Accepted Manuscript

The effects of ownership structure on dividend policy: Evidence

from seasoned equity offerings (SEOs)

Anh Ngo, Hong Duong, Thanh Nguyen, Liem Nguyen

PII: S1044-0283(17)30241-7
DOI: doi:10.1016/j.gfj.2018.06.002
Reference: GLOFIN 440
To appear in: Global Finance Journal
Received date: 8 July 2017
Revised date: 8 March 2018
Accepted date: 8 June 2018

Please cite this article as: Anh Ngo, Hong Duong, Thanh Nguyen, Liem Nguyen , The
effects of ownership structure on dividend policy: Evidence from seasoned equity
offerings (SEOs). Glofin (2017), doi:10.1016/j.gfj.2018.06.002

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 ACCEPTED MANUSCRIPT

The effects of ownership structure on dividend policy: Evidence from seasoned equity
offerings (SEOs)

Author 1 Name: Anh Ngo

Department: Accounting, Finance, and MIS
University: Norfolk State University
Town/City: Norfolk
State (US only): Virginia
Country: United States of America
Email: adngo@nsu.edu

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Author 2 Name: Hong Duong
Department: Accounting and Legal Studies

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University: Salisbury University
Town/City: Salisbury
State (US only): Maryland
Country: United States of America

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Email: hkduong@salisbury.edu

Author 3 Name: Thanh Nguyen

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Department: Business and Economics
University: University of South Carolina Upstate
Town/City: Spartanburg
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State (US only): South Carolina

Country: United States of America
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Email: ttnguy20@gmail.com

Author 4 Name: Liem Nguyen

Department: Economics and Management
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University: Westfield State University

Town/City: Westfield
State (US only): Massachusetts
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Country: United States of America

Email:lnguyen@westfield.ma.edu
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Corresponding author: Anh Ngo:

Corresponding Author’s Email: adngo@nsu.edu

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The effects of ownership structure on dividend policy: Evidence from seasoned equity
offerings (SEOs)

ABSTRACT

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This paper examines the effects of ownership structure on dividend policy, specifically the role

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of controlling shareholders in shaping dividend policy in a sample of firms that pay dividends

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and issue new equity simultaneously. The results show that managers in weakly governed firms

are more likely to initiate customized dividends to meet outside large shareholders’ needs while

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simultaneously using costly external capital to finance new investment projects. This paper
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contributes to the existing literature on agency problems by explaining why firms engage in this

suboptimal dividend policy: it allows large shareholders to extract private benefits.

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JEL classifications: G32; G34; G35

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Keywords: Dividend policy; Large shareholders; SEO underpricing; Equity offerings

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1. Introduction

Studies suggest that firms should not simultaneously pay dividends and issue equity,

because the cost of using retained earnings to finance new investment projects is lower than the

cost of issuing new equity (e.g., Fazzari, Hubbard, & Petersen, 1988). In the presence of

information asymmetry, equity issuance is costly because market participants who believe that

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firms issue new equity only when their stocks are overvalued will buy new stocks only at a

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discount price. Pecking order theory (e.g., Myers & Majluf, 1984) suggests that firms should use

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retained earnings followed by debt before using funds from new equity issues to finance new

projects. Accordingly, firms anticipating upcoming investments are more likely to save cash out

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of cash flow by ceasing to pay dividends to shareholders. Nevertheless, firms frequently do pay
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dividends and issue equity simultaneously.

Theoretical studies have attempted to resolve this puzzle. La Porta et al. (2000) outline
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two models, the outcome model and substitute model, to explain firms’ payout policies. The
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outcome model suggests that dividends are the results of effective pressure by shareholders to

force managers to disgorge cash, thereby avoiding free cash flow problems. The substitute model
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proposes that insiders maintain dividends to establish a reputation in the market and thereby get
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lower-cost external financing. The first model predicts that strong governance should be

associated with higher dividend payouts, whereas the second model predicts the opposite. Along
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related lines, Jensen (1986) argues that firms can employ dividend policies as a substitute for

other corporate governance characteristics to convince shareholders that they will not be

expropriated. More recently, Mori (2010, 2015) emphasizes the role of taxes and the power of

controlling shareholders: the firm will use its cash to issue dividends while simultaneously

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issuing new equity to finance projects if, for those shareholders, the tax advantages of

‘customized’ dividends outweigh the costs of the new issue.

In this paper, we empirically test the time-preference-fitted model for the first time, by

examining the role of large shareholders in shaping dividend policy in a sample of firms that pay

dividends and raise new equity in the same year. We also investigate the interaction between

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dividend policy and corporate governance for the sample firms. Specifically, we examine the

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effects of corporate governance on dividend payout not from the substitute perspective but from

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the outcome perspective. We contend that when dividend payments and equity issues occur

simultaneously, managers are using dividends to pacify controlling shareholders to avoid

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dismissal, rather than to establish the firm’s reputation in capital markets, and that managers in
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weakly governed firms are more likely to behave in this way.

This paper thus contributes to the existing literature on agency costs and dividend policy.
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It adds new empirical findings to the explanation of why firms engage in suboptimal dividend
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policies by paying dividends and issuing equity simultaneously. It also sheds new light on how

controlling shareholders collude with entrenched managers to extract private benefits, thus
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possibly expropriating minority shareholders.

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The remainder of this paper is organized as follows. Section 2 reviews the related

literature on dividend policy and corporate governance. Section 3 develops the hypotheses and
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empirical predictions. Section 4 describes the sample and methods, and Section 5 discusses the

results and the implications of the findings. Section 6 concludes.

2. Related literature

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A vast literature is available on corporate dividend policy. Various theories have been

developed to explain why firms pay dividends: (1) to signal the prospect of future earnings to

uninformed outside investors; (2) to appeal to investors whose dividend preferences are not met

by other firms in order to enhance share prices via the clientele effect (Allen, Bernardo, &

Welch, 2000); (3) to reduce agency costs or the free cash flow problem (Jensen, 1986); and (4) to

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cater to irrational investors who prefer growth and dividend-paying stocks in order to boost share

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prices above their fundamental values (Baker & Wurgler, 2004).

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Signaling theory (e.g., Bhattacharya, 1979; John & Williams, 1985; Ross, 1977) suggests

that dividends are used as a device to signal high firm quality even though dividends are costly

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for individuals because of the high personal income tax. DeAngelo and DeAngelo (1990) find
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that managers of firms with long histories of paying continuous dividends are especially

reluctant to omit dividends when their firms encounter protracted financial difficulties. In this
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case, managers may foresee that the benefits of paying continuous dividends obviously outweigh
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the costs of issuing new equity. Signaling theory also predicts that dividends can establish a

reputation for managers. Analyzing a survey of 603 chief financial officers of U.S. firms, Baker
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and Powell (1999) find that signaling is the most obvious and important aspect of a firm’s
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dividend policy.

