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Ownership and dividend policy: new evidence from

Germany

Matthias Smit and Henk von Eije

Abstract

This study examines whether large shareholders influence dividend policy in Germany in

the period 2005-2008. First, we test if the voting power of large shareholders influences

the decision on paying dividends. Second, we examine if the voting power influences the

amount of dividends paid. Third, we study if different shareholder types influence the

amount of dividends differently, and fourth, whether shareholder types in interaction with

their voting power influence the amount of dividends. We find no evidence of the impact

of the holdings of the largest shareholders: neither on the decision to pay cash dividends

nor on the amounts of dividends paid. Banks, and families (including private

blockholders) pay less dividends. When voting power is included, state authorities

increase dividends. Finally, we have indications that families use the recently instituted

instrument of Beteiligungsgesellschaften to receive more dividends than they do without

this tax vehicle.

JEL Classification: G32, G35

Key words: Dividend policy, Ownership structure, Germany, Beteiligungsgesellschaften

November, 30, 2009

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1. Introduction

This paper examines how large shareholders influence the dividend policy of firms. We analyze this

topic with data on German companies that are listed on the major indices DAX, MDAX, SDAX,

TecDax, and GEX for the years 2005 till 2008. This paper focuses entirely on the “classical” way to

distribute cash to shareholders, i.e. cash dividends, and leaves aside share repurchases. Von Eije and

Megginson (2008) find for 15 European countries that the real cash dividends paid increased from

1989 to 2005. Thus cash dividends still play an important role in the business world today despite the

existence of other cash distribution methods.

In this context, this study tries to answer four main questions. First, we study if the relative size of the

voting rights of the large shareholders influences the company’s decision to pay dividends. Second, we

analyze if the size of the voting rights of the large shareholders influences the relative amount of

dividends paid to shareholders. Largest shareholders can be grouped into several categories, namely

banks, financial institutions1, companies, state authorities, Beteiligungsgesellschaften

2, and families

and private blockholders. We, third, analyze whether these different types of largest shareholders

influence the amount of dividends paid, and, fourth, whether the size of the voting right and the type of

the largest shareholder together influence the amount of dividends paid.

This paper adds value to the existent literature in several ways. First, it reveals the influence of large

shareholders on dividend policy on a sample of German firms using very recent data as financial data

from 2005 to 2008 are with ownership data from 2009. The use of recent data is needed, because the

corporate tax system has changed in 20013 and previous studies (like those of Goergen et al. (2005)

and Gugler and Yurtoglu (2003)) are based on the situation that dividends were taxed at a much higher

rate than after the tax change of 2001. Related to this change in the tax system, another contribution of

this paper is the analysis of the dividend preference of Beteiligungsgesellschaften that are used

amongst others by families and other private blockholders for indirect shareholdings. Due to the

sample period, this study is, moreover, able to partly capture the effects of the current financial crisis.

We do not find evidence that the size of the ownership influences the likelihood to pay cash dividends

and the size of the ownership does not influence the amount of cash dividends either. However, if

banks or families are the largest owners, the amount of dividends paid becomes smaller. When voting

power is included, state authorities increase dividends. We, finally, have indications that the recently

instituted instrument of Beteiligungsgesellschaften favors the distribution of dividends in comparison

to companies that are owned directly by families.

1 These are e.g. mutual funds, pension funds, investment companies, and insurance companies.

2 Those will be explained in detail in section 2.2.4.

3 Details about the change in the tax system can be found in section 7.4.

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The rest of this paper is structured as follows. In section 2 we present the special features of the

German economic system. Section 3 provides an overview of the literature that deals with the link

between ownership and dividend policy. Section 4 describes the data and its limitations, and contains

some descriptive statistics. Section 5 outlines the methodology used in this paper. In section 6, the

empirical results are explained in detail before, finally, section 7 concludes this analysis and provides a

recommendation for further research.

2. The German economic system

The German economy is different from other major economies in some areas. One important

difference that matters for dividend policies is the role of capital markets for financing. One may

distinguish between outsider (investors are at arm’s length) and insider systems (close relationship

with investors), both of which are explained by Leuz and Wüstemann (2003).

An outsider system is featured by a heavy reliance of firms on public debt and equity markets for

raising capital. As the corporate ownership of firms is mostly dispersed, investors are at arm’s length

from firms and have no preferred access to company information. Thus, the existence of public debt

and equity markets is very important for monitoring managers and firms (Franks and Mayer, 1994).

Accounting and disclosure regulations are designed to ensure that outside investors are reasonably

well informed, and, hence, willing to invest in the public debt and equity markets. For the same

reason, dividends in outsider systems are more relevant since they convey an important signal to the

market and may help to overcome information asymmetries between management and investors. The

US and UK are quite good examples of outsider systems.

