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The effect of corporate governance and growth opportunities on dividend payout; does cross-listing matter?


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Master Thesis

MSc DD International Financial Management

The effect of corporate governance and growth opportunities on

dividend payout; does cross-listing matter?

Final Version 12th January, 2018

Jinhan Wu, s3050998 Supervisor: Dr. V. Purice


Using a sample of 434 firms listed on U.S. capital markets, including Over-the-counter, and 356 domestically listed firms from 47 countries during 2010 to 2015, this research confirms corporate governance’s positive effect, as well as growth opportunities’ negative effect on firm’s dividend payout. Then, based on the proved relationship above, this research also finds support that cross-listing and Over-the-counter both strengthen the positive relationship between growth opportunities and dividend payout. Meanwhile, although cross-listed and Over-the-counter firms do have stronger corporate governance, no evidence is observed for their strengthening the negative effect of corporate governance on dividend payout.



1. Introduction

In the past decades, many firms, from both emerging and developed countries, have been cross-listed on foreign capital markets. According to the Annual Statistics Guide published by World Federation of Exchanges in 2016, there are 2409 cross-listings on the world’s 56 major stock exchanges, among which, U.S. is the most attractive launching destination with over 800 foreign listings on three mainstream stock exchanges: NYSE, NASDAQ and AMEX. Following this trend, many researchers have extended their study to examine how cross-listing affects corporate factors, among which, corporate governance and growth opportunities are the popular options.



There is the reason for questioning whether they are really willing to sacrifice their own interests in return for certain benefits brought by cross-listing in U.S. capital market. On the other hand, several studies question the enforcement power of legal and regulatory requirements requested by SEC and U.S. GAAP. For instance, as Licht (2003) indicates in his paper, non-U.S. firms have different characteristics which may result in not meeting prerequisites of certain regulations and this “hands-off” effect fails to improve corporate governance structures. Also, foreign firms could get exemptions from SEC who wants to increase the attractiveness of U.S. capital markets (Karmel, 2002). Confronted with the mixed evidence, this research first aims to examine whether cross-listed firms indeed have stronger corporate governance. Also this research tries to reveal whether cross-listing can affect the relationship between corporate governance and dividend payout.

Hail and Leuz (2009) argue that firms with more growth opportunities are more inclined to list abroad. This raises the question whether cross-listing can further enhance growth opportunities or not. Following market segmentation hypothesis, Foerster and Karolyi (1999) confirms that cross-listed firms increases their investor base by overcoming investment obstacles. Increased investor base, as well as enhanced public reputation and exposure is expected to enlarge the amount of growth opportunities. Furthermore, Lin et al. (2005)’s paper reveals that accessing larger amount of external capital is an important consideration when firms make cross-listing decisions. Cross-listing can contribute to lower cost of capital of up to 40%, as Errunza and Miller (2000) shows. Easier access to external capital increases firm’s willingness to pursue more profitable growth options and in this case, growth rates are likely to be increased. Previous studies lack empirical evidence whether cross-listing can affect the relationship between growth opportunities and dividend payout. Therefore, second aim of this research is to look for empirical evidence that can answer the question above.



Then, I additionally include two dummy variables, cross-listing and Over-the-counter. I distinguish Over-the-counter because it has significant differences compared with cross-listing, therefore Over-the-counter is reckoned as in the middle area of cross-listing and domestic listing. The result shows support for the strengthening effect of both cross-listing and Over-the-counter on the negative relationship between growth opportunities and dividend payout (Mitton, 2004). Meanwhile, summary statistics do indicate that cross-listed and Over-the-counter firms have stronger corporate governance over domestically listed firms, however, no similar evidence is observed for neither cross-listing nor Over-the-counter has strengthening effect on the positive relationship between corporate governance and dividend payout.

This research contributes to investigate the two opposite relationships between corporate governance and dividend payout, and shows evidence supporting positive relationship. This research also tries to reveal how cross-listing affects corporate factors, as well as their cause and effect. Beside, this research distinguishes Over-the-counter from cross-listing, and examines the interaction effect separately.



2. Literature review and hypotheses

2.1 Why do firms pay dividends?

Dividends are corporate’s distribution of profits to shareholders. Since the proposition of dividend irrelevance was proposed by Miller and Modigliani (1961), firm’s dividend policy has become a rather hot-discussed topic. Researchers have tried to understand why some firms pay dividends, while some others not. After several decades of efforts, three widely-accepted theories, as explained below, are suggested.

2.1.1 Signalling theory

Dividends can be seen as a communication tool between firms and their investors. Miller and Modigliani (1961), in their paper, indicate that share prices might convey implicit information and respond to the change of dividend policy under the market imperfection situation. Subsequent studies have continued to examine information content hided in dividend policy and proposed signalling theory, which basically suggests that dividend announcement, as a signal, contains non-public information and delivers messages about firm’s future performance (John and Williams, 1985). The assumptions include the existence of possession of private information held by insiders, and the delivery of true and reliable signal. Empirical studies have followed signalling theory and do find significant evidence for it. For instance, Asquith and Mullins (1983) observe a positive relationship between dividend announcement, which includes first-time and resumed payout, and excess return with a sample of 168 firms showing a +3.7 percent increase for two-day announcement period. Nissim and Ziv (2001) document over 14,000 firm-year observations of dividends change and find a positive relationship with earning changes. Similar result on market reactions is reinforced by the subsequent research of Michaely et al. (1995). With +3.4 percent and -7.0 average excess return, their paper suggests much more negative market reactions when firms announced to decline dividends since markets perceive a positive long-run performance of firms which pay regular and stable dividends. This could explain why managers are rather reluctant to reduce dividends (Lintner, 1956). Furthermore, DeAngelo and DeAngelo (1990) find that even in financial crisis, managers prefer to cut dividends down, rather than not to pay at all.