According to the free cash flow hypothesis (Jensen, 1986), firms can also employ
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dividend policies as a substitute for other corporate governance characteristics to convince

shareholders that they will not be expropriated. To establish reputations, the managers of poorly

governed firms who intend to raise future external financing in the market may pay dividends to

signal a good financial position to market participants.

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The financial literature shows that the payout versus retention decision is affected by the

flotation costs of raising external equity and by personal taxes on payouts. Theoretical models of

imperfections in capital markets imply that external financing is more costly than internal

financing (Fazzari, Hubbard, & Petersen, 2000; Hubbard, 1998; Myers & Majluf, 1984). Myers

and Majluf (1984) argue that if a firm issues new shares through seasoned equity offerings

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(SEOs), investors may interpret the firm as overvalued because the managers are assumed to

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have no incentive to sell undervalued shares. Accordingly, Asquith and Mullins (1986) find that

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an SEO announcement lowers the share price on the announcement date and that the price

reduction is positively related to the size of the flotation. Myers and Majluf's (1984) pecking

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order theory of financing preference suggests that firms should use internal financing sources
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(retained earnings) rather than external financing sources (debt and new equity issues) to finance

new projects in order to avoid financing costs due to information asymmetry. Simultaneously
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issuing new equity and paying dividends not only is costly but also may incur additional taxes (in
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the United States, the effective tax rate on dividends is much higher than the effective tax rate on

capital gains) and wasteful flotation costs for individual shareholders (Fazzari et al., 1988).
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Why, then, do firms pay dividends and raise new equity at the same time? Recent
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theoretical discussions have expanded our understanding of this issue. The “sleeping dogs”

theory (Warther, 1993) explains that managers set high payout levels to avoid intervention in
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management by shareholders who prefer high dividends. Accordingly, Zwiebel (1996) and

Myers (2000) develop models in which managers must pay a minimum dividend or face

retaliation by stockholders. More recently, Mori (2015) has argued that a group of controlling

shareholders who have substantial control over dividend policy can compel the firm to issue

equity to finance new projects, if their own benefits from continuing to receive dividends, after

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accounting for taxes and transaction costs, are greater than the pro rata flotation costs. He

develops a model based on intertemporal consumption choice to explain the tax clientele effect

of dividends. The model shows that corporate investors are expected to prefer time-preference-

fitted dividends if tax rates remain constant over time. Time-preference-fitted dividends are

dividends received at preferred dates that can help investors minimize their tax burdens or

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maximize tax savings.

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The literature on corporate governance shows that controlling shareholders with a large

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equity stake have strong incentives to monitor operating management (La Porta, Lopez-De-

Silanes, Shleifer, & Vishny, 2000; Shleifer & Vishny, 1986). In some cases, controlling

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shareholders can replace or fire managers and thus managers have incentives to pay sufficient
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dividends to mollify controlling stockholders while raising equity to fund projects that might not

pass muster with them or might even harm minority stockholders. Most shareholders do not
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benefit from simultaneously paying dividends and issuing equity, because of the flotation costs
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of new offerings and the additional tax burden. However, if controlling stockholders do benefit,

they can force managers to adopt such a combination strategy to enrich themselves at the
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expense of other, noncontrolling shareholders.

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No current theory can explain why firms engage in such a combination strategy. Are they

protecting entrenched managers? Do they balance the tradeoff between signaling-effect benefits
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and flotation costs? Or does the controlling corporate shareholders’ time preference have a

substantial impact on the firm's dividend decision and equity issuance?

3. Hypotheses development

Generally, shareholders do not expect firms to issue dividends and raise equity

simultaneously, because of the additional tax and flotation costs associated with information

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asymmetry. If they observe such a combination strategy, outside investors may presume that the

controlling shareholders are intervening in management to extract dividends. Some large

shareholders (e.g., corporations and institutions) prefer to invest in high dividend stocks because

institutional investors are relatively less taxed than individual investors. Mori (2010)

theoretically examines the tax clientele effects of dividends. Investors may create “homemade

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dividends” by realizing capital gains in periods in which they receive fewer dividends, but doing

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so has cost disadvantages. Home-made dividends can be more expensive than dividends directly

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paid out by the firms. On the other hand, excessive current dividends are also unfavorable,

because reinvesting unwanted dividends incurs intertemporal double taxation. As a result,

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investors prefer customized time-preference-fitted dividends to maximize tax savings.
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Thus, our first testable hypothesis is the following:
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Hypothesis 1. Firms with a substantial presence of large outside shareholders are more likely to
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pay dividends and conduct SEOs simultaneously.

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There are two competing views on the relationship between large shareholders and
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dividend policy. The first assumes that outside large shareholders act as an alternative corporate

governance mechanism and monitor managerial activities, by becoming members of the board of
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directors or by using voting rights. In accord with this view, Hu and Kumar (2004) find that

dividend payment and dividend yield correlate negatively with the fraction of total shares owned

by large outside shareholders.

By contrast, the second view predicts a positive relation between ownership by large

shareholders and dividend payments. Shleifer and Vishny (1986) find that large shareholders

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have a strong incentive to monitor managers, but active monitoring is expensive. Thus, large

shareholders are unlikely to monitor management directly but instead rely on dividends to

prevent managers from empire building or overinvesting in negative-NPV projects. Regular

dividend payments force managers to rely on external markets for additional funds, thus

increasing external scrutiny.

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When firms pay dividends and issue equity simultaneously, we also predict a positive

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relation between large shareholders and dividend payment, but this prediction is based on a

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different perspective. Large shareholders who prefer time-preference-fitted dividends have

incentives to compel managers to pay dividends even it is costly for the firm to do so—and

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managers have incentives to pacify controlling shareholders. In this case, the dividend policy is
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the outcome of weak governance rather than a substitute for other forms of governance. Put

differently, managers of firms with weak governance do not pay dividends to improve their
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firms’ reputations; instead, the weak governance mechanisms allow both large shareholders and
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managers to pursue their own benefits by expropriating small shareholders through nonoptimal

corporate dividend policies. This suggests the following testable hypothesis:

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Hypothesis 2. Firms with weak governance are more likely than firms with strong governance

to pay dividends and conduct SEOs at the same time.

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In addition, entrenched managers who pay dividends to meet the needs of large outside

shareholders when their firms have financing deficits or investment opportunities may need to

obtain external funds as quickly as possible, and therefore are more likely to experience more

underpricing of SEOs. This suggests the following hypothesis:

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Hypothesis 3. Firms that pay dividends and conduct SEOs simultaneously are more likely to

experience greater SEO underpricing.

