erc/metu
INTERNATIONAL CONFERENCE IN ECONOMICS  IV
September 13-16, 2000, Ankara

Corporate Governance and Dividend Pay-Out Policy in Germany

B. Burçin Yurtoğlu (University of Vienna, Austria)
Klaus Gugler (University of Vienna, Austria)

Abstract

An alternative explanation of why dividends may be informative is put forward in this paper. We claim that dividends signal the severity of the conflict between the large, controlling owner and small, outside shareholders, and accordingly, dividend change announcements provide new information about this conflict. To test the rent extraction hypothesis and to discriminate it from the cash flow signaling explanation, we utilize information on the ownership and control structure of the firm. We analyze 815 dividend change announcements in Germany over the period 1992 to 1998 and find significantly larger negative wealth effects in the order of two percentage points for majority controlled companies that decrease their dividends than for other firms. The rent extraction hypothesis has also implications for the levels of dividends paid. We find larger holdings of the largest owner to reduce, while larger shareholdings of the second largest owner to increase the dividend pay-out ratio.

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Middle East Technical University
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