2.1.2 Agency theory



may further misbehave with the aim to pursue their own interests. Once managers are able to control excess cash flow, the possibility of overinvestment problem is significantly increased. Dividend payout, which is regarded as a way of distributing cash, offers a solution to overinvestment problem. The early study of Easterbrook (1984) confirm that paying dividend is used to reduce free cash flow. Meanwhile, he also indicates that dividend payout could force managers to approach capital markets and in this way, managers might receive much more attention and scrutiny with which shareholders are able to monitor at a lower cost. Therefore, dividend payout suggests benefits for corporate shareholders. In line with Easterbrook, Jensen (1986) proposes similar conclusion with the evidence that managers who hold more free cash flow are more flexible, and therefore more inclined to benefit themselves instead of shareholders. Agency theory is also supported by the further empirical studies (Holder et al., 1998; Saxena, 1999).

2.1.3 Clientele theory



What needs to be noted after discussing three major theories is that, there may be certain contradictings among these theories. For instance, investors who prefer capital gains may also prefer stocks with high dividend payout because this delivers positive future expectations according to signalling theory, or because high dividend payout mitigates agency conflicts within the firms and this indicates less risk according to agency theory. The possible explanation of contradictings among different convincible theories could be due to the existence of so many factors that are at play and intertwined simultaneously. However, each theory can still hold independently as previous research has offered sufficient evidence, both theoretically and empirically. The following discussion of corporate governance and growth opportunities on dividend payout will be mainly built on the theories above.

2.2 Corporate governance and dividend payout

First of all, to be clear, corporate governance, is discussed at firm level because firm-level, instead of country-level, is more specific, overall and reliable when we desire to measure the governance mechanisms within firms. Defined as a set of laws, policies, rules and practices by which firms are controlled and directed, corporate governance plays a couple of roles in firms, helping prevent the accounting fraud, ensures the transparency of financial reports and improves the responsibility of managements.



However, few researchers argue the opposite relationship, which is named substitution hypothesis, with the suggestion that firms with stronger corporate governance mechanisms no longer need to sacrifice that much cash to prevent expropriations, which in other words, mean that they can reserve more cash pay less dividends (La Porta et al., 2000). Hence substitution relationship between corporate governance and dividend payout is proposed and supported by several studies as well. John and Knyazeva (2006) indicate stronger corporate governance could lead to both lower dividend payout itself and the incidence of dividend payout, because better corporate governance ensures the more efficient usage of corporate resources and lowers the benefits which are supposed to prevent managements’ misbehaviours.

Confronted with mixed evidence, some researchers do examine two competing hypotheses discussed above and they find that the outcome hypothesis dominates. For instance, Jiraporn et al. (2011) use 4771 observations with corporate governance measurements provided by Institutional Shareholder Services and their study significantly support the positive relationship between corporate governance and dividend payout. Adjaoud and Ben-Amar (2010) investigated over 700 firms listed on Toronto Stock Exchange, supporting the dominance of outcome hypothesis over substitution hypothesis. Hence, we tend to follow the outcome hypothesis as well and the first hypothesis of this paper is:

H1: Firms with stronger corporate governance pay more dividends.

2.3 Growth opportunities and dividend payout

Myers (1977) describes that firm can be viewed as an entity containing assets and growth opportunities, and he further defines growth opportunities as those potentially profitable projects that can be discovered and put into use by firms. Unlike what people usually acknowledge, growth opportunities do not simply mean the new projects due to R&D or development and joint ventures, they could also broadly indicate M&A of other firms, brand reputation enhancement, and replacement of existing assets (Mason and Merton, 1985). The empirical analysis of Tong and Reuer (2004) supported significantly positive effect on growth options driven by R&D as well as joint ventures. Therefore, it means that growth opportunities may increase firm value (Varaiya et al., 1987) except for assets, although they are the future options that have not been realized yet.



more reluctant to distribute free cash as dividends, which in other words, means sacrificing chances of pursuing higher profits. Meanwhile, investors are also willing to accept lower dividends as they expect higher capital gains in case cash is appropriately used for growth opportunities. Consistent with this logic, Smith and Watts (1992)’s paper finds that firms with more growth opportunities are more likely to pay less dividends with the argument of their competing relationship regarding the distribution of free cash flow (Jones and Sharma, 2001). La Porta et al. (2000)’s research proves that dividend payout is negatively related to growth opportunities and the negative relationship is supposed to be stronger under the situation of stronger corporate governance and higher shareholder protection. Similar finding is documented by Subramaniam et al. (2011) through investigating 409 Malaysian firms with top market capitalisation and Bopkin (2010) with the sample including 34 emerging markets. Except for arguments from the aspect of free cash flow distribution, some researchers make arguments based on the signalling effect. For instance, Black (1976) indicates that the cut of dividends may deliver the message to investors that firm had more attractive growth opportunities. Oppositely, paying dividends can be interpreted as a sign of lacking growth opportunities (Fairchild, 2010). Firms take an act of cutting dividends may trigger the market punishment since investors may regard this action as bad news. So firms are rather cautious when making dividend policy change since it could probably generate side effect, and therefore cause loss of growth opportunities.