4. Sample and methods

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4.1. Data and sample

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The data used in this study are derived from several sources. We first obtain a sample of

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SEOs from Thomson Securities Data Corporation Platinum (SDC). We then retrieve the

accounting data for the SEO sample from Compustat. Finally, we obtain ownership and

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governance index information for the SEO firms from Wharton Research Data Services (WRDS)
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and Professor Andrew Metrick's website,1 respectively. To fill in any missing information, we

check proxy statements obtained from the SEC’s EDGAR database. We restrict our sample to
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the years 1996 to 20022 because the data, although more than a decade old, have several unique
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features that are suited to examining the effects of ownership structure on dividend policy and

equity issuance decisions. First, these data contain block ownership information that is free of the
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biases and errors usually observed in standard sources of such data. Second, the data represent a
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balanced panel of firms with detailed information on inside and outside large shareholders for

each year, so we can distinguish the effects of inside and outside large shareholders on dividend
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policy and equity issuance decisions. Third, the data encompass a seven-year period well before

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Professor Andrew Metrick’s website (http://finance.wharton.upenn.edu/~metrick/data.htm) provides data on
ownership and governance index (G-INDEX) for more than 20,000 firm-years during 1996–2002.
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This dataset contains standardized data for blockholders (large shareholders) of 1913 companies during the period
1996–2002. The dataset was manually collected and checked by Dlugosz, Fahlenbrach, Gompers, and Metrick
(2006). The data cleaning procedure is explained in detail by Dlugosz et al. (2006).

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the recession of 2007–2011, whose effects could bias the study. Omitting recent data may not

significantly affect the generalizability of our research implications to other noncrisis periods,

because the crisis of 2007–2011 significantly affected firms’ dividend policy and financing

behavior through investor pessimism, serious liquidity problems, and the massive fiscal stimulus

used to fight the recession. Bliss, Cheng, and Denis (2015) document a significant reduction in

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corporate payouts—both dividends and share repurchase—during 2008–2009. They also show

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that payout reductions are more likely in firms that are more susceptible to the negative

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consequences of an external financing shock.

For inclusion in the sample, firms must be listed on major U.S. exchanges (NYSE,

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NASDAQ, or AMEX) and have accounting data available in the Compustat database. We
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exclude firms in financial and regulated industries. The merging process reduces the sample to

756 equity offerings by 656 firms during the sample period. Of these, 177 firms pay dividends
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and issue equity simultaneously. All accounting data used to construct the variables are
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winsorized at the 5th and 95th percentiles to eliminate the effects of outliers.

4.2 . Methods
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Dividend policy involves two decisions: (1) whether to pay dividends and (2) how much to
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pay each year. We shed light on both decisions by using a two-stage analysis. In the first stage,

we employ logistic regressions to examine the effects of large shareholders on firms’ decisions to
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pay or not pay dividends, given that these same firms are concurrently raising external financing.

In the second stage, we use Tobit regression to investigate the extent to which large outside

shareholders explain the magnitude of dividend payout. We analyze the following two scenarios:

(1) inclusion of either large inside shareholders or large outside shareholders in the Tobit

specifications and (2) inclusion of both large inside and large outside shareholders.

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Stage 1: The logistic regression model to be estimated is the following:

Log[prob(PAYERi,t=1)/(1−prob(PAYERi,t=1))] = α0 + α1CASHi,t + α2DEFICITi,t + α3REi,t

+ α4ROAi,t + α5LOGSIZEi,t

+ α6OWNERSHIPi,t + α7LEVERAGEi,t

+ α8TOBINQi,t + α9LAGDIVIi,t + εi,t . (1)

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Stage 2: The Tobit regression specifications are as follows:

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DIVIDENDSALESi,t = α0 + α1CASHi,t + α2DEFICITi,t + α3REi,t + α4ROAi,t + α5LOGSIZEi,t

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+ α6OWNERSHIPi,t + α7LEVERAGEi,t + α8TOBINQi,t

+ α9LAGDIVIi,t + εi,t (2a)

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DIVIDENDYIELDi,t = α0 + α1CASHi,t + α2DEFICITi,t + α3REi,t + α4ROAi,t + α5LOGSIZEi,t
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+ α6OWNERSHIPi,t + α7LEVERAGEi,t + α8TOBINQi,t

+ α9LAGDIVIi,t + εi,t (2b)

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DIVIDENDPAYOUTi,t = α0 + α1CASHi,t + α2DEFICITi,t + α3REi,t + α4ROAi,t + α5LOGSIZEi,t

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+ α6OWNERSHIPi,t + α7LEVERAGEi,t + α8TOBINQi,t + α9LAGDIVIi,t

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+ εi,t . (2c)
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The dependent variables are DIVIDENDSALES, DIVIDENDYIELD, and

DIVIDENDPAYOUT, respectively. DIVIDENDSALES is the ratio of total cash dividends to total

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sales. DIVIDENDYIELD is the ratio of total cash dividends to stock price. DIVIDENDPAYOUT

is the ratio of total cash dividends to income before ordinary items. Other independent variables

include the firm’s return on assets (ROA), retained earnings (RE), the natural logarithm of the

book value of assets (LOGSIZE), cash balance (CASH), book debt ratio (LEVERAGE), Tobin’s Q

(TOBINQ), and dividend amount paid one year before the SEO year (LAGDIVI). We also

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construct an independent variable, financing deficit (DEFICIT), to reflect whether firms issue

new equity to finance their short-term deficits. The OWNERSHIP variables are OWNOUT,

OWNIN, and OWNSUM, which are the natural logarithms of the firm’s proportion of ownership

held by large outside shareholders (OWNOUT), the proportion held by all inside large

shareholders (OWNIN), and the aggregate ownership of all individual large shareholders

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(OWNSUM), respectively. We apply the approach of Frank and Goyal (2003) to decompose

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annual corporate cash flow into (1) dividends, (2) investments, (3) change in working capital,

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and (4) internal cash flow to assess whether firms are conducting SEOs to finance their near-term

capital needs or long-term investment outlays. A firm has a financing deficit in a given year if

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the total of dividends, investments, and change in working capital exceeds the internal cash flow.
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The firm has a surplus if the opposite relation holds. We construct the financing deficit variable

(DEFICIT) using accounting data one year before the issuing year. Therefore, we expect a
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negative relation between the financing deficit and the likelihood of paying dividends.
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We also examine the impact of corporate governance on the dividend policies of firms

that issue new equity and pay dividends simultaneously. We use the governance index (G-
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INDEX)3 as a proxy for the level of shareholder rights. Firms with stronger shareholder rights
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have a low G-INDEX and vice versa. The G-INDEX is a proxy for internal corporate governance;

large ownership by external shareholders may proxy for external governance. In this study, we
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expect greater expropriation of small shareholders by large shareholders for firms with weak

internal governance (high G-INDEX) than for those with relatively strong corporate governance

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We obtain G-INDEX information for each firm in the sample from Prof. Andrew Metrick’s website. Gompers et al.
(2003) construct a governance index by summing all corporate governance provisions (one point for one provision)
that restrict shareholder rights or increase managerial power. Firms with a G-INDEX ≤ 5 are classified as
“democracy firms,” and firms with a G-INDEX ≥ 14 are classified as “dictatorship firms.”

