The ownership structure and ownership concentration of

The Relationship between Ownership
Structure and Dividend Policy in Malaysia: Post Financial Crisis of 2007-2008


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Corporate governance system in
Malaysia has gained a major attention from researchers due to its significant
impacts on corporate performance. Good corporate governance can improve the
efficiency of corporate and able to decrease agency problem thus increase the firm
value. Ownership structure as one of the major element of corporate governance,
it plays an important role in determining the quality of corporate governance
system. Different ownership structure and concentration has to deal with agency
problem and this might influences the performance of companies. In the context
of agency problem, there are a significant impact of ownership structure on the
dividend policy of companies. The dividend policy of companies is considered as
one of the indicators for the valuation of companies’ performance. Therefore,
the relationship between ownership structure and dividend policy among
government-linked companies and family owned companies are identified in this
research study.








Background of Study

Ownership structure in Malaysia

In Malaysia, most of the ownership
structure and ownership concentration of companies are vested by government,
families and other institutions, which is known as blockholders (Singam, 2003).
Blockholders refer to the shareholders that holding a large amount of shares,
stocks, or bonds, of companies and has the authorities or power to control and
direct the decisions of companies. The level of ownership concentration
indicates the distribution of authority between management team and
shareholders. Singam (2003) stated that nominee companies is the largest
shareholder group among top five shareholders in Malaysia due to its 45.6% of
ownership of total shares among the non-financial public listed companies. It
is followed by government as the second largest shareholders group which owned
17.2% of the total shares. Among the public listed companies in Malaysia, there
are significant amount of government linked companies and family owned
companies can be found (Ghazali, 2007).

Government Ownership

Government-linked companies in
Malaysia is formed from the state enterprise, which is one of the initiatives
of Malaysian government announced in post-independence plans in order to
encourage the involvement of entrepreneurship (Ting & Lean, 2011). According
to Najid and Rahman (2011) (as cited in PCG, 2007), government-linked companies
in Malaysia refer to the public or private companies which operate with
commercial activities where the government owned fully or partially for the
ownership of companies. Malaysian Government as the shareholder of companies,
has the direct controlling interest in influencing the decision made by
companies, including the appointment of board members, senior management
officers and major decision such as contract awards, strategy, restructuring
and financing, acquisitions and divestment (Lau & Tong, 2008). GLCs is not
only operate with commercial objectives, it also has to deal with political
objectives. Basically, government linked companies in Malaysia is directed
through Government-Linked Investment Companies (GLICs), which consists of Khazanah
National Berhad (KNB), Kumpulan Wang Simpanan Perkerja (KWSP), Kumpulan Wang
Amanah Pencen (KWAP), Lembaga Tabung Angkatan Tentera (LTAT), Lembaga Tabung
Haji (LTH), Menteri Kewangan Diperbadankan (MKD), and Permodalan Nasianol
Berhad (PNB). These GLICs mainly function as the median of allocation of
government funds from Malaysian government to GLCs.

. According to Esa and Ghazali
(2012), GLSc is one of the essential element for the development of economy in
Malaysia, and its composition of market capitalization of Bursa Malaysia is
almost 49 percent. There are a lot of researchers studied on the relationship
between government ownership and performance of companies. However, there are
still lack of evidences that can specifically prove the relationship between
the government ownership and dividend policy. The agency problem that arise
from government ownership due to the motive of companies’ operation and
activities. As stated on above, GLCs which operate with the commercial
objectives as well as political objectives and this might leads to a weaker
governance performance and agency problem. Md-Rus et al. (2013) explained that
the government which concerns in improving the country welfare and non-profit
consideration will causes less attention in maximizing the value of companies.
The government tends to focus less on commercial objective and leads to poor
management in investment and influence the profitability of companies as well
as the dividend policy. In contrast, the government as the major ownership can
ensure the effective management of companies in order to decrease the
shareholders’ agency cost and increase the profitability.



   Family ownership

            Family ownership
is defined as the ownership which owned by a family and managed by the members
of family. Family owned companies in Malaysia make up a large composition among
the companies which listed in Bursa Malaysia (Jalila & Devi, 2012). According
to the studies of Ibrahim and Samad (2010), there are an increment of 9.5% for
the control of family and increment of 10% for the cut off level of voting
rights in Malaysia. Amran and Ahmad (2011) also found that there are 70 percent
of family owned companies make at least 50% of contribution to the Gross Domestic
Product (GDP) in Malaysia. It is found that there are some research studies on
the agency problem within family owned companies. Based on the research of
Schulze (2017), it is found that family ownership can improve the
corporate governance efficiency and reduce the agency costs. This is because
the directors as well as the members of family, they tends to make the
investment decision that can maximize firm profitability and shareholder’s
value. The directors of family owned companies have a better knowledge and
understanding for the operation of business and they are able to make the
decision that can provide the best interest for companies and family. However,
Md-Rus et al. (2013) stated that family ownership might leads to poor corporate
performance and raise agency problem due to the confusion for the roles and
responsibilities between family’s shareholders and managers. The family’s
shareholders may lacking the knowledge on managing business and some of them
may request for private remunerations from companies.