Overall, the competing relationship between dividend payout and growth opportunities seems solid and is supported by most studies. Hereafter I make the following hypothesis:

H2: Firms with more growth opportunities pay less dividends.

2.4 Why do firms list abroad?

The motivations behind cross-listing behaviour have attracted the interests of researchers for several years and three mainstream explanations, which are mainly used to build subsequent hypotheses, are briefly reviewed as follows.

2.4.1 Market-based motivation



is expected to have several corresponding impact. First, it enlarges the investor base. Foerster and Karolyi (1999)’s research claims that U.S. investors do face less obstacles towards cross-listed firms compared with non-cross-cross-listed firms and larger investor base is able to decline firm’s risk. Second, the increased marketability reduces the cost of capital as the evidence from the study of Errunza and Miller (2000) documents that over 40% cost of capital declines after cross-listing and concludes that the liberalizations of financial market do have significant positive effect. Third, the increased marketability also increases the liquidity, which is consistent with the research of Foerster and Karolyi (2000). They examine 333 non-U.S. firms that cross-listed on U.S. capital markets from 1982 to 1996 and show that the order flow trading after inter-market behaviour become more intense with the increased liquidity of non-U.S. firms. While, Lee (2003) questions the market segmentation with the different interpretation that the announcement abnormal returns of non-U.S. firms are not a result of the increased marketability, but from their improved capability of taking advantage of it.

2.4.2 Information-based motivation



analysed. King and Segal (2008) also report positive firm valuation based on a sample of 287 Canadian cross-listed firms.

2.4.3 Bonding-based motivation

Coffee (2002) and Stulz (1999) are regarded as the pioneers of bonding hypothesis which argues that firms with poor corporate governance in home country list abroad in order to legally bond themselves to more mature governance regulation and regimes. U.S. capital market is the most popular destination since it has better shareholder protection with more strict regulations and mature institutional framework all over the world, and that’s the reason why most firms, especially from the emerging markets, with immature and incomplete regulations, choose to list on U.S. stock exchanges. Several empirical studies have followed bonding hypothesis and provide evidence for it. For instance, Charitou et al. (2007) analyse Canadian firms cross-listed on U.S. capital market and state that enhanced scrutiny contributes to stronger corporate governance quality after firms’ cross-listing. Frésard and Salva (2010)’s study investigates over 800 cross-listed firms and they claim that it is more difficult for managers to chase after personal interest with corporate resources in cross-listed firms.

However, bonding effect is still debated among researchers. Cochrane et al. (1996) show that the requirements of SEC and reconciliation with U.S. GAAP are the barriers that foreign firms must overcome if they want to list on U.S. capital market. Firms with poor corporate governance may give up even they desire to do so. Licht (2003)’s study proposes the avoiding hypothesis, which is critically against bonding hypothesis. He claims that the improvement of corporate governance is not among firm issuers’ priorities since putting efforts in enhancing regulations can be a quicker way to get governance regimes improved, compared with listing abroad. Even after cross-listing, the enforcement power of SEC and U.S. GAAP is questioned (Siegel, 2005; Karmel, 2002).

Overall, all three motivations above can contribute, at least partly, to why firms pursue cross-listing even though it is costed. More detailed and thorough discussions will come up as next two hypotheses are formed.

2.5 Cross-listing, corporate governance and dividend payout



bonding hypothesis are based on two aspects. One is managerial opportunism, and the other one is U.S. governance regimes themselves.

The evidence of managerial timing during the cross-listing decision-making process is proved by Webb (1999). He finds that firms accelerates cross-listing process once they are in peak performance and his study further shows comparatively poor performance after cross-listing. As a matter of course, we have the reason to reconsider motivation of cross-listing behaviour from managerial perspective, whether firm issuers are really willing to do so. La Porta et al. (1997) detect that higher minority shareholder protection leads to higher capability for firms to raise external capital, which has positive effect on firm value and is beneficial to majority shareholders and managers (Gompers et al, 2003). However, the upgrade due to bonding to stronger governance structures and higher disclosure standards could harm the majority shareholder’s benefit of control. As a result, they are even likely to chase capital markets with poorer investor protection and this is so-called “race to the bottom” scenario, instead of “race to the top”. Therefore, firms are confronted with a certain trade-off effect between increased external capital accessibility and reduced private benefits. The dilemma is rather complicated because several factors intertwine and influence simultaneously. For example, firms with significant weak corporate governance can benefit much more from accessing to external capital, but it also costs more to comply with stringent regimes and imply sacrificing more private benefits. So far, no exact quantitive measurement can be precisely defined to make a proper evaluation. Therefore, the motivation of legal bonding cannot be completely confirmed, and is somehow doubted.



most of which are widely held by a big amount of shareholders, unlike Asian and European large-shareholder controlling firms. Second, Karmel (2002) proves that sometimes foreign firms could easily get exemptions from SEC and it is regarded as certain relief in order to attract more foreign firms landing on U.S. capital markets, especially in early years. For instance, 20-F is adapted to all foreign private firms listed on U.S. exchanges, while Canadian firms follow10-F. There are observable several exemptions of disclosure regulations in 20-F. Foreign issuers do not need to disclose material transactions including controllers, directors, or officers. Also, 20-F only requires foreign firms to disclose shareholders with over 10% voting securities, while it is 5% in 10-F. More examples can be found if we make a careful comparison.