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(low G-INDEX). Our logistic models for examining the interaction between internal corporate

governance and dividend policy are as follows:

Log [prob(PAYERi,t = 1)/(1−prob(PAYERi,t = 1))] = α0 + α1CASHi,t + α2DEFICITi,t

+ α3REi,t + α4ROAi,t + α5LOGSIZEi,t
+ α6OWNOUTi,t + α7LEVERAGEi,t
+ α8TOBINQi,t + α9LAGDIVIi,t

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+ α10G-INDEXi,t + εi,t (3a)

Log [prob(PAYERi,t = 1)/(1−prob(PAYERi,t = 1))] = α0+ α1CASHi,t + α2DEFICITi,t + α3REi,t

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+ α4ROAi,t + α5LOGSIZEi,t + α6OWNINi,t
+ α7LEVERAGEi,t + α8TOBINQi,t

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+ α9LAGDIVIi,t + α10G-INDEXi,t + εi,t (3b)
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Log [prob(PAYERi,t = 1)/(1−prob(PAYERi,t = 1))] = α0+ α1Cashi,t + α2DEFICITi,t + α3REi,t
+ α4ROAi,t + α5LOGSIZEi,t + α6OWNSUMi,t
+ α7LEVERAGEi,t + α8TOBINQi,t
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+ α9LAGDIVIi,t + α10G-INDEXi,t + εi,t . (3c)

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We use the natural logarithms of the firm’s proportion of ownership held by large outside

shareholders (OWNOUT) and the aggregate ownership by all individual large shareholders
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(OWNSUM) as the main independent variables. We also use the natural logarithm of aggregate
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ownership by all inside large shareholders (OWNIN) to compare the effects of different types of

large shareholders on the likelihood of paying dividends. Other independent variables are
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described above. All independent variables except the ownership variables are scaled by the

book value of assets. For a given firm year, the dependent variable for the logistic regression

(PAYER) equals one if the firm pays dividends in that year and zero otherwise.

5. Empirical results

5.1. Summary statistics

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Table 1 presents the summary statistics and correlation results. The statistics are provided

separately for dividend payers and nonpayers. Dividend payers have higher retained earnings,

larger assets, and a higher proportion of ownership by large outside shareholders. The means

(medians) of TOBINQ for dividend payers and nonpayers are 1.871 (1.424) and 3.363 (2.232),

respectively. These values suggest that dividend payers have fewer investment opportunities, in

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accord with previous studies (Fama & French, 2001). In addition, dividend payers have a higher

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G-INDEX (mean = 9.594) than nonpayers (mean = 8.132), suggesting that dividend payers have

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weaker internal corporate governance. Retained earnings (RE) are considerably larger for

dividend payers than for nonpayers. In terms of return on assets as measured by earnings scaled

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by total assets, dividend payers are not much more profitable than nonpayers.
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[Insert Table 1 about here]

Table 2 presents the correlation matrix for the eight independent variables for the logistic
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regressions. As would be expected, the correlation matrix shows negative correlations between
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RE and DEFICIT and between TOBINQ and DEFICIT. LOGSIZE has a positive but not

significant correlation with ROA. TOBINQ has a negative correlation with large shareholder
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ownership. In addition, LOGSIZE has a negative, statistically significant correlation with large
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shareholder ownership.

[Insert Table 2 about here]

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5.2 . Logistic regression: large shareholder ownership and propensity to pay dividends

Table 3 presents the logistic regression results based on model (1). The dependent

variable takes a value of one if the firm pays dividends in SEO years and zero otherwise. All

independent variables are as described above. We estimate two variations of logistic regressions

and report the results in columns 1–4. We estimate the likelihood of paying dividends as a

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function of outside ownership as the main independent variable and the control variables

mentioned above. Columns 1, 2, and 4 of Table 3 report the results of logistic regressions using

OWNOUT, OWNIN, and OWNSUM, respectively. Column 3 presents the results using both

OWNOUT and OWNIN in the logistic regression, to examine whether OWNOUT has a more

pronounced effect on forcing firms to pay dividends during SEO years. All four regression

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specifications show that firms with high retained earnings and market capitalization and a long

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history of paying dividends are more likely to pay dividends. Our main variable of interest,

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aggregate large outside shareholder ownership (OWNOUT), has a positive and highly significant

coefficient of 3.029. However, the coefficient for aggregate large inside shareholder ownership

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(OWNIN) is small and not statistically significant, with a value of 0.134. The coefficient for the
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sum of all large shareholder ownership (OWNSUM) is 2.443 and statistically significant. This

finding provides evidence that outside large shareholders have the power to force managers to
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pay dividends even when firms have good investment opportunities. The coefficients of logistic
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regressions represent the change in logit corresponding to a change of one unit in the predictor

variables. Thus, drawing inferences from the estimated coefficients is difficult. To show how
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much OWNOUT contributes to the probability of paying dividends during SEO years, we also
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calculate its marginal effect at the mean4—that is, the difference between two probabilities given

a one-standard-deviation change in OWNOUT while the other predictor variables are fixed at
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their means. A one-standard-deviation (9.3%) increase in the outside large shareholders’ stake

(OWNOUT) would lead to an approximately 17.23% increase in the probability of paying

dividends in SEO years. In sum, Table 3 confirms the prediction that large shareholders have

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The results are not reported in Table 3 for the sake of brevity.

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incentives to force managers to pay customized dividends even when firms have a financing

deficit.

[Insert Table 3 about here]

We now turn to logistic regressions examining governance in the sample firms that

issue equity and pay dividends simultaneously. To measure corporate governance we use

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Gompers et al. 's (2003) G-INDEX, which is often used in corporate governance studies as a

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proxy for the balance of power between shareholders and managers. We use the logarithmic

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values of the G-INDEX rather than the raw G-INDEX in all regression specifications. We merge

our previous sample with the G-INDEX dataset obtained from Professor Andrew Metrick’s

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website to create a new sample that includes governance information. The merging process
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reduces our sample to 228 firms, of which 107 are dividend payers and 121 are non–dividend

payers. We use the same vector of control variables mentioned above in our new logistic
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regression specifications, 3a, 3b, and 3c. The dependent variable for all three models is PAYER,
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which equals one if the firm pays dividends in SEO years and zero otherwise. The results from

these regressions are presented in Table 4.

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[Insert Table 4 about here]

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The estimated coefficients for the G-INDEX in models 3a and 3c are positive and

statistically significant at the 5% level, suggesting that firms with weak corporate governance are
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more likely to pay dividends to outside large shareholders even when they have financing

deficits in dividend payment years. The coefficient on the G-INDEX in model 3a is 1.575 and is

statistically significant at the 5% level. The coefficient on OWNIN is not statistically significant,

further strengthening our arguments on the effects of large outside shareholders on corporate

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dividend policy. The results are consistent with our second hypothesis, that weak governance

leads to a suboptimal dividend policy.