In contrast, the German economy resembles an insider system because the public debt and equity

markets play a minor role for financing. As the main sources of financing are internal and debt

financing, German firms have a strong relationship to a commercial bank, the so-called Hausbank for

the provision of loans. Being a major lender, such a bank has superior access to company information

and can request to get that through debt covenants. The information asymmetry is therefore not as

pronounced as it is in an outsider system. In addition to their function as issuer of debt, banks control

substantial equity stakes in German companies as well, either directly or indirectly through proxy

voting, and, consequently, are often represented on the supervisory board (Aufsichtsrat) which is the

main instrument of German corporate governance. In addition, cross holdings between firms and

families owning controlling stakes are common in Germany. Hence, in Germany corporate governance

and control are primarily in the hands of insiders so that the key contracting and financing parties are

reasonably well informed while outside investors face a lack of transparency. This lack of

transparency is an important feature of the German corporate governance system because it provides

barriers to entry and therefore reduces the threat of competition for control from outside (Rajan and

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Zingales, 1998). This view is supported by Da Silva et al. (2004:132) who report that the control

patterns in Germany have not changed much in the 1980s and 1990s. Legal changes in 1994

(Securities Act) and 1998 (Corporate Control and Transparency Act), however, indicate that the

German financial system is transforming towards an arm’s-length system, according to Leuz and

Wüstemann (2003). They reason that these changes were necessary because the reunified Germany

had an immense refinancing demand and, thus, needed to adapt itself to international capital markets

which have a demand for reliable public information.

These differences in the economic systems between the US and UK on the one hand and Germany on

the other hand may have implications for the dividend policies, too. Lease et al. (2000) report that

shareholders of German firms earn a lower dividend yield than those from the USA or UK. La Porta et

al. (2000) find in a cross-sectional study on 4,103 listed firms from thirty-three countries that in civil

law countries, like Germany, firms offer on average a lower degree of minority shareholder protection

while they at the same time pay lower dividends than firms in common law countries. Da Silva et al.

(2004), however, take a closer look at the data set of La Porta et al. (2000) and show that this pattern

might not be as obvious as the authors indicate. One finding of their review is that, e.g., Germany as a

civil law country has dividend payouts (measured by dividends over earnings) that are higher than the

median payouts of the common law countries. Hence, Germany might be an exception from the group

of civil law countries when it comes to the amount of dividends paid. This might also reflect upon the

dividend preferences of large shareholders in Germany.

With respect to the size of dividend payments in Germany, there are also legal restrictions as to the

amount that a firm has to pay out as dividends. The German Stock Corporation Act (Aktiengesetz,

AktG) regulates the payout policy of Aktiengesellschaften (AG). In its paragraph 150 it states that an

AG has to build up a legal reserve (gesetzliche Rücklage) from 5 percent of its profits until a certain

limit is reached. According to paragraph 58 AktG the management of an AG is allowed to pay at most

50 percent of the profit into another legal reserve (Gewinnrücklage), unless the voting at the annual

general meeting or the charter of the company rules otherwise. In general, the rest of the profit has to

be paid out to the shareholders of the company. However, again, the shareholders can vote for a

different payout policy in the annual general meeting. For owners of preference shares (Vorzugsaktie)

different rules apply. Normally, those preference shares do not bear a voting right for the owner. In

compensation for this the owner of such a share is entitled to a minimum cumulative preferred

dividend. If this higher dividend is not paid out and if this missed payment is not executed in the next

year, the owners of preference shares regain a voting right until all arrears are paid out (§ 140 AktG).

In Germany, dividends are normally declared once a year (Da Silva et al., 2004:73). According to

paragraph 58 AktG, management and the supervisory board make a proposition on how to use the

annual profit, including a proposition on the dividend. The final decision on whether to accept this

proposition or to decide for another way of allocating the profit is made by the voting shareholders in

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the annual general meeting. Da Silva et al. (2004) observe some facts about the actual dividend

behavior of German firms. First, German firms often practice dividend smoothing, i.e. they do not so

often change the dividend per share, irrespective of whether an increase or a decrease in the earnings

per share or in the cash flow per share occurs. They report that after two consecutive years of

increased profitability only 32 percent of German firms increase their dividends, whereas 75 percent of

US-based firms do the same. Second, in 1991-92 approximately 25 percent of all German firms did

not pay any dividends at all, whereas only 10-12 percent of UK firms abstain from paying dividends.

Third, regarding the size of a firm there appears to be a U-shaped curve between firm size and

dividend payout. The largest and the smallest quintiles exhibit below average payout ratios.

3. Literature Review

This literature review consists of two parts. The first one deals with the ownership structure of

companies in conjunction with dividend policy. It outlines findings on how ownership structure

changes after dividend events like initiations, omissions and changes of dividend size and whether

large shareholders prefer different levels of dividend payout ratios. The second part concentrates on

the preference of certain shareholder types concerning dividend policy. The three main types of

shareholders discussed are banks, state authorities, and families and private blockholders.