In conclusion, it is possible that cross-listing indeed improves corporate governance. However, due to managerial opportunism, diverse characteristics between U.S. and non-U.S. firms and “hands-off” effect, there are quite sufficient reasons to question whether cross-listing can affect corporate governance that significantly, so as to strengthen its relationship with dividend payout. Therefore I make the third hypothesis as follows:

H3: The positive relationship between corporate governance and dividend payout is not

strengthened through cross-listing on U.S. capital markets.

2.6 Cross-listing, growth opportunities and dividend payout

The study of Hail and Leuz (2009) documents a large panel of over 31,000 firm-year observations covering firms cross-listed on U.S. capital markets from 44 countries and their study suggests that firm does time the cross-listing behaviour. Firms pursue cross-listing when growth opportunities are about to expand. What can be concluded from this research is that, firms are more inclined to list abroad when they possess more growth opportunities. Then the question arises whether cross-listing can further increase growth opportunities, or even increase growth rates.



relationship can be explained by a couple of arguments below. First, cross-listing is an effective way to counter market segmentation since it can reduce information costs (Lang et al., 2003) and transaction costs (Alexander et al., 2003) of investors. Second, firm’s liquidity is supposed to be improved by increasing information transparency and complying with higher disclosure standards, brought by cross-listing. As a result, decreased information asymmetry reduces cost of capital (Amihud and Mendelson, 1986). Third, Coffee (1999) states that cross-listing reduces the risk of wealth expropriation, which could also contribute to lower cost of capital. This is due to the benefits of stronger minority shareholder protection brought by destination capital market. Therefore, cross-listing, for several reasons, enables foreign firms to raise external capital more easily and this could explain why firms list abroad when confronting expanded opportunities. In turn, lower cost of capital is expected to drive firms to chase more profitable projects, and therefore achieve higher growth.

To sum up, it is very likely that both the amount of growth options and the growth rates are increased through cross-listing behaviour. The empirical study of Khurana et al. (2007), consisting of 476 cross-listed firms on U.S. stock exchange from 37 countries, provides evidence of the positive relationship between cross-listing and firm growth rates. Meanwhile, Mitton (2004) finds that the negative relationship between dividend payout and growth opportunities could be even stronger when firms have stronger corporate governance. Although bonding hypothesis is somehow doubtful according to discussions above, it’s obvious that cross-listed firms on U.S. capital markets do have stronger corporate governance. Therefore, I assume stronger sensitivity between growth opportunities and dividend payout because of firm’s cross-listing behaviour and make the following hypothesis:

H4: The negative relationship between growth opportunities and dividend payout is



3. Data and methodology

3.1 Data selection

There are 5888 firms with firm-level Corporate Governance Score (CGV Score) in ASSET4 database and therefore, they become the primary firm pool for this research. With primary firm pool, I then exclude the firms which lack proper CGV Score from the year 2010 to 2015 in case they only have CGV Score for less than three-year observations. Also, I remove the firms without proper cash dividends from the same time period according to Datastream database. Hereby, 3366 firms are still left after first-step selection.

Next, I check the listing status with ISIN code in Orbis database. There are 25 firms which cannot be found, and 18 firms which are already delisted from capital markets. Furthermore, I do a cross-check of their legally original country and listing country, and as a result, it comes to 1245 firms after second-step selection with 719 non-U.S. firms that are listed on U.S. capital markets and 526 non-U.S. firms that are domestically listed.

The last step is that I filter out banks, financial firms and insurance firms because of their different financial and accounting characteristics, which may significantly influence research result (Cheng et al., 2014).

My final sample contains a panel data of 4505 year-observations of 790 non-U.S. firms (98 cross-listed firms on NYSE, NASDAQ or AMEX, 336 Over-the-counter firms, and 356 non-cross-listed firms) from 47 countries as showed in Table 1.