We also conduct a robustness check using the entrenchment index (the E-INDEX)5 instead

of the G-INDEX (the results are not reported for the sake of brevity). The E-INDEX is constructed

by Bebchuk, Cohen, and Ferrell (2009) as a subset of the G-INDEX focused on entrenchment

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provisions. We do not use the E-INDEX in our main regressions because the merging process

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significantly reduces our sample size. Using the E-INDEX, we obtain results similar to those in

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Table 4, suggesting that the effects of outside large shareholders on dividend policy are more

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pronounced in firms with entrenched managers.

5.3. Tobit regressions: large shareholder ownership and dividend amounts

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The Tobit regression results are tabulated in Tables 5, 6, and 7. In regression

specifications 2a, 2b, and 2c, we use DIVIDENDYIELD, DIVIDENDSALES, and

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DIVIDENDPAYOUT as the dependent variables, respectively. We examine the relation between

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dividend amount (dividends to sales ratio, dividend payout) and the aggregate ownership of all

outside large shareholders (OWNOUT), the aggregate ownership of all inside large shareholders
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(OWNIN), and the aggregate ownership of all large shareholders (OWNSUM), along with the
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control variables, in models 2a, 2b, and 2c.

Several findings emerge from Table 5. DIVIDENDYIELD appears to increase with firm
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size and retained earnings. The coefficients on OWNOUT for model 2a and 2b are - 1.166 and

0.021, respectively, and are not statistically significant. Outside block ownership (OWNOUT) is

negatively associated with dividend yield but positively associated with DIVIDENDPAYOUT

5
Professor Bebchuk provides an E-INDEX dataset on his website at the following address:
http://www.law.harvard.edu/faculty/bebchuk/data.shtml.

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and DIVIDENDSALES. When we take DIVIDENDPAYOUT as the dependent variable, we find

strong evidence that large outsider shareholders play a critical role in dividend policy for firms

that pay dividends and raise external financing at the same time. Specifically, the coefficient on

OWNOUT in model 2c is 0.505 and statistically significant at the 1% level. In addition, the

coefficient on DEFICIT is negative with a magnitude of −0.476 but is not significant, indicating

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that DEFICIT does not have a strong effect on dividend policy for the sample firms. This is

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consistent with our predictions that entrenched managers pacify large outside shareholders at the

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expense of minor shareholders by continuing to pay dividends even when their firms have

financing deficits. When we replace OWNOUT with OWNIN (Table 6) and OWNSUM (Table 7),

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we do not observe similar effects of inside large shareholders on dividend policy, as the
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coefficients on OWNIN are not statistically significant.

[Insert Tables 5, 6 about here]

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The coefficients of most of the other independent variables are not significant, and the
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signs are inconsistent with previous findings on the determinants of payout policy and dividend

yields (e.g., Fama & French, 2001). This finding is not surprising given that we focus on a
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sample of firms that pay dividends but have financing deficits. Obviously, large outside
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shareholders prevent firms from pursuing an optimal dividend policy, especially firms with

highly entrenched managers.

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[Insert Table 7 about here]

5.4. Large shareholder ownership and the underpricing of seasoned equity offerings

We now ask whether firms that pay dividends and conduct equity offerings at the same

time experience greater SEO underpricing. SEO underpricing occurs when the offer price is

lower than the closing price on the day before the offer date. The literature on IPO and SEO

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underpricing is vast, and empirical studies have documented many factors affecting the pricing

decisions of issuing firms. Information asymmetry theory (e.g., Myers & Majluf, 1984) explains

that managers are tempted to mislead outside investors by issuing equity when their stocks are

overvalued. Anticipating such a tactic, outside investors will discount the prices they are willing

to pay for the firm's new shares; and the greater the information asymmetry, the greater the

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discount. Another explanation is that underwriters have an incentive to set offer prices lower

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than the equilibrium prices to foster sales and build up their reputation. Studies show that the

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major determinants of SEO underpricing include the level of information asymmetry, the level of

uncertainty about firm value, underwriter reputation, relative offer size, and conventional

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underwriter pricing practices (e.g., Altinkiliç & Hansen, 2003; Corwin, 2003).
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We expect that firms that pay dividends to mollify large outside shareholders even

though they have financing deficits are more likely to experience greater SEO underpricing in
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order to obtain external funds quickly. We test our third hypothesis using the following
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regression specification:

UNDERPRICINGi,t = β0 + β1PAYERi,t + β2RUNUPi,t + β3IPOUNDERPRICINGt

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+ β4VOLATILITYi,t + β5OFFERSIZEi,t + β6RANKi,t + β7TICKi,t

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+ β8LOGSIZEi,t + β9NASDAQi,t + εi,t . (4)

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Our dependent variable is UNDERPRICING, which is defined as the difference between

the closing price on the offer day and the offer price, divided by the offer price. An alternative

proxy for SEO underpricing is DISCOUNT, which is defined as the difference between the

closing price on the day before the offer and the offer price, divided by the closing price on the

day before the offer. Our variables of interest are OWNOUT and a dummy variable (PAYER) for

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firms that conduct SEOs and pay dividends simultaneously. We expect positive coefficients on

both OWNOUT and PAYER in the regression analysis.

We also include a set of explanatory variables commonly used in the literature. First,

VOLATILITY, a proxy for stock price uncertainty, is defined as the standard deviation of stock

returns over the 30 trading days ending 10 days before the offer date. We expect a positive

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coefficient on VOLATILITY given that Corwin (2003) finds that higher return volatility is

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associated with greater underpricing. Second, RUNUP, a proxy for the pre-offer price run up, is

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defined as the cumulative adjusted returns over the five trading days before the offer. We expect

a positive coefficient on RUNUP given that studies of SEO underpricing (e.g., Loughran &

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Ritter, 2002) have documented that equity issuers are more tolerant of excessive underpricing if
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they simultaneously learn that postmarket valuation is higher than they expected. Therefore,

issuers who see a greater recent increase in their stock price have an edge over their contracted
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underwriters in setting offer prices.

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We include OFFERSIZE in our regression to control for the effects of price pressure

(Corwin, 2003). OFFERSIZE is defined as the ratio of shares offered to the total number of
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shares outstanding before the offer. We construct a variable, TICK, to control for the effects of
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pricing technique. TICK equals one if the decimal portion of the closing price on the day before

the offer is less than $0.25 and zero otherwise. We also include a variable to control for the
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quality of the lead underwriter for each SEO, RANK, which is an adjusted form of Carter and

Manaster's (1990) rank based on rankings from Professor Jay Ritter’s website.6 Finally, we

include common variables often used in studies of SEO underpricing, such as

6
Professor Jay Ritter makes the dataset available at the following URL: https://site.warrington.ufl.edu/ritter/ipo-
data/.

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IPOUNDERPRICING, measured as the average underpricing across all IPOs during the same

month as the SEO, and a NASDAQ dummy variable, which equals one if the issuers are listed on

NASDAQ and zero if listed on NYSE or AMEX at the time of the offer.