3.1 Ownership and payout policy

Michaely et al. (1995) investigate market reactions to initiations and omissions of dividends using data

of all companies on the New York Stock Exchange (NYSE) and the American Stock Exchange

(AMEX) that initiated dividends between 1964 and 1988. They investigate whether the share of

institutional ownership changes after a dividend omission4. They use data of the share of institutional

ownership three years before the omissions and three years after the omission. With respect to

ownership, they examine whether dividend omissions lead to a significant change in ownership but

find that this is not the case. The average institutional ownership over all firms in their sample is 30.0

percent (18.1 percent standard deviation) before the omission and 30.9 percent (17.6 percent standard

deviation) after the omission. Michaely et al. (1995) conclude that this adds support to the impression

that dividend omissions do not produce dramatic shifts in ownership.

Crutchley et al. (1999) investigate the simultaneity of the financial variables leverage, dividends,

insider ownership and institutional ownership and the link to agency cost. They use a three-stage least

squares regression with four regression equations, i.e. one for each of the four variables. Their data

4 They also tried to analyze the change in institutional ownership before and after dividend initiations, but failed

to collect a large enough sample.

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consist of New York Stock Exchange and American Stock Exchange listed companies for the periods

1984 to 1987 and 1990 to 1993. In the first sample period, institutional ownership is found to be

determined simultaneously with dividends5 while these two variables have positive impacts on each

other. Interestingly, though, the authors find a different result in the second sample period where

dividends are negatively determined by institutional ownership while the latter is determined

positively by the former. Crutchley et al. (1999) suggested that this change in the influence of

institutional ownership on dividends may be caused by the fact that many institutional investors had

become active monitors in the second sample period.

Dhaliwal et al. (1999) deal with the theory of tax clienteles for dividend policies and examine changes

in the ownership of the equity of firms that initiate dividends and expect that corporate investors that

are tax-exempt/tax-deferred and for whom dividends are not tax disadvantaged will start buying shares

of companies that initiated a dividend. Aggregate institutional ownership is used in that study as a

proxy for ownership by tax-exempt and tax-deferred corporate investors. Dhaliwal et al. (1999) use a

sample of 203 New York Stock Exchange (NYSE) / American Stock Exchange (ASE) / National

Association of Securities Dealers Automated Quotation System (NASDAQ) listed companies that

initiated or reinitiated6 a dividend payment between 1982 and 1995. Their finding is within their

expectation, namely that institutional ownership increases statistically and economically significantly

after the initiation of the dividend payment.

Short et al. (2002) deal with the link between dividend policy and institutional ownership in the UK.

In contrast to some papers mentioned above, they do not analyze initiations, changes, and omissions of

dividends, but focus on the level of dividends. Their analysis is based on a sample of 211 firms that are

listed on the London Stock Exchange and uses data from 1988 to 1992. The methodology of that paper

uses four different dividend models, namely the Full Adjustment Model, the Partial Adjustment Model

(Lintner, 1956), the Waud Model (1966) and the Earnings Trend Model (Fama and Babiak, 1968). For

all these models they find strong evidence of a positive association between dividend payout policy

and institutional ownership.

Gugler and Yurtoglu (2003) deal with dividends as informative signals that indicate the severity of

conflict between large, controlling owners and small, outside shareholders. They analyze 736 dividend

announcements of 266 companies in Germany between 1992 and 1998 and find that larger holdings of

the largest owner reduce the dividend payout ratio while larger holdings of the second largest owner

increase this ratio. Their study also reveals that substantial deviations from the one-share-one-vote rule

also reduce the dividend payout. This is measured by the cash-flow-right-to-voting-right ratio of the

largest ultimate shareholder and the result indicates that the smaller this ratio is the larger becomes the

incentive of the large and controlling shareholder to seek compensation other than through pro-rata

5 In addition, they find it to be simultaneous with leverage and insider ownership, too.

6 Reinitiation of dividends after not paying cash dividends for at least five years.

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dividends. In line with this result, Gugler and Yurtoglu (2003) also find that the larger the cash flow

right of the controlling shareholder is, the larger are the dividends that are granted to the rest of the

shareholders.

Grinstein and Michaely (2005) examine the relationship between institutional holdings and payout

policy in U.S. public firms. From corporate theory, they name three reasons why ownership structure

and payout policy may be related. First, agency theories suggest that with better monitoring managers

are likely to share more profit with investors. They refer to Jensen (1986) who states that with

enhanced monitoring, firms are more likely to pay out their free cash flow. Grinstein and Michaely

(2005) further state that building on the assumption that institutions are better monitors, agency

theories imply that larger institutional shareholdings will increase payouts. The second reason that is

given by Grinstein and Michaely (2005) is based on Allen et al. (2000) who argue that firms want

institutions to facilitate takeovers or to monitor in order to increase value. Due to common institutional

charter, prudent-man rule restrictions and comparative tax advantages that some institutions have for

dividends, institutional investors prefer higher dividends, and, hence, Grinstein and Michaely (2005)

summarize that this second reason implies that higher dividends will lead to larger institutional

holdings. Finally, their third reason deals with adverse selection problems that might lead uninformed

investors to prefer dividend over repurchases (Barclay and Smith (1988), Brennan and Thakor (1990)).