Table 1 Sample Selection

Country CL OTC NCL Total


Australia 2 22 20 44 Austria 1 1 Bahrain 1 1 2 Belgium 1 3 4 Brazil 25 25 Canada 30 2 1 31 64 Cayman Islands 1 1 China 11 9 20 Colombia 4 4 Egypt 2 2 France 2 26 28 Germany 1 17 18 Greece 1 1 Hong Kong 3 18 3 24 Indonesia 1 3 4 Ireland 5 1 4 10 Israel 1 1 Italy 1 3 4 Japan 4 1 97 33 135 Kuwait 2 2 Luxembourg 1 1 Malaysia 1 26 27 Mexico 3 4 7 Netherlands 4 1 5 10 New Zealand 1 1 2 Norway 2 3 5 Oman 2 2 Panama 1 1

Papua New Guinea 1 1

Peru 1 1 Philippines 1 2 12 15 Poland 1 1 Portugal 1 1 Qatar 5 5 Republic of Korea 2 59 61 Russian Federation 14 14 Saudi Arabia 5 5 Singapore 7 7 South Africa 3 1 7 3 14 Spain 1 6 7 Sri Lanka 1 1 Switzerland 4 1 12 17 Taiwan 78 78 Thailand 18 18 Turkey 13 13 United Arab Emirates 3 3 United Kingdom 17 2 44 16 79 Grand Total 87 9 2 336 356 790 98



3.2 Main and control variables

As showed by Table 2, for dependent variable, I adopt widely-used Dividends / Net sales (e.g., La Porta et al., 2000) as the proxy to measure Dividend Payout (DS).

Table 2 Variables and Descriptions

Variable Short Term Proxy

Dividend Payout DS Dividends / Net sales

Cross-listing DCL Dummy equals 1 if firm is cross-listed, dummy equals 0 if firm is not Over-the-counter DOTC Dummy equals 1 if firm is listed as Over-the-Counter, dummy equals 0 if

firm is not

Pay or Not DN Dummy equals 1 if firm does pay dividends in that year, dummy equals 0 if firm does not


Governance CGV Corporate Governance Score Growth

Opportunities GO (Book value of liabilities + market value of equity) / Total assets Firm Size SZ Log (total assets)

Free Cash Flow FCF (EBIT + interest expense on debt + non-cash expense - change in working

capital - capital expenditure) / Total assets Profitability PF EBIT / Net sales

Leverage LV Book value of liabilities / Book value of equity Firm Maturity FM Retain earnings / Book value of equity

Tax TX Tax rate

Beta Beta Beta rate

Different Share DDC Dummy equals 1 if firm has different class stocks with different voting rights, dummy equals 0 if firm does not

Law Type DLT Dummy equals 1 if country of firm applies common law, dummy equals 0 if country of firm applies civil law

Table 2 lists variables with theirs short terms and measurements in the research.



For control variables, I have had a thorough review of other related studies and do include several firm-level factors that may affect firm’s dividend payout, such as Size (SZ), Free Cash Flow (FCF), Profitability (PF), Leverage (LV), Firm Maturity (FM), Tax (TX), Beta (Beta) and Different Shares (DDC). Their measurements are mentioned in Table 2. In case firms which do not pay dividends may influence the result, dummy variable Pay or Not (DN) is applied to control for whether cash dividend is paid or not in that firm-year. Besides, I also consider Law Type (DLT) as country-level factor because many literatures (e.g., La Porta et al., 1997) suggest cross-country governance significantly influence firm’s policy.

3.3 Regression models

Together with all the control variables, two independent variables, Corporate Governance (CGV) and Growth Opportunities (GO) are included in Model 1, which aims to test first two hypotheses on how corporate governance and growth opportunities affect dividend payout. Dividend Payouti,t =  + 1 CGVi,t +2 GOi,t +3 DNi,t

+ 4 SZi,t + 5 FCFi,t + 6 PFi,t + 7 LVi,t + 8 FMi,t + 9 TXi,t

+10 Betai,t + 11 DDCi,t + 12 DLTi,t + u i,t (Model 1)

Compared with Model 1, Model 2 adds two more independent dummy variables, Cross-listing (DCL) and Over-the-counter (DOTC). Furthermore, two interaction effect variables, DCL * CGV and DOTC * CGV, are used to examine hypothesis 3, whether cross-listing and Over-the-counter can strengthen the relationship between corporate governance and dividend payout. Dividend Payouti,t =  + 1 CGVi,t + 2 GOi,t + 3 (DCLi,t * CGVi,t) + 4 (DOTCi,t * CGVi,t)

+ 5 DCLi,t + 6 DOTCi,t + 7 DNi,t

+ 8 SZi,t + 9 FCFi,t + 10 PFi,t + 11 LVi,t + 12 FMi,t + 13 TXi,t

+14 Betai,t + 15 DDCi,t + 16 DLTi,t + u i,t (Model 2)



Dividend Payouti,t =  + 1 CGVi,t + 2 GOi,t + 3 (DCLi,t * GOi,t) + 4 (DOTCi,t * GOi,t)

+ 5 DCLi,t + 6 DOTCi,t + 7 DNi,t

+ 8 SZi,t + 9 FCFi,t + 10 PFi,t + 11 LVi,t + 12 FMi,t + 13 TXi,t

+14 Betai,t + 15 DDCi,t + 16 DLTi,t + u i,t (Model 3)

3.4 Summary statistics

Table 3 shows the mean, median and standard deviation of all non-dummy variables. Accordingly, some valuable points can be observed. First, cross-listed and Over-the-counter firms do pay more dividends than domestically listed firms as dividend payout suggests the average of 0.0709, 0.0636 and 0.0585, respectively for each type of firms. Second, with the mean of 0.7166, 0.5027 and 0.2308, it clearly indicates that cross-listed firms also have significantly stronger corporate governance over Over-the-counter and domestically listed firms. Third, the mean of growth opportunities does not show similarly significant and obvious trend. Growth opportunities of cross-listed firms (1.6947) is only slightly larger than those of domestically listed (1.6861) and Over-the-counter (1.5844) firms.

