Dividend Policy and Agency Theory: Evidence from Indian Firms

In this article, the cost minimization model of dividends, which is underpinned by agency theory, is estimated and tested on data from 882 private sector firms listed on the Mumbai Stock Exchange for the period 1994 to 1998. Specifically, the hypothesis implied by the model is that private sector firms in India set their target payout ratios so as to minimize the sum of agency costs and the costs associ ated with raising external finance. Cross-sectional weighted least squares method ology is used, and squared and interaction terms are introduced into the model, along with a number of novel explanatory variables. It is found that government ownership, insider ownership, risk, debt, and growth opportunities, have a negative impact on the payout ratio. In contrast, institutional ownership, foreign ownership and dispersed ownership have a positive impact on the payout ratio. These results are consistent with the predictions of the cost minimization model of dividends in the context of listed companies in India.