Institutional shareholders and dividend payout in Malaysia

Abstract

This study seeks to furnish insights on institutional shareholders by assessing whether higher presence of institutional shareholders leads to higher dividend payout or vice versa in line with a particular version of the agency theory. The panel data consists of 100 Malaysian firms from the trading and services sector of Bursa Malaysia from the years 2005 to 2008. In line with the ‘efficient monitoring hypothesis’ theory of institutional shareholders and in conjunction with the outcome model of dividends, we find the presence of institutional shareholders results in higher dividends payout in Malaysia. In spite of the lower fraction of shareholding by institutional shareholders in Malaysia as compared to developed markets, it is clear from the results that the they in fact bring about a positive impact to the firms they invest in by resulting in higher dividends payments. We have provided a framework linking the two theories of dividends (outcome and substitute) and the three theories of institutional shareholders (efficient monitoring hypothesis, conflict of interest hypothesis and strategic alignment hypothesis) to better analyze the two broad ranging theories into greater depth.