Table 3 Summary statistics of non-dummy variables

Variables Mean Median Standard Deviation


Dividend Payout 0.0709 0.0636 0.0585 0.0493 0.0239 0.0284 0.1049 0.9003 0.1112 Corporate Governance 0.7166 0.5027 0.2308 0.8104 0.5494 0.1301 0.2558 0.3070 0.2440 Growth Opportunities 1.6947 1.5844 1.6861 1.4599 1.3243 1.2892 1.0431 0.8400 1.3293 Size 7.2804 6.8755 6.5621 7.2788 6.8398 6.5757 0.6425 0.6064 0.6177 Free Cash Flow 0.0461 0.0683 0.0731 0.0797 0.0654 0.0621 0.7556 0.0936 0.1774 Profitability 0.1039 0.0841 0.0991 0.0995 0.0762 0.0842 0.1566 0.0688 0.1016 Leverage 1.8076 1.5431 1.5150 1.1378 1.1058 1.0146 5.6097 2.0344 3.2847 Firm Maturity 0.5730 0.6779 0.5495 0.6176 0.7165 0.5679 0.7410 0.3432 0.5119 Tax 0.2984 0.2959 0.2507 0.2604 0.2772 0.2312 0.4519 0.2675 0.2119 Beta 1.0989 0.9661 0.7521 0.9350 0.9300 0.6800 0.8368 0.6092 0.6210 Observations 576 1949 1980 576 1949 1980 576 1949 1980

Table 3 shows summary statistics of non-dummy variables.



4. Results

4.1 Correlation analysis

Table 4 Correlation matrix

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (1) Dividend Payout 1 (2) Cross-listing 0.1431* 1 (3) Over-the-counter 0.1350* -0.3237* 1 (4) Corporate Governance 0.1081* 0.3245* 0.2608* 1 (5) Growth Opportunities 0.2657* 0.0411* 0.0128 0.0706* 1 (6) Pay or Not 0.1577* 0.0348* 0.0696* 0.0704* 0.0463* 1 (7) Firm Size -0.1476* 0.2815* 0.1341* 0.1456* -0.3088* 0.0652* 1

(8) Free Cash Flow 0.2106* -0.0244 0.0045 0.0378* 0.1138* 0.0521* -0.0498* 1

(9) Profitability 0.2859* 0.0400* -0.0722* 0.0129 0.4492* 0.0663* -0.2335* 0.3211* 1 (10) Leverage -0.0473* 0.0298* -0.0072 0.0375* -0.0716* -0.0123 0.1435* -0.0047 -0.0636* 1 (11) Firm Maturity -0.0779* -0.0145 0.1204* -0.0075 0.0738* 0.0867* 0.0983* 0.0086 0.0622* -0.2497* 1 (12) Tax -0.1049* 0.0325* 0.0611* -0.0158 -0.0708* -0.0108 0.0952* -0.0093 -0.0880* 0.0504* 0.0082 1 (13) Beta -0.0775* 0.1264* 0.1098* 0.1300* -0.0503* 0.0182 0.0973* -0.0281 -0.0870* 0.0103 0.0018 0.0764* 1 (14) Different Share -0.1353* 0.0131 0.2309* -0.0458* -0.0389* 0.0319* 0.1732* -0.0027 -0.0516* -0.0047 0.0457* 0.1141* 0.0423* 1 (15) Law Type 0.1568* 0.2812* 0.0969* 0.5911* 0.0672* 0.0285 -0.1622* -0.0066 0.0643* 0.0057 -0.0747* -0.0279 0.1075* -0.1269* 1 Table 4 shows correlation matrix excluding 5% outliers of Dividend Payout, Corporate Governance and Growth opportunities.

* indicates 5% significance level of each coefficient.



What needs to be kept in mind is that, correlation only quantifies to which two variables are related, and it does not show cause and effect and the joint influence of other variables. Therefore, more reliable cause and effect relationship should be revealed by using regression models.

4.2 Hausman-Taylor estimator

Every firm has their own characteristics which are not changed within in a couple of years. Fixed-effect method is able to control for unmeasured variables which remain constant over the time, but vary among individuals. Therefore, with a panel data including 790 firms from 47 countries, I prefer Fixed-effect rather than Random-effect. The rejection of Hausman test as well indicates the preference of Fixed-effect.

However, Model 1 contains two control variables, beta and law type, which are time-invariant variables. In this case, they are omitted in the regression result of Fixed-effect method. Moreover, in Model 2 and 3, two more important dependent variables, cross-listing and Over-the-counter, are added. They are time-invariant as well in almost all firms during the year of 2010 to 2015, and are omitted as well. Although the interaction of time-invariant variables will not drop and it does influence the model, no coefficient is showed for time-invariant variables. The solution is to adopt a new approach introduced by Hausman and Taylor (1981):

yi,t = 1X1i,t +2X2i,t + δ1Z1i,t + δ2Z2i,t + ui + εi,t

Hausman-Taylor estimator is transformed from Random-effect method and it includes time-variant exogenous variables (X1), time-invariant exogenous variables (Z1), time-variant

endogenous variables (X2) and time-invariant endogenous variables (Z2). ui is unobserved and

panel-level random effect. εi,t is the idiosyncratic error.



well with the help of Sargan-Hansen test, which is used for testing validity of over identification. When putting corporate governance and different share in the regression model as exogenous variables, it indicates that the equation is exactly identified with the rejection of over identification. Time-variant or time-invariant characteristics are defined according to data themselves and in this research, cross-listing, Over-the-counter, law type and Beta are time-invariant variables. The rest are time-variant variables. Table 5 below lists how variables are categorized for Hausman-Taylor estimator regression.

