characterised by an Anglo-Saxon tradition and a matching sample of other EU companies from Civil Law legal systems. We hypothesize that, due to the different characteristics of both the legal system and the nature of agency conflicts in firms from those countries, the type of institutional investors and their role in corporate governance is different and so the use of dividend policy to solve the conflict of corporate governance problem differs in each legal system. We find that while in firms from Anglo-Saxon tradition the relation between dividends and institutional investors, pension and investment funds, is possitive, in Civil Law countries the relation is negative where investors are banks or insurance companies with other private interest inside the firm. These results are consistent with our hypotheses and breed new insights into the role of dividend policy as a disciplining mechanism in firms from different legal system with an important presence of institutional investors.