Grinstein and Michaely (2005) reason that since institutional investors are informed investors they

might not face these problems. Furthermore, they might simply prefer the least costly payout policy,

i.e. share repurchases. In their empirical analysis, Grinstein and Michaely (2005) obtain three major

results. First, they find clear evidence that institutions prefer dividend-paying over non-dividend-

paying stocks. Their second finding is that institutions do not show a preference for firms that pay

higher dividends. Even more so, they find evidence that institutions prefer low-dividend stocks to

high-dividend stocks. Consequently, they show that firms who increase their dividends do not attract

more institutional investors. Third, Grinstein and Michaely (2005) find that institutions prefer firms

that repurchase shares as opposed to firms that do not repurchase their shares. With share repurchases

however, they find that firms that repurchase more as well as firms that repurchase regularly have

higher institutional ownership. Finally, the authors report that they detect a trend for dividend paying

and share repurchasing firms. Before the mid-1980s7 institutions preferred firms that paid more

dividends. However, after that time institutions show an aversion against high dividends and a

preference for repurchasing firms.

Goergen et al. (2005) examine the flexibility and downward flexibility of dividends in Germany

during the period from 1984 to 1993. In this context they also investigate whether ownership and

7 This changed when the SEC rule 10b-18 was enacted in the mid-1980s which enabled firms to freely

repurchase their own stock (Grinstein and Michaely, 2005).

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control have an impact on dividend policy. They find that the presence of a large shareholder has no

impact on the dividend decision.

Lee et al. (2006) investigate the changes in institutional ownership following changes in dividend

policy for a Taiwanese sample8. They find strong evidence of a clientele effect for investors with

different tax brackets, e.g. private investors and institutional investors. In line with Michaely et al.

(1995), they find that institutions as a whole show an insignificant response to dividend changes.

When regarded separately, only foreign institutions show a positive and significant reaction to

dividend increases. Lee et al. (2006) further find that institutions in Taiwan prefer higher dividends

and higher payout ratios while they dislike firms that pay no dividends.

Graham et al. (2006) examine a sample of NYSE firms that make an initial dividend announcement

between 1990 and 1998 and monitor the market reactions to these announcements. They divide their

sample between firms that announce anticipated quarterly dividends on a regular basis and those firms

that initiate unanticipated dividend payments. They find that compared to the unanticipated dividend

initiating firms, the firms with anticipated announcements have a large number of institutional traders

prior to the news release. Furthermore, Graham et al. (2006) find that after firms unexpectedly

announced the initiation of dividend payments, institutional ownership rose from 32.2 percent of

shares outstanding at the end of the quarter before the dividend initiation announcement to 50.6

percent at the end of the quarter after the announcement. In general, their results indicate that the

trading volume increased for dividend-initiating firms after the announcement of dividend initiation

was made public. They state that this is consistent with institutional investors increasing their

ownership in those dividend-initiating firms. Contrary to a common assumption in the literature that

institutional investors are the most informed investors, Graham et al. (2006) do not find evidence for

this hypothesis. They rather find evidence of increased trading prior to unanticipated dividend

announcements for stocks with low institutional ownership.

Similarly to the study of Short et al. (2002), Mancinelli and Ozkan (2006) conduct a study of the

relationship between dividend policy and ownership structure for an Italian sample9. This study uses

2001 data on a sample that consists of 139 listed Italian firms. They use a methodology based on tobit

regression and find that the voting right of the largest shareholder has a significantly negative impact

on the dividend payout ratio. This contradicts the finding of Short et al. (2002) who find exactly the

opposite for their UK sample. Mancinelli and Ozkan (2006) interpret their result as a support for their

prediction that a higher level of concentration of ownership when measured in the voting rights of the

largest shareholder leads to a higher probability of expropriation of minority shareholders. One

possibility of how expropriation can occur in this context is called tunneling. In this approach, the

8 Lee et al. (2006) state that there is no capital gains tax in Taiwan.

9 Mancinelli and Ozkan (2006) state that the ownership structure in Italy is highly concentrated and that this

results in relevant agency problems.