Table 5 Variable classifications for Hausman-Taylor

Time-variant exogenous variables Time-variant endogenous variables Time-invariant exogenous variables Time-invariant endogenous variables

Corporate Governance Pay or Not Cross-listing Beta

Tax Growth Opportunities Over-the-counter

Different Share Size Law Type

Free Cash Flow Profitability

Leverage Firm Maturity

Cross-listing * Corporate Governance Over-the-Counter * Corporate Governance

Cross-listing * Growth Opportunities

Over-the-counter * Growth Opportunities

Table 5 shows how this research categorizes variables when using Hausman-Taylor estimator.

4.3 Results and analysis

4.3.1 Corporate governance, growth opportunities and dividend payout

Table 6 gives the regression result of Model 1, adopting four methods, OLS, Random-effect, Fixed-effect and Hausman-Taylor estimator. As mentioned above, OLS and Random-effect are not suitable for this research. When comparing coefficients for each variable with Fixed-effect model and Hausman-Taylor model, they document very similar results with almost the same significance level. In this case, for the convenience of analysis, the following analysis will be mainly focused on the result of Hausman-Taylor estimator.



possibility of agency problems (Grossman and Hart, 1980), because managers have less space to abuse cash. Therefore, managers are expected to be more willing to distribute dividends (Jiraporn et al., 2011; Harford et al., 2012), which can have positive signal to the capital market.

Table 6 The effect of corporate governance and growth opportunities on dividend payout

Variables OLS Random-effect Fixed-effect Hausman-Taylor

CGV 0.0299 (0.0372) 0.0320 (0.0385) 0.2205* (0.1178) 0.2318*** (0.0741) GO -0.0654*** (0.0100) -0.0660*** (0.0102) -0.0779*** (0.0201) -0.0786*** (0.0196) DN 0.0499 (0.0584) 0.0629 (0.0587) 0.2253*** (0.0692) 0.2242*** (0.0676) SZ -0.0103 (0.0158) -0.0114 (0.0164) -0.3285*** (0.1027) -0.2930*** (0.0904) FCF -0.0587* (0.0305) -0.0600** (0.0305) -0.0963*** (0.0351) -0.0962*** (0.0343) PF 1.4701*** (0.1119) 1.4775*** (0.1125) 1.7056*** (0.1385) 1.7068*** (0.1355) LV -0.0009 (0.0028) -0.0008 (0.0028) 0.0023 (0.0037) 0.0022 (0.0036) FM -0.0002 (0.0187) 0.0012 (0.0190) 0.0595* (0.0316) 0.0606* (0.0309) TX -0.0060 (0.0319) -0.0039 (0.0321) 0.0351 (0.0388) 0.0321 (0.0375) Beta -0.0101 (0.0135) -0.0188 (0.0141) Omitted 0.1073 (0.1981) DDC -0.0193 (0.0270) -0.0103 (0.0276) 0.0087 (0.0463) 0.0321 (0.0356) DLT 0.0188 (0.0252) 0.0175 (0.0261) Omitted -0.1412** (0.0645) Observations 4505 4505 4505 4505 σμ / 0.0764 0.3371 0.2783 σe 0.5762 0.5762 0.5755 ρ 0.0173 0.2550 0.1896

Table 6 shows how corporate governance and growth opportunities affect dividend payout using OLS, Random-effect, Fixed-effect and Hausman-Taylor estimator.

***, **, * respectively indicates 1%, 5%, 10% significance level of each coefficient.



4.3.2 Cross-listing, corporate governance, growth opportunities and dividend payout

Table 7 gives the regression results using Fixed-effect and Hausman-Taylor estimator, after adding two dummy variables, cross-listing (DCL) and Over-the-counter (DOTC). Again, when comparing the coefficients for each variable with Fixed-effect model and Hausman-Taylor model, they document very similar results with almost the same significance level. In this case, for the convenience of analysis, the following analysis will be mainly focused on the result of Hausman-Taylor estimator.

Column 3 shows the result which does not include interaction effect. The coefficients of cross-listing and Over-the-counter are 0.2192 and 0.0914, which respectively show significance at 1% and 5% level. This result indicates that cross-listed, as well as Over-the-counter firms pay more dividends than domestically listed firms. Meanwhile, corporate governance and growth opportunities remain significant effects on dividend payout, which is consistent with hypothesis 1 and 2.



