Principal–principal agency conflicts, product market competition and corporate payout policy in China
| Pages | 265-279 |
| Published date | 10 January 2020 |
| DOI | https://doi.org/10.1108/JABS-02-2018-0038 |
| Date | 10 January 2020 |
| Author | Amjad Iqbal,Xianzhi Zhang,Muhammad Zubair Tauni,Khalil Jebran |
| Subject Matter | Strategy,International business |
Principal–principal agency conflicts,
product market competition and corporate
payout policy in China
Amjad Iqbal, Xianzhi Zhang, Muhammad Zubair Tauni and Khalil Jebran
Abstract
Purpose –The purpose of this paper is to examine theinteraction between competition and corporate
payout policy and more specifically to answer the question that whether competition mitigates the
principal–principal agency conflicts and influences firms to distribute dividends to shareholders in
Chinesecorporations.
Design/methodology/approach –This research models measures of competition with scaled
measures of dividends and analyzes a sample of 16,730 firm-year observations from Chinese-listed
manufacturingfirms for the period spanning 2003 to 2016. Further, this research uses the Tobit model(a
censoredregression) to empirically test the proposedhypotheses.
Findings –This research finds thatintense competition not only mitigates agency problemsand forces
firms to disgorge cashbut also increases a firm’s likelihood to pay dividendsand weakens the negative
associationbetween agency conflicts and dividends.
Practical implications –The results show an important policy implication for the industry. As the
principal–principalagency conflict restrains the dividends, the regulatory authorities couldencourage a
competitive environmentand a more diverse ownership structure to induce a higherdividend rate and
protect the minorityshareholders. In addition, this study also has implicationsfor other emerging markets
characterizedby concentrated ownership and principal–principalagency problems.
Originality/value –This study adds to the literature related to the disciplinary role of competition and
identifies competition as a significant determinant of corporate payout p olicy. Furthermore, this research
extends earlier research on corporate payout decisions that besid es firm-level corporate governance and
country-level legal system, industry-level competition also influences corporate payout decisions, significantly.
Keywords Product market competition, Agency conflicts, Dividend policy, China
Paper type Research paper
1. Introduction
According to the agency theory, firms’ managers have the incentives to use corporate
resources (especially free cash flows) to benefit themselves instead of caring about
shareholders’ wealth (Jensen, 1986). However, extracting excess cash from firms as
dividends can reduce the free cash flows under managers’ control. This further can
pressure managers to go to the external market for their financing needs, and hence, can
expose the firm to market scrutiny. In practice, insiders are more inclined to retain the
excess cash, so the question arises that how can they be induced to disgorge the excess
cash under their control to outside shareholders. This question becomes even more serious
when the outside shareholders are the minority shareholders with weak legal protection as
in most of the developing countries,especially Asian countries.
In the past few decades, researchers across the globe have provided various inconclusive
explanations for the dividend puzzle (Black, 1976). However, the recent strand of dividend
policy research identifies firm-level agency problems as a significant determinant of a firm’s
Amjad Iqbal is based at the
School of Management,
Fudan University,
Shanghai, China.
Xianzhi Zhang is based at
the School of Accounting,
Dongbei University of
Finance and Economics,
Dalian, China.
Muhammad Zubair Tauni is
based at International
Business School, Zhejiang
Gongshang University,
Hangzhou, China.
Khalil Jebran is based at
the School of Business
Administration, Dongbei
University of Finance and
Economics, Dalian, China.
Received 8 February 2018
Revised 19 October 2018
17 December 2018
22 February 2019
Accepted 21 March 2019
DOI 10.1108/JABS-02-2018-0038 VOL. 14 NO. 3 2020, pp. 265-279, ©Emerald Publishing Limited, ISSN 1558-7894 jJOURNAL OF ASIA BUSINESS STUDIES jPAGE 265
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