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large shareholders do not only have a majority stake in the firm, but also possess a large portion or

complete ownership of the cash flow rights of other businesses that have relationships with the firm

(Shleifer and Vishny, 1997). In this way, they are able to expropriate corporate wealth by setting

unfair terms for within-group transfers of assets and control stakes or by sales of goods and services

(Faccio et al., 2000). Hence, according to Mancinelli and Ozkan (2006), Italy seems to be a good

example for expropriation of minority shareholders through tunneling. A second interpretation that

they give is the extent to which top managers are related to the largest shareholder. They find support

for the prediction that managers rather hold resources under their own control than distribute returns to

shareholders and reason that this seems likely as in 70 percent10

of Italian firms the top managers come

from the largest shareholder.

______________

Table 1 about here

_____________

3.2 Dividend preferences of different shareholder types

In the literature there is evidence that different types of large shareholders show different preferences

for dividend policies for various reasons. Those shareholders are e.g. banks, financial institutions,

companies, state authorities, and families and private blockholders. One important variable in this

context might also be whether the shareholder is of domestic or foreign origin. The following sections

will summarize the empirical findings that can be found in the literature for the dividend preferences

of banks, state authorities and families.

3.2.1 Banks

Banks play an important role in the German economy. Goergen et al. (2005) state that the German

corporate governance system is sometimes called a ‘bankbased corporate governance system’ that is

characterized by strong relationship banking. Da Silva et al. (2004:51) present three reasons as to why

German banks play such an important role in corporate governance. First, through equity participation

in industrial and commercial companies. Second, and due to the fact that most shares in Germany are

bearer shares that many shareholders deposit with their bank, these banks have control over a

considerable proportion of voting equity of large corporations at the annual general meeting,

especially through proxy voting. Third, banks are well represented on the supervisory board of many

corporations in Germany. Thus, banks are able to influence the outcome of the voting on the annual

general meeting significantly. There is, however, a trend towards lower direct shareholdings by banks.

10 Faccio and Lang (2002)

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Da Silva et al. (2004) show this for a sample of 221 German industrial and commercial quoted firms.

They used the years 1984, 1989, and 1993 to analyze the first-tier and ultimate level ownership

different investor types’ shareholdings exceeding 25 percent and 50 percent11

. The result of this study

is that the percentage of banks within all shareholders that had a first-tier ownership in a company of

at least 25 percent (50 percent) dropped from 12.1 percent (2.7 percent) in 1984 to 7.7 percent (2.4

percent) in 1993. For ultimate control, the figures dropped from 15.9 percent (5.5 percent) in 1984 to

10.1 percent (3.8 percent) in 1993. This development reflects the slight trend of the German economy

away from the huge amount of cross-holdings among firms and towards a more open and foreign

investor-friendly climate (Da Silva et al., 2004). Nonetheless, like France, Italy, and Japan, Germany

is still regarded as a traditionally bank-dominated economy (Da Silva et al., 2004:51)12

.

Regarding the dividend preference of banks as shareholders, Da Silva et al. (2004) further show that

bank-controlled firms have significantly lower dividend payout ratios than firms controlled by

dispersed ownership, or families. They show that bank control has a strongly negative impact on the

dividend payout ratio. Amihud and Murgia (1997) point into the same direction when they conclude

that the low dividend payout level in Germany might be due to the fact that banks are often in control

of majority voting stakes in shareholders’ meetings. They reason that banks who are a major

shareholder and lender of a company at the same time favor low dividend payouts in order to provide

greater security for their debt. In contrast to Da Silva et al. (2004), Gugler (2003) finds target payout

ratios13

of bank-controlled firms to be larger than those of family-controlled companies. Goergen et al.

(2005) find in addition, that if banks are in control this increases the likelihood of dividend omissions

in the wake of earnings losses, mitigates agency costs and reduce the need for dividends as a

monitoring device. Furthermore, Gugler (2003) finds that in bank-controlled corporations lagged

dividends determine this year’s dividend only marginally and that this might reflect the compensating

incentives of holding debt and equity of those firms at the same time.

3.2.2 State authorities

Gugler (2003) reasons that in state-controlled firms there exists a double principal-agent problem,

namely between the managers of the firm and the elected representatives of the government on the one

hand, and between the elected representatives of the government and the citizens on the other hand.

Gugler (2003:1301) assumes that “large numbers lead citizens to shirk on their monitoring role of

politicians, and thus the politicians themselves may not actively monitor the companies the state

owns.” Therefore, higher dividends are needed as a substitution for monitoring in state-controlled

firms. Gugler (2003) finds in his sample of Austrian companies that state-controlled firms have the

highest target payout ratio compared to firms controlled by banks, families and foreign owners. In

11 Their analysis does not take into account the proxy votes that banks can exercise on behalf of their customers.

12 Da Silva et al. (2004) cite Rajan and Zingales (1995) in this point.

13 These target payout ratios are measured as τ = ατ / (1 - (1 - α)), where τ symbolizes the target payout ratio and

α stands for the speed of adjustment coefficient.

