I discuss the paper in the following pattern: section I summarizes the main points of the paper. Section II analyzes the paper in light of literature that agrees and disagrees with different arguments Section III will provide conclusion based on the analysis and critiques to the paper while discussing the main contribution to academic knowledge.
I. Study Summary
The objective of this paper is to examine the relationship between corporate governance on dividends payout in Canada to better understand "why companies pay dividends".
In the light of agency theory, Adjaoud and Ben-Amar tested two competing hypothesis, which are outcome and substitution hypothesis. They ...view middle of the document...
2- Consistent with studies that claim that companies maintain constant pattern of dividend payout, a significant positive relationship between dividend payout and different firms financial attribute was found.
3- Dividend payout is positively related to the firm size.
4- There is a positive relationship between free cash flow and dividend payout, consistent with the FCF explanation of dividends.
5- There is a negative relationship between firm risk, as measured by price volatility and dividend payment.
6- There is a negative relation between US cross listed firms and dividend payout
7- Board composition is positively related to dividend payout.
8- The strength of shareholder right has a positive effect on dividend payout.
Adjaoud and Ben-Amar concluded the following:
1- Findings No. 1&8 above, suggests that when shareholders rights are strong, the shareholder can press on manager to pay dividends.
2- The results support the model of dividend policy in that corporate governance mitigates agency conflict through payout policy.
Adjaoud and Ben-Amar, however, noted that a possible limitation to their paper is that they relied on G&M governance rating report in the study, and using other proxies for governance quality may produce different finding.
The paper focused only on the agency theory for explaining why companies pay dividends in the form of testing the relationship between corporate governance and dividend payout. The literature shows that there are other theories that explain company dividend policy: Catering theory of dividends, for instance, was concluded by (Baker & Wurgler, 2004) to explain corporate dividend behavior. Another theory for explaining dividend payment is life-cycle theory which was found to be relevant in explaining dividend behavior by (deanglo, Deanglo, & Stulz, 2006).
Adjaoud and Ben-Amar, examined the relationship between corporate governance and only one type of dividends which is cash dividends. They ignored dividends in form of stock repurchase without explaining the reason for the exclusion. Although share repurchase is a substitute to cash dividends as evidenced by (Grullon & Michaely, 2002) who found that companies are substituting share repurchase for dividends. They concluded that it is more appropriate to rely on total payout rather than dividends payout.
Adjaoud and Ben-Amar, in this paper, found a positive relationship between the firm size and dividends payout. On the other side, (Gupta, Kennedy, & Weave, 2009) showed that, based Globe & Mail report, there is a positive correlation between firm size and corporate governance score. The two finding together cast a doubt that Adjaoud and Ben-Amar constructed spurious relationship between the corporate governance quality and dividend payout while the direct relationship is between large mature firms and dividend payout. Such doubt is also evidenced by (Danis &...