Impact of Outside Directorships on Dividend Payout: Evidence from Distressed and Non-Distressed Firms.

Abstract

This study determined the impact of outside directorship on dividend policy in non-financial firms based on a sample of listed firms available on PSX over a five-year period (2016-2020). Other control variables that are used in the study are profitability, liquidity, firm size, growth opportunity, insider ownership, and asset tangibility and borrowing ratio. Bird in hand theory and agency theory are applied to support our study. The study incorporates all the Pakistani non-financial firms that have paid dividend two times in five year period. The research model uses a panel dataset of 152 PSX-listed family firms over the period 2016–2020. Further annual reports and balance sheet analysis are used for the data of variables. The empirical results show a significant negative effect of outside directors on dividend decisions. Some control variables show a significant positive impact on dividend payout. Random effect logit regression and correlation matrix are used to get the results through stata. The findings imply that when a company has a larger number of outside directors on its board, it pays smaller dividends. This evidence supports the replacement hypothesis, according to which companies with poor corporate governance must develop a reputation by providing dividends. In other words, dividends serve as a stand-in for independent board members. This finding provides policymakers with new information about agency conflicts of interest within the firm. It also gives information on the effectiveness of various replacement methods for lowering agency costs.