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addition, state-controlled companies show significant dividend smoothing. His explanation is that the

elected politicians who are held accountable for all activities of government can be expected to have a

strong interest in a steady flow of dividends. First, dividends may be able to convince citizens that the

government successfully controls the company. Second, the steady flow of dividends will reduce the

free cash flow in the hands of the managers and, hence, reduce the agency problems that can result

from this free cash flow. Gugler (2003) computes the target payout ratios for state-controlled firms and

finds them to be 42.90 percent (33.30 percent for firms doing R&D). In addition, he also looks at the

dividend flexibility of firms. He finds that the ranking in flexibility to cut dividends is ‘family’ >

‘foreign firm’ > ‘bank’ > ‘state’ control. This, again, is consistent with the findings above where state

controlled firms have a strong preference for stable dividends and families are not reliant on dividends

as a means of reducing agency cost. In contrast to Gugler’s (2003) findings, Lee et al. (2006) find for

their Taiwanese dataset that government entities prefer lower positive dividends and payout ratios. A

reason for this is not mentioned by Lee et al. (2006). They only state that during the sample period

some of the companies in the sample were in the process of privatization while the government was

still owning shares and assume that it would be unlikely for a government to sell low dividend paying

shares and buy high dividend paying shares just for the sake of tax-free dividends.

3.2.3 Families

Da Silva et al. (2004:129) also comment on the dividend payout ratios for firms that are family-

controlled in Germany. They find those firms to have the largest dividend payout ratio (24.22 percent)

compared to company-controlled (18.50 percent), bank-controlled (16.60 percent) and widely-held

firms (19.03 percent). Interestingly, though, their analysis reveals that control by families does not

seem to have an impact on dividend policy. Gugler (2003) finds contradictory evidence regarding the

target payout ratios of family-controlled firms in Austria, i.e. that those firms choose significantly

lower target payout ratios (25.00 percent) when compared to bank-controlled firms (34.40 percent) 14

.

Gugler and Yurtoglu (2003) do not find a linear relationship between dividend payout ratios and

family ownership for a sample of German firms. For family ownership, their analysis reveals a U-

shaped relationship between the dividend payout ratio and the cash flow rights of the largest

shareholder (with a minimum at 40.20 percent) and an inverted U-shaped relationship between the

dividend payout ratio and the voting rights of the largest shareholder (maximum at 47.80 percent).

These shapes are consistent with the patterns that were found for the whole sample in Gugler and

Yurtoglu (2003).

14 The target payout ratios for firms that are active in R&D were found to be 13.00 percent for family-controlled

firms and 19.10 percent for bank-controlled firms.

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______________

Table 2 about here

_____________

3.2.4 Other shareholder types

For the remaining shareholder types that are included in this research no empirical evidence was found

in the literature. Thus this paragraph presents the author’s expectations regarding their effect on

dividends.

First, financial institutions are expected to show a preference for lower dividends, as banks do. One

reason therefore is that in four cases out of 35 in the sample of this study, the financial institution that

is a largest shareholder is owned by a bank itself. There, the financial institution is the investment trust

company of the bank. Hence, the dividend preference would be similar. A second reason might be that

financial institutions are able to thoroughly assess a company they want to invest in. Investment

professional have the knowledge to analyze the company and enough experience on how to exercise

control effectively. This might be enough for them to monitor the management closely, so that high

dividends as a substitute for monitoring is not needed in this case.

Second, companies that invest in other firms often do this for strategic reasons. This means, that the

buying company has an interest in a cooperation with the firm it partly bought. In those cases, one can

expect that the management team of the buying company has acquired plenty of information about the

target company. In addition, close relationships between both management teams might also develop

during the preparation of the acquisition. Hence, for the same reasons that are valid for banks and

financial companies, companies are expected to have a negative influence on dividends when

compared to widely-held ownership.

Third, the Beteiligungsgesellschaften are of special interest for this study. In Germany, those firms are

often called Beteiligungsgesellschaften, Vermögensverwaltungsgesellschaften,

Verwaltungsgesellschaften, or Holding. The reason for the special interest is a change in the corporate

tax policy in Germany in 2001 that determines the expectations of the dividend preference of these

companies. Detailed information about the change of the tax regulation is outlined in appendix B.

Before this policy change, dividends that were paid by German companies (Kapitalgesellschaften,

such as AG and KGaA) to other companies (also Kapitalgesellschaften) that owned shares of the

former were fully liable to taxation. The alteration of the paragraph 8b of the Corporate Tax Act

(Körperschaftsteuergesetz) in the course of the tax reform 2001 brought a radical change. From then

on until 2003, dividends that were exchanged between companies were completely tax-free. From

2004 on until today, 95 percent of those dividends are still tax-free and only 5 percent are liable to

taxation. After these changes in tax policy, the possibilities to save taxes rose for companies. In

addition, wealthy families or other private blockholders who set up a Beteiligungsgesellschaft to which

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they transferred their shareholdings in other firms could also profit from this new tax regulations. The

dividends, which the Beteiligungsgesellschaft would then receive were 100 percent or 95 percent tax-

free, respectively. This tax incentive might have changed the behavior of families and private

blockholders regarding their dividend preference. Thus, it is expected that while direct holdings of

families and private blockholders will still have a negative influence on dividends, their indirect

holdings through Beteiligungsgesellschaften could have a positive impact on dividends.

