Institutional ownership and corporate value Essay

Institutional ownership and corporate value - Essay Example Abstract Institutional investors are a significant financial market force. They are rapidly replacing individual investors in the capital market. Unlike individual investors, institutional investors invest large amounts of their company resources into various stocks and shares, thereby devoting many of their resources to monitoring their investment. This paper investigates whether a company’s dividend policy is affected by the level of institutional ownership. The paper focuses on Kuwaiti public companies that are listed on the Kuwait stock exchange (KSE). This study examines the implications of corporate governance on dividend policy. It focuses on the cross-sectional relationship of the organizational ownership structures and dividend payout policies. In this paper, a regression model is employed to explore the link between institutional ownership and cash dividends. The dependent variable, cash dividends, is measured by using two different proxies. The independent variable, institutional ownership, is measured as the natural logarithm of shares held by institutional investors, then scaled by the number of shares outstanding. The control variables include returns on equity, firm size, leverage, firm age, financial loss, year effects, and industry effects. The relevant data is collected from the KSE website and the Institute of Banking Studies in Kuwait (ISB). The monitoring hypothesis suggests that institutional investors tend to function as a superior oversight mechanism, and therefore are more likely to limit corporate managers. The other perspective relates to the entrenchment effect hypothesis, which states that institutional investors may align their interests with management’s interests at the expense of minority wealth. Table of Contents Declaration 2 Acknowledgement 3 Abstract 4 Table of Contents 5 List of Tables 5 Chapter 1: Introduction 7 1.1 Background 7 1.2 Research Question 8 1.3 Aims and Objectives of the Study: 8 1.4 Rationale and Justification for the Study: 9 1.5 Methodology: 9 1.6 Research Structure 10 Chapter 2: Literature Review 12 2.1 Kuwait Stock Exchange 12 2.2 Institutional Ownership and Cash Dividend Payouts 13 2.2.1 The Monitoring Role of Institutional Ownership 14 2.2.2 The Entrenchment Role of Institutional Investors 17 Chapter Three: Hypothesis Development 21 4.2 Regression Models 26 Chapter Five: Data and Results 28 Chapter Six: Conclusions and Implications of the Research 38 Chapter Seven: Future Research 40 List of References 41 List of Tables Table 1: Frequency of Institutional Investors over Time 29 Table 2: Descriptive Statistics for the Dependent, Independent, and Control Variables 330 Table 3: Pearson Correlation Coefficients, N = 648 323 Table 4: Regression Results of the Dependent Variable: CashPayOut 345 Table 5: Regression Results of the Dependent Variable: CashDiv_Earnings 368 Chapter 1: Introduction 1.1 Background Institutional investors are a significant financial market force. T hey are rapidly replacing individual investors in the capital market. Unlike individual investors, institutional investors invest large amounts of their company resources into various stocks and shares, thereby devoting many of their resources to monitoring their investment (Grossman and Hart, 1980; Shleifer and Vishny, 1986). In addition, institutional investors are generally more and better informed then individual invest