Table 7 The test of whether cross-listing and Over-the-counter have strengthening effect

Variables No interaction effect Model 2 Model 3

Fixed-effect HT Fixed-effect HT Fixed-effect HT

CGV 0.2205* (0.1178) 0.1796*** (0.0627) 0.1247 (0.1910) 0.0881 (0.1701) 0.2234* (0.1179) 0.1848*** (0.0632) GO -0.0779*** (0.0201) -0.0785*** (0.0199) -0.0780*** (0.0201) -0.0787*** (0.0200) -0.0454* (0.0252) -0.0457* (0.0251) DCL * CGV / 0.1174 (0.3837) 0.1015 (0.3809) / DOTC * CGV 0.1613 (0.2504) 0.1453 (0.2481) DCL * GO / -0.1005* (0.0546) -0.1029* (0.0542) DOTC * GO -0.0824* (0.0430) -0.0821* (0.0428) DCL Omitted 0.2192*** (0.0827) Omitted 0.1840 (0.2486) Omitted 0.3922** (0.1537) DOTC Omitted 0.0914** (0.0439) Omitted 0.0389 (0.1017) Omitted 0.2231*** (0.0803) DN 0.2253*** (0.0692) 0.2267*** (0.0689) 0.2264*** (0.0693) 0.2279*** (0.0690) 0.2298*** (0.0692) 0.2312*** (0.0690) SZ -0.3285*** (0.1027) -0.3265*** (0.0960) -0.3271*** (0.1027) -0.3249*** (0.0961) -0.3283*** (0.1027) -0.3304*** (0.0961) FCF -0.0963*** (0.0351) -0.0964*** (0.0350) -0.0961*** (0.0351) -0.0962*** (0.0350) -0.0969*** (0.0351) -0.0970*** (0.0350) PF 1.7056*** (0.1385) 1.7042*** (0.1380) 1.7035*** (0.1385) 1.7021*** (0.1381) 1.7210*** (0.1387) 1.7199*** (0.1384) LV 0.0023 (0.0037) 0.0023 (0.0037) 0.0023 (0.0037) 0.0023 (0.0037) 0.0024 (0.0037) 0.0025 (0.0037) FM 0.0595* (0.0316) 0.0602* (0.0315) 0.0592* (0.0317) 0.0600* (0.0316) 0.0640** (0.0317) 0.0646** (0.0317) TX 0.0352 (0.0388) 0.0372 (0.0384) 0.0354 (0.0388) 0.0377 (0.0385) 0.0341 (0.0388) 0.0358 (0.0385) Beta Omitted 0.0158 (0.1974) Omitted 0.0197 (0.1996) Omitted 0.0144 (0.1989) DDC 0.0087 (0.0463) 0.0158 (0.0339) 0.0117 (0.0465) 0.0197 (0.0345) 0.0113 (0.0463) 0.0144 (0.0339) DLT Omitted -0.1671** (0.0671) Omitted -0.1656** (0.0676) Omitted -0.1748*** (0.0674) Observations 4505 4505 4505 4505 4505 4505 σμ / 0.2196 / 0.2180 / 0.2199 σe 0.5755 0.5754 0.5751 ρ 0.1271 0.1255 0.1276

Table 7 shows the test of whether Cross-listing and Over-the-counter affect the relationship between corporate governance, growth opportunities and dividend payout using Fixed-effect and Hausman-Taylor estimator.

***, **, * respectively indicates 1%, 5%, 10% significant level of each coefficient





5. Conclusions

Confronted with controversial arguments on the relationship between corporate governance and dividend payout, my finding suggests that corporate governance has positive effect on dividend payout (Mitton, 2004; Adjaoud and Ben-Amar, 2010; Jiraporn et al., 2011). Firms with stronger corporate governance have less agency conflicts, and therefore managers with less space to abuse cash are more willing to distribute dividends. My finding also indicates competing relationship between growth opportunities and dividend payout. Firms with more growth opportunities are more willing to reserve cash at hand, instead of giving them out, in case of profitable projects. This finding of is consistent with many other papers (Smith and Watts, 1992; Jones and Sharma, 2001; Bopkin, 2010).

Furthermore, this research also examines how cross-listing (including Over-the-counter) affects the relationships above. The result shows that both cross-listing and Over-the-counter are able to strengthen the negative effect of growth opportunities on dividend payout (Mitton, 2004) since cross-listing can boost public exposure, brand reputation and reduce cost of capital (Reese and Weisbach, 2002), therefore create more growth opportunities and increase growth rates. Besides, summary statistics of my sample strongly document that corporate governance of cross-listed, Over-the-counter and domestically listed firms decreases progressively and this demonstrates the fact that cross-listed, as well as Over-the-counter firms do have stronger corporate governance (Charitou et al., 2007; Frésard and Salva, 2010). However, no empirical evidence of their strengthening effect of corporate governance on dividend payout is found. This may be explained by the fact that, cross-listing brings firm-level corporate changes of many factors, which simultaneously affect the relationship in different ways.



list, while those firms whose managers ever wish, but fail for whatever reasons, are not considered.

This research contributes to investigate the two opposite relationships between corporate governance and dividend payout, and shows evidence supporting outcome hypothesis, in other words, positive relationship. This research also tries to reveal how cross-listing affects corporate factors, as well as their cause and effect. Beside, this research distinguishes Over-the-counter, an interesting listing status which is in-between of cross-listing and domestic listing, and examines the interaction effect separately.




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