Finally, the effect of foreign shareholders on dividends might be a positive one. Lee et al. (2006) and

Gugler (2003) find some evidence for a positive effect. However, there might be a different finding as

there are also different types of foreign shareholders that have different preferences.

4. Data

This section explains the data that are used in this study. It will start with the sample itself, the data

sources and explain which companies are included and which are not. In addition, section 3.2 will

provide an insight into the German law and institutions concerning the transparency of ownership and

explain how the notification system actually works. Section 3.3 describes the variables used in this

study. Finally, section 3.4 will present some descriptive statistics.

4.1 Sample

As mentioned in the introduction, the sample of this study comprises all German companies that were

listed in the German stock indices DAX, MDAX, SDAX, TecDax, and GEX on February 19, 2009.

From these 221 companies 30 belonged to the DAX, 50 to the MDAX, also 50 to the SDAX, 30 to the

TecDAX and 83 to the GEX15

. The stocks of those firms are all traded within the so-called Prime

Standard segment of the Deutsche Börse AG and have to fulfill the highest transparency requirements

on the German stock market16

. Due to the different structure of their financial reports, 6 banks, 3

insurance companies and one other financial institution were deleted from the sample. In addition,

another 51 companies were excluded because they were no German companies or there were not

enough data available. Finally, due to statistical reasons, four other firms were excluded as they were

found to be extreme outliers within the sample. The remaining sample of 156 companies can be

subdivided into seven different industries. 42 firms belong to the manufacturing, petroleum and

technology sector, 20 other represent the electronics, software, and IT business. From the utilities,

telecommunication and energy sector 13 companies are included in the sample and 17 companies are

active in the chemical and agricultural sectors. 32 companies belong to the service and real estate

15 22 out of those 83 were listed in the GEX and in one of the other indices simultaneously.

16 Among those transparency requirements are e.g. quarterly published company reports. Hence, the inclusion of

the earnings reporting frequency as a control variable does not make sense in this study.

14 / 42

industries, 17 are active in food or health care products, while the remaining 15 can be found in the

consumer goods or other businesses.

4.2 Transparency of ownership in Germany and limitations of the data

4.2.1 Regulation

In this study, the most important variable in the analysis of dividend determination is the ownership

variable, i.e. the relative amount of shares that the large shareholders of a company possess. To be able

to acquire these data there are however some difficulties which will be highlighted in this section.

It is said to be a German tradition to preserve the incumbents’ power by emanating as little

information about the firm’s activities as possible (Becht and Boehmer, 1999). Nevertheless, in

Germany the judicative basis for the publication of stockholdings that exceed certain thresholds of

stock ownership in a firm is laid by the law named WpHG (Wertpapierhandelsgesetz). This law was

passed in July 1994 and is the German interpretation of the guidelines 88/627/EWG and 89/592/EWG

of the council of the European Community. The former deals with the information that has to be

published due to acquisitions and dispositions of significant investments in exchange-listed

companies. The latter deals with the coordination regarding the rules on insider trading. Despite the

thirteen sections and 46 paragraphs of this law (details are discussed below), the efficacy of disclosure

regulation is very low (Becht and Boehmer, 1999). Within the context of the “Zweites

Finanzmarktförderungsgesetz”, not only the WpHG was established, but also the Federal Securities

Supervisory Office, that is known as the “Bundesanstalt für Finanzdienstleistungsaufsicht” (BaFin;

http://www.bafin.de) today17

.

In practice, there are different regulations that require the publication of ownership data in Germany.

As this paper only includes stock corporations, the so-called Aktiengesellschaften (AG) or

Kommanditgesellschaft auf Aktien (KGaA), only the applicable regulations will be dealt with here.

Companies that are AGs and KGaAs are not required to reveal the identity of owners who are

individuals in its annual report. In contrast, any company must include in its annual report whether it

owns more than 25 percent in another AG or KGaA itself (Becht and Boehmer, 1999). Furthermore,

AGs and KGaAs are obliged to include their own ownership in other firms if they exceed 20 percent

(§271 Handelsgesetzbuch (HGB)). Apart from the annual report, company statutes and contractual

arrangements provide valuable ownership and control information because German companies

17 In 1994, this entity was established as the Bundesaufsichtsamt für den Wertpapierhandel (BAWe). This

institution was merged together with the “Bundesaufsichtsamt für das Kreditwesen” and the “Bundesaufsichts-

amt für das Versicherungswesen” into the “Bundesanstalt für Finanzdienstleistungsaufsicht” on May 1st, 2002

when the Financial Services Supervisory Law “Finanzdienstleistungsaufsichtsgesetzes” (FinDAG) was passed.