Table 8 reports the results from the test of the relation between outside block ownership

and SEO underpricing. The coefficients on PAYER and OWNOUT are both positive and

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statistically significant at 5%, irrespective of UNDERPRICING or DISCOUNT. Specifically, the

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coefficient on PAYER is 0.005 (t-statistic = 1.980) for model 1 and 0.065 (t-statistic = 2.873) for

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model 2. Similarly, the coefficient on OWNOUT is 0.063 (t-statistic = 2.143) for model 1 and

and 0.089 (t-statistic = 1.974) for model 2. These results suggest that firms with outside large

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shareholders are more likely to experience greater SEO underpricing.
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[Insert Table 8 about here]

Other control variables are consistent with findings of previous studies. The coefficients
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on RUNUP, VOLATILITY, and OFFERSIZE are all positive and statistically significant,
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indicating that SEO underpricing increases with the volatility of stock returns before SEOs, with

relative offer size, and with preoffer abnormal returns. In addition, the coefficient on RANK is
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negative, suggesting that SEO underpricing decreases with underwriter reputation. Issuers listed
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on NASDAQ experience higher levels of SEO underpricing.

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6. Discussion and conclusions

Shareholders may request that managers pay dividends to reduce agency problems

connected with free cash flows. Thus dividend policy can be an outcome of strong corporate

governance. From an external governance perspective, Grossman and Hart (1980) and Shleifer

and Vishny (1986) point out that large shareholders can reduce agency problems by mitigating

the difficulty of collective action by shareholders. Large shareholders have incentives to monitor
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management and have the power to implement changes. Large shareholders also facilitate

takeovers (Grossman & Hart, 1980) and thus can reduce the agency costs between managers and

shareholders.

Large shareholders can improve corporate governance through two mechanisms. The first

is direct intervention. Large shareholders, especially activist large shareholders, can suggest

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strategic changes or vote against managers. The second mechanism is the “Wall Street rule,”

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otherwise known as the threat of exit. If managers engage in value-destroying projects, large

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shareholders may punish the manager by simply selling their shares, thus pushing down the

stock.

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As we note in section 2, existing theories such as signaling theory or the monitoring
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theory of dividends provide some explanations of why firms issue equity and pay dividends

simultaneously. Easterbrook (1984) argues that the main value of keeping dividend-paying firms
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constantly in the market for capital is that financial market participants are very good monitors of
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managers. When a firm issues equity, its management is reviewed and monitored by the

purchasers, investment bankers, and other market participants acting as protectors of the
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collective interests of shareholders. Consequently, these managers are more likely to act in
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investors’ interests than those who are not in the market for external financing.

Another explanation is that paying dividends and issuing new equity concurrently will
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maintain the current debt-equity ratio, thus preventing wealth transfer from shareholders to

bondholders. If an outside large shareholder effectively acts as an alternative governance

mechanism, firms with a substantial proportion of large shareholders do not need to pay

dividends to maintain their reputation or signal their quality to financial markets to raise new

equity. In accord with this view, Hu and Kumar (2004) find that both the likelihood of dividend

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payments and dividend yields are negatively related to the fraction of total shares owned by the

largest outside shareholders.

Although large shareholders can alleviate the conflict of interest between shareholders

and managers by inducing managers to maximize firm value, they may also extract private

benefits by directly intervening or colluding with managers. For example, large shareholders can

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induce managers to approve transactions that tunnel corporate resources away from the firm to

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the shareholders' other firms under unfavorable terms, thus extracting private benefits by

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expropriating minority shareholders. Recent studies indicate that some forms of private benefits

may reduce firm value. In an examination of block trades between 10% and 50% in which

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ownership increased from less than to more than 20%, Albuquerque and Schroth (2010) provide
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an empirical estimate that the private benefits to large shareholders are 10% of the value of the

block trade or 3% or 4% of the value of the equity of the target firm. Firm value falls by $1.76
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for every $1 of private benefit, on average. Dhillon and Rossetto (2015) show that undiversified
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large shareholders are extremely conservative, thus inducing firms to forgo risky, value-creating

investment. Large shareholders like pension funds may vote for labor-friendly managers
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(Agrawal, 2012), or a mutual fund may side with underperforming managers to preserve
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business ties (Davis & Kim, 2007).

We find that managers who want to pacify controlling shareholders are more likely to
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engage in a suboptimal dividend policy even though such a policy may lower the firm’s value.

The situation is more severe in firms with weak internal governance, where managers can take

advantage of the collective action problem of small shareholders. Control over dividend policy

confers a substantial perquisite on large shareholders: customized dividends. This also implies

that entrenched managers who fear being discharged are more likely to conduct SEOs and pay

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dividends simultaneously. Our results somewhat complement the theory of substitution

monitoring effects.

Like many empirical analyses of corporate governance, this study is subject to

limitations. The first challenge for any empiricist is to avoid the endogeneity problem arising

from the two-way relationship between large shareholders and firm characteristics. Identifying

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causal effects is empirically difficult. The second challenge is the omission of variables that may

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jointly affect both the actions of large shareholders and firm characteristics. In this paper, we

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assume that large shareholders can exacerbate agency problems by convincing or coercing

managers to engage in costly financing activities. However, such threats or jawboning (e.g.,

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writing private letters to firm management) are typically unobservable. Future empirical research
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may shed more light on this area by constructing a better proxy for the voice or jawboning of

larger shareholders through manual collection of data such as 13-D filings, public media
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announcements, private letters to management, and surveys.

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PT
CE
AC

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Table 1
Summary statistics.

Non-dividend payers (N = 479 firms) Dividend payers (N = 177 firms)

Variable Mean Median Std. Dev Mean Median Std. Dev

RE 0.014 0.104 0.713 0.150 0.148 0.212

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ROA 0.037 0.051 0.136 0.038 0.045 0.077

IP
LOGSIZE 6.821 6.785 1.167 7.803 7.771 1.429

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TOBINQ 3.363 2.232 3.799 1.871 1.424 1.611

OWNSUM 0.272 0.244 0.176 0.271 0.233 0.174

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OWNOUT 0.181 0.703 0.151 0.199 0.191 0.186

DIVIDENDSALES 0.038 0.013 0.120

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DIVIDENDYIELD 2.517 0.709 4.776

DIVIDENDPAYOUT 0.349 0.215 0.625

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DIVIDENDASSETS 0.016 0.009 0.028

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G-INDEX 8.132 8.012 2.647 9.594 10.145 2.756

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Notes: RE is retained earnings scaled by the book value of assets. ROA is return on assets scaled by the book value of assets.
TOBINQ is the market value of assets scaled by the book value of equity. LOGSIZE is the natural logarithm of the book value of
assets. OWNSUM is the natural logarithm of the proportion of total equity held by all large shareholders for that firm year.
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OWNOUT is the natural logarithm of the proportion of total equity held by all outside large shareholders. OWNIN is the natural
logarithm of the proportion of total equity held by all inside large shareholders (directors and managers). DEFICIT is a firm’s
financing deficit, constructed as by Frank and Goyal (2003). DIVIDENDYIELD is a firm’s cash dividends per share for that firm
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year. DIVIDENDSALES is a firm’s cash dividends divided by total sales for that firm year. DIVIDENDPAYOUT is a firm’s total
cash dividends divided by its net income before extraordinary items. DIVIDENDASSETS is annual dividends divided by the book
value of assets. LAGDIVI is a dummy variable taking value one if one year before the SEO a firm pays dividends and zero
otherwise. Large shareholders are shareholders who own at least 5% of the common stock.

