The Impact of Ownership Structure on Corporate Financial Policies
Abstract
Agency theory recognizes that because common stockholders are dispersed
and hold diversified portfolios, they delegate financial and other decision making to
corporate managers. However, managers may have personal goals that compete with
shareholder's wealth maximization, and such conflicts of interest are addressed by
agency theory. Equity agency cost are incurred when managers do not attempt to
maximize firm value; And stockholders incur costs to monitor the managers and
influence their action.
Agency theory suggests several ways to mitigate equity agency cost. Among
those mechanisms, financial policies in the form of debt and dividends may reduce
equity agency costs by "bonding" the free cash flow. In many agency studies,
ownership structure of the firm in the form of insider ownership, institutional
ownership, stockholder dispersion can also considered as determinants of equity
agency costs. Extent literatures about agency theory suggest substitutability and
simultaneous determination ofseveral ofthe agency-conflict-reducing mechanisms.
Extant literatures about agency theory suggest links between financial policy
and ownership structure of the firm. Studies of ownership structure and financial
policy assume that any causality among these choices runs from ownership structure
to financial policy. This research tries to examine the impact ofownership structure
on corporate debt and dividend policies as well as the substitutability between these
two financial policies in Indonesia manufacturing firms.
This research finds that insider ownership has negative but insignificant
impact on leverage ratio, while both institutional ownership and stockholder
dispersion have negative and significant impact on leverage ratio. This research also
finds that insider ownership has a positive and significant impact on dividend payout
ratio, while both institutional ownership and stockholder dispersion have negative
and insignificant coefficient. Finally, this research finds that there is an
interrelationship between leverage ratio and dividend payout ratio, representing
substitutability between the two mechanisms.
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