Dividend Policy

            Dividend policy is an essential element that
being discussed by many researchers in the field of corporate finance. Dividend
policy is defined as the policy used by company when deciding the proportion of
companies’ earnings will be paid to shareholders. According to Uwuigbe et al.
(2012), dividend policy is a vital decision for companies as it indicates the
allocation of funds to investors and the allocation of funds for investment
activities. They also pointed that dividend policy can provides the information
about the corporate performance to shareholders as well as customers,
investors, employees, and government. Ling et al. (n.a.) explained that every
stakeholders such as investors, managers, and lenders will have different view
on dividend policy. Dividend paid is not only considered as income for
investors, it also a consideration for investors during the valuation of
companies. On the other hands, managers will unsatisfied with higher dividend
paid as there will be less funds allocated for investment of companies. For
lenders, higher dividend declared also indicates that less amount of claimed
available due to low allocation of funds in servicing and redemption. An
optimal dividend policy is important for companies as it can ensure a balance
point between current dividend and future growth in order to maximizing the stock
prices of companies (Ling et al. n.a.).







The Impact of Ownership Structure to Dividend Policy

In this research study, the
relationship between ownership structure among government linked companies and
family owned companies and dividend policy is examined through the indicator
such as profitability, cash flow, capital structure, and investment.

Ownership structure as part of
corporate governance, it can influences the dividend policy of companies. Based
on Thanatawee (2013), the free cash flow hypothesis pointed that agency problem
between shareholders and managers is the factor that encourages companies pay
dividend. This is because the conflicts between shareholders and managers is
existed when making decision on the allocation of companies’ earnings. Without
consider the best interest of shareholders, the managers prefer higher retained
earnings as they can have higher control on the resources of companies.
Managers might invest the funds of companies in the projects that comes with
negative net present value. By paying the dividend to shareholders,
shareholders are satisfied because it can decrease the investment funds
available for managers as well as the risk of the resources wasted by managers.
Thus, dividend policy can be used in mitigating the agency problems that exists
in companies.

the context of agency theory, there are significant relationship between
corporate governance policy and dividend policy. According to Thanatawee (2013)
(as cited in La Porta et al.), there are low dividend paid of the companies
with poor corporate governance and weak protection of shareholders whereas
higher dividend paid is found in the companies with higher concentration of

Different types of ownership
structure and concentration can cause different impacts on dividend policy of
companies. Dividend policy also vital in mitigating the agency problem between
large controlling shareholders and minority shareholders. Large controlling
shareholders is refer to the shareholders with more than half percentages on
the ownership structure and they have the authority to influence the decision
of company. According to Kouki (2009), most of the public listed companies are
vested by large controlling shareholders and this avoids the managers access
the full control for the resources in company. Distribution of dividend to
shareholders can prevent management team make investments on unprofitable or
risky projects when there is existing free cash flow in companies. However,
Kouki (2009) (as cited in Maury and Pajuste) stated that it is found that there
is negative relationship between large controlling shareholders and dividend
policy. The negative relationship is explained by the reason where the large
controlling shareholders tends to maximize their private benefits without
consider the interest of minority shareholders. Large shareholders might allocate
more funds for salary payment and assign the executive position for incapable
family members. Different ownership structure will have different consideration
in setting the dividend policy while dividend policy plays an essential role in
mitigating agency problem and used for valuation of company’s performance.










Problem Statement

            Global financial
crisis of 2007-2008 has caused the significant impacts on the performance of
firms or companies. Many firms faced distressed problem during financial
crisis. There are researchers found that the poor corporate governance in Asia
countries, including Malaysia, Korea, Thailand and Philippines is one of the
factors that leads to East Asian financial crisis (Mitton, 2001). According to
Singam (2003), corporate governance system in Malaysia is highlighted due to
the high bankruptcy rate of companies during and post financial crisis.
Financial crisis emphasized the problems of corporate governance in Malaysia
that can directly lead to the inefficient performance of companies. Ownership
structure as one of the major dimension in corporate governance has a strong
impact on the performance of corporate governance. Based on the research done
by Miltton (2001), one of the significant problem of corporate governance that
leads East financial crisis is ownership structure. It is found that weak
protection for shareholders and high level of ownership concentration can lead
to agency problem in company. In order to mitigating the agency problem in
company and increase the stock prices, optimal dividend policy is examining by
most of the company.

Meanwhile, ownership structure also
leads to significant impact on dividend policy of company. Companies with
different ownership structure tends to have different views on dividend policy
due to the factors such as profitability, cash flow, capital structure and investment
policy. The companies with low profitability during financial crisis were more
likely to face distress problem if they still maintain high dividend paid. On
the other hands, some companies might want to give a good sign about companies’
future performance by increasing the dividend paid. Thus, companies with
different ownership structure will restructure the dividend policy that can
benefits the most to the companies. The allocation of funds of dividend and
investment have to be adjusted to a balance point in order to minimize the
impacts of financial crisis. Thus, the behaviours of dividend policy which is
still questionable by the researchers need to be figured out and its
relationship with ownership structure have to be identified.

In this study, the relationship
between ownership structure and dividend policy after financial crisis is
examined through the indicators such as profitability, capital structure, cash
flow, and investment. Companies with different ownership structure tends to
have different views on the dividend policy in order to deal with the agency
problems which occurred in the ownership structure. Some researchers argued
that government can create value for firms with the reasons that government as
the largest ownership able to ensure efficient allocation of funds in order to
maximizing the benefits of shareholders and company. Yet, there are conflicting
of interest between government and shareholders because the objectives of
government linked companies not only focused on maximizing the profitability,
but on improving social welfare and development of economy as well. Ibrahim and
Samad (2010) pointed that agency problem also occurred in family owned company
due to lacking experience and knowledge in management and some shareholders
tends to gain extra benefits from the earnings. Therefore, it is crucial to
identify the behaviours of dividend policy under government ownership and
family ownership when it is being used for the mitigation of agency costs.