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Table 2
Pearson correlation coefficients for explanatory variables.

CASH DEFICIT RE ROA LOGSIZE TOBINQ OWNSUM

DEFICIT −0.060
(0.287)

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RE −0.248 −0.107

IP
(< 0.000) (0.058)

CR
ROA −0.194 −0.233 0.698

(< 0.000) (< 0.000) (< 0.000)

LOGSIZE −0.389 0.024 0.174 0.027

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(< 0.000) (0.670) (0.002) (0.632)

TOBINQ 0.463 −0.175 0.045 0.139 −0.269

AN
(< 0.000) (0.002) (0.422) (0.013) (< 0.000)

OWNSUM −0.105 0.004 0.043 0.149 −0.144 −0.030

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(0.060) 0.994 (0.441) (0.008) (0.010) (0.586)

LAGDIVI −0.364 0.038 0.116 0.033 0.319 −0.255 −0.043

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(< 0.000) (0.504) (0.038) (0.557) (< 0.000) (< 0.000) (0.446)
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Notes: RE is retained earnings scaled by the book value of assets. ROA is return on assets scaled by the book value of assets.
TOBINQ is the market value of assets scaled by the book value of equity. CASH is the cash balance scaled by the book value of
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assets. LEVERAGE is the book debt ratio. DEFICIT is a firm’s financing deficit, constructed as by Frank and Goyal (2003).
OWNSUM is the natural logarithm of the proportion of total equity held by all large shareholders for that firm year. OWNOUT is
the natural logarithm of the proportion of total equity held by all outside large shareholders. OWNIN is the natural logarithm of
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the proportion of total equity held by all inside large shareholders (directors and managers). DIVIDENDYIELD is a firm’s cash
dividends per share for that firm year. DIVIDENDPAYOUT is a firm’s total cash dividends divided by its net income before
extraordinary items for that firm year. DIVIDENDASSETS are annual dividends divided by the book value of assets. LAGDIVI is
a dummy variable taking value one if one year before the SEO a firm pays dividend and zero otherwise. Large shareholders are
shareholders owning 5% or more of a company’s stock.

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Table 3
Logistic regression analysis: large shareholders and likelihood of paying dividends.

Independent variable Dependent variable (PAYER = 1)

(predicted sign) OWNOUT (1) OWNIN (2) OWNOUT + OWNIN (3) OWNSUM (4)
Intercept −4.480 −3.661 −6.710* −4.980
(1.736) (1.713) (4.120) (1.844)

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CASH (+/−) −4.356** −4.390** −16.746 −3.940***

IP
(2_
(2.125) (2.155) (7.190) (2.141)

CR
DEFICIT (−) −3.525* −3.181 −8.092 −3.301*
(1.972) (1.949) (5.570) (1.981)
RE (+) 2.550** 2.398* 5.939** 2.442*

US
(1.853) (1.371) (3.310) (1.351)
ROA (−/+) −7.462** −7.266 −8.014** −7.677
AN
(2.755) (2.676) (6.202) (2.717)
LOGSIZE (+) 0.304 0.264 −0.126 0.347
(0.210) (0.217) (0.360) (0.218)
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OWNOUT (+) 3.029** 1.590***

(1.552) (0.720)
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OWNIN (+/−) 0.134 0.504

(1.714) (0.610)
PT

OWNSUM (+) 2.443*

(1.391)
−1.803** −1.449 −1.928 −1.794
CE

LEVERAGE (−)
(1.770) (1.768) (2.870) (1.806)
TOBINQ (−) −0.057 −0.0487 0.269 −0.054
AC

(0.130) (0.135) (0.308) (0.135)

LAGDIVI (+) 5.270*** 5.162*** 6.435*** 5.326***
(0.530) (0.514) (1.410) (0.542)
Likelihood ratio 291.235*** 128.956*** 149.175*** 295.053***

Notes: The dependent variable, PAYER, equals one if the firm pays a dividend during SEO years, and zero otherwise. Large
shareholders are shareholders owning 5% or more of a company’s stock. *, **, and *** indicate significance at the 10%, 5%, and
1% levels, respectively. Standard errors of the coefficients are in parentheses. Other independent variables are described in the
notes to Table 1.

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Table 4
Logistic regression analysis: payout policy and corporate governance.

Dependent variable (PAYER = 1)

Independent variable Model 3a Model 3b Model 3c

(predicted sign) OWNOUT OWNIN OWNSUM

T
Intercept −7.117 −6.708 −8.043

IP
(2.818) (2.796) (2.889)
CASH (+/−) −4.061 −4.020 −3.728

CR
(2.572) (2.659) (2.604)
RE (+) 2.051 1.780 1.835

US
(1.554) (1.601) (1.546)
ROA (−/+) −5.943* −6.160** −6.008**
(3.127) (3.139) (3.274)
AN
LOGSIZE (+) 0.258** 0.210 0.308
(0.263) (0.265) (0.273)
M

OWNSUM (+) 2.932** 2.213 3.661*

(1.807) (2.246) (1.716)
ED

LEVERAGE (−) −3.383 −3.077 −3.955

(2.430) (2.518) (2.625)
−0.013 −0.008 −0.030
PT

TOBINQ (−)
(0.130) (0.125) (0.134)
LAGDIVI (+) 5.609*** 5.615*** 5.861
CE

(0.686) (0.698) (0.743)

G-INDEX (+) 1.575** 1.701* 1.657**
AC

(0.869) (0.909) (0.886)

Likelihood ratio 223.559*** 221.945*** 225.675***

Notes: The dependent variable, PAYER, equals one if the firm pays a dividend during SEO years, and zero otherwise. Large
shareholders are shareholders owning 5% or more of a company’s stock. G-INDEX is the governance index, and is obtained from
Professor Andrew Metrick’s website (http://finance.wharton.upenn.edu/~metrick/data.htm). *, **, and *** indicate significance
at the 10%, 5%, and 1% levels, respectively. Standard errors of the coefficients are in parentheses. Other independent variables
are described in the notes to Table 1.

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Table 5
Tobit analysis: outside large shareholders and dividend policy.

