The Impact of Corporate Governance Mechanisms on Dividend Policy

Abstract

What determines when a company pays dividends or why, has been a topic of debate in the finance literature for decades. A vast body of research has suggested that dividends are used as a mitigation strategy to agency costs arising from corporate governance practices (La Porta et al, 2000). Previous literature has investigated if dividend policy in a country or region is an outcome that complements good corporate governance practices and investor protection laws or a substitute model for those practices and laws. This research aims to investigate the association between the corporate board characteristics and the dividend policy among firms on the Saudi Stock Exchange. The research sample includes data from 103 non-financial firms over four years, from 2015 to 2018. The study employs logit and tobit models to investigate how corporate governance mechanisms such as board independence, board size and frequency of meetings impact dividend policy. This study concludes that board size, board independence and frequency of board meetings do not influence the firm's decision to pay dividends while board size has a significantly positive impact on the levels of cash dividends paid to investors. Furthermore, the level of free cash flow has a significant positive influence on both the decision to pay dividends and the magnitude of dividend payouts. In conclusion, board characteristics which represent one of the crucial mechanisms of corporate governance, are found to be complementary to corporate laws and regulations imposed on the Saudi market after 2015.