Dependent variables

Independent variable Model 2a Model 2b Model 2c

(predicted sign) DIVIDENDYIELD DIVIDENDSALES DIVIDENDPAYOUT

Intercept −18.691 −0.153 −2.000

T
(2.375) (0.064) (0.373)

IP
CASH (+/−) 0.314 −0.082 −0.247

(3.364) (0.092) (0.523)

CR
DEFICIT (−) −2.658 0.014 −0.476

(3.006) (0.079) (0.457)

US
RE (+) 3.441** −0.046 0.280

(1.864) (0.029) (0.270)

AN
ROA (−/+) −5.761 0.231* 1.354

(4.679) (0.127) (0.934)

M

LOGSIZE (+) 1.413*** −0.003 0.089**

(0.246) (0.006) (0.036)

ED

OWNOUT −1.166 0.021 0.505***

(2.253) (0.060) (0.821)

PT

LEVERAGE (−) 3.722 −0.037 0.568*

(2.307) (0.060) (0.322)

CE

TOBINQ (−) 0.168 −0.001 −0.009

(0.154) (0.005) (0.031)

AC

LAGDIVI (+) 8.456*** 0.225*** 1.265***

(0.954) (0.026) (0.144)

AIC criterion −121.106 −123.103 323.191

Notes: The dependent variable, DIVIDENDYIELD, is the ratio of cash dividends to stock price for model 2a. DIVIDENDSALES
is the ratio of dividends to total sales for model 2b. DIVIDENDPAYOUT is the ratio of dividends to total income before
extraordinary items for model 2c. Other independent variables are described in the notes to Table 1. Standard errors of the
coefficients are in parentheses. *, **, and *** indicate significance at the 10%, 5%, and 1% levels, respectively.

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Table 6
Tobit analysis: inside large shareholders and dividend policy.

Dependent variables
Independent variable Model 2a Model 2b Model 2c
(predicted sign) DIVIDENDYIELD DIVIDENDSALES DIVIDENDPAYOUT
Coefficients Coefficients Coefficients

T
Intercept −19.410 −0.174 −1.862

IP
(2.475) (0.066) (0.385)

CR
CASH (+/−) 0.450 −0.068 −0.254
(3.399) (0.092) (0.532)
DEFICIT (−) −2.748 0.011 −0.442

US
(3.014) (0.079) (0.460)
RE (+) 3.506** −0.047 0.228
AN
(1.858) (0.028) (0.269)
ROA (−/+) −6.026 0.216* 1.479
(4.705) (0.127) (0.934)
M

LOGSIZE (+) 1.459** −0.001 0.084**

(0.256) (0.007) (0.038)
ED

OWNIN 1.063 0.081 −0.002

(2.569) (0.069) (0.367)
PT

LEVERAGE (−) 3.611 −0.034 0.605**

(2.301) (0.059) (0.320)
CE

TOBINQ (−) 0.177 −0.001 −0.014

(0.154) (0.005) (0.031)
LAGDIVI (+) 8.526*** 0.227*** 1.265***
AC

(0.970) (0.026) (0.145)

AIC criterion 895.028 122.372 325.635

Notes: The dependent variable, DIVIDENDYIELD, is the ratio of cash dividends to stock price for model 2a. DIVIDENDSALES
is the ratio of dividends to total sales for model 2b. DIVIDENDPAYOUT is the ratio of dividends to total income before
extraordinary items for model 2c. Other independent variables are described in the notes to Table 1. Standard errors of the
coefficients are in parentheses. *, **, and *** indicate significance at the 10%, 5%, and 1% levels, respectively.

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Table 7
Tobit analysis: large shareholders and dividend policy.

Dependent variables
Model 2a Model 2b Model 2c
Independent variable DIVIDENDYIELD DIVIDENDSALES DIVIDENDPAYOUT

T
(predicted sign) Coefficients Coefficients Coefficients
−18.853 −0.189 −2.135

IP
Intercept
(2.631) (0.070) (0.415)

CR
CASH (+/−) 0.209 −0.072 −0.166
(3.377) (0.092) (0.528)
DEFICIT (−) −2.693 0.012 −0.488

US
(3.012) (0.079) (0.461)
RE (+) 3.555** −0.047 0.258
AN
(1.856) (0.029) (0.269)
ROA (−/+) −5.829 0.218* 1.275
(4.719) (0.127) (0.935)
M

LOGSIZE (+) 1.416** −0.001 0.101**

ED

(0.259) (0.007) (0.038)

OWNSUM −0.275 0.068 0.424*
(2.010) (0.054) (0.298)
PT

LEVERAGE (−) 3.610 −0.044 0.576*

(2.311) (0.060) (0.321)
CE

TOBINQ (−) 0.173 −0.001 −0.008

(0.155) (0.005) (0.031)
LAGDIVI (+) 8.455*** 0.228*** 1.288***
AC

(0.965) (0.026) (0.147)

Likelihood ratio 895.180 −122.541 323.606

Notes: The dependent variable, DIVIDENDYIELD, is the ratio of cash dividends to stock price for model 2a. DIVIDENDSALES
is the ratio of dividends to total sales for model 2b. DIVIDENDPAYOUT is the ratio of dividends to total income before
extraordinary items for model 2c. Other independent variables are described in the notes to Table 1. Standard errors of the
coefficients are in parentheses. *, **, and *** indicate significance at the 10%, 5%, and 1% levels, respectively.

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Table 8
Outside large shareholders and SEO underpricing.

Independent variable Dependent variables

(predicted sign) UNDERPRICING (Model 1) DISCOUNT (Model 2)

Intercept 0.012*** 0.094***

T
(4.145) (6.512)

IP
PAYER (+) 0.005** 0.065***

CR
(1.980) (2.873)
OWNOUT (+) 0.063** 0.089**

(2.143) (1.974)

US
RUNUP (+) 0.244*** 0.322**

(3.710) (8.962)
AN
IPOUNDERPRICING (+/−) −0.007 0.046

(−0.812) (1.283)
M

RANK (−) −0.012*** −0.015***

(−3.340) (−5.442)
ED

VOLATILITY (+) 0.731*** 0.328***

(6.903) (3.932)
PT

OFFERSIZE (+) 0.017*** 0.025***

(3.734) (2.944)
CE

TICK (+) 0.003 0.018

(1.034) (0.871)
AC

NASDAQ (+) 0.008** 0.020**

(1.964) (2.140)

R-squared 0.204 0.208

Notes: This table reports coefficients (t-values) from regression models that were based on White's heteroskedasticity-
adjusted standard errors. The dependent variables are UNDERPRICING for model 1 and DISCOUNT for model 2.
UNDERPRICING is defined as the closing price on the offer day minus the offer price, divided by the offer price. DISCOUNT is
defined as the closing price on the day before the offer minus the offer price, divided by the closing price on the day before the
offer. Other variables are described in the notes to Table 1. T-statistics of the coefficients are in parentheses. *, **, and ***
indicate significance at the 10%, 5%, and 1% levels, respectively.

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