(Becht and Boehmer, 1999)

15 / 42

frequently enter contracts where one company (controlled firm) fully surrenders claims on profits or

decisions to another, controlling firm (Becht and Boehmer, 1999). The most frequent examples of

those contracts are Profit and Loss Agreements (Gewinnabführungsvertrag) and Subordination of

Management Agreement (Beherrschungsvertrag). The former implies a transfer of both profits and

losses to the controlling company, the latter assigns the complete managerial control rights to the

controlling company (Goergen et al., 2004; §291 AktG). If a company entered such a contract this

gives a clear picture about the shareholder that is actually controlling the company. As this study deals

with the largest exchange-listed companies in Germany, however, those kinds of contracts will

probably be of less relevance because the firms in this sample will rather control other firms than be

controlled by others through those kinds of agreements.

The sources from which primary ownership data can be obtained are company registers, the

Bundesanzeiger (http://www.bundesanzeiger.de), the BaFin and the Federal Antitrust Office

(Bundeskartellamt) (Becht and Boehmer, 1999). The company registers are managed by local courts

and contain all filed documents from the businesses within the district of the court. Those documents

comprise the statutes, charters, and annual reports. To gain access to their information, there are,

however, four obstacles that have to be overcome (Becht and Boehmer, 1999): First, one must travel to

the potentially distant court in whose district the business is located. Second, the courts mostly only

have the most recent documents on site due to the storage space they have in their court buildings. It

might thus become necessary to request older documents days or weeks in advance to have them on

site when needed. Third, since the documents are sorted by company but not by type of document, it

may require some time and manual search to find the required information. Finally, and most serious,

most companies violate the law by not furnishing mandatory filings. Hansen (1996:56) assumes that

the law is broken in this way by two-third of all German companies. Understaffed courts and fees of

maximum EUR 5,000 are not able to stop or even sanction those business practices (Becht and

Boehmer, 1999). To overcome those obstacles, the German government provides an online portal

(http://www.unternehmensregister.de) where all publications from the electronic version of the

Bundesanzeiger, all filings and documents from the company registers and important company

information of securities-emitting companies can be obtained online. However, despite this appealing

online platform, the final problem mentioned by Becht and Boehmer (1999), the incompleteness of the

filings, persists.

The BaFin publishes all filings that are submitted to it under §21 to §29 WpHG on their website and

makes it possible to search for all filings that were submitted per company. According to §21 WpHG

anyone who reaches, transgresses or falls below 3%, 5%, 10%, 15%, 20%, 25%, 30%, 50%, or 75% of

ownership of voting rights of a German company has to notify this company and the BaFin. From

these filings, it is possible to obtain a good – yet not perfectly precise – impression of the current

ownership structure of an AG or KGaA for all shareholders who possess at least 3% of the voting

rights.

16 / 42

Finally, the Bundeskartellamt publishes a list of all takeovers and large voting block acquisitions that

it approved on its website. As only merger-related activities are included in this data source, it is not

able to provide a complete overview on the ownership structure of all major companies in Germany.

4.2.2 The notification process18

As mentioned above, if a shareholder exceeds, reaches or falls below the thresholds of stock

ownership stated by the WpHG, a notification is required. This notification has to be sent to the

company that issued the shares and the BaFin simultaneously within four trading days. The issuing

company then has to publish this information without any delay but at least within three trading days.

After this publication, the information has to be sent to the company register for storage. Hence, the

maximum time allowed between the actual trade and its publication are seven trading days. Becht and

Boehmer (1999) comment that before reaching the market, this information will have passed through

many hands and, if it is price relevant, could easily be used for illegal insider trades. They further note

that the German filing system appears antiquated, costly, and prone to errors compared to the filing

systems in the United States (Electronic Data Gathering Analysis and Retrieval, EDGAR) and Canada

(System for Electronic Document Analysis and Retrieval, SEDAR).

4.3 Data sources and Variables19

As mentioned before, this study follows the methodology of Mancinelli and Ozkan (2006) but it will

also extend it in some cases. The main feature that distinguishes their methodology from many other

papers is the fact that the ownership variable is collected for only one point in time. This study follows

that approach, too, since it was not possible to obtain historic ownership data.

The dependent variable in this study is the amount of cash dividends paid. In Mancinelli and Ozkan

(2006), the cash dividends are expressed in two ratios, namely cash dividends/earnings and cash

dividends/market capitalization. As a reason for those two ratios they state that although the cash

dividends/earnings ratio is the most commonly used measure of dividend payouts, it might be subject

to earnings manipulation due to accounting practices. For that reason, the cash dividends/market

capitalization ratio is used to provide more robustness to the findings (Mancinelli and Ozkan, 2006).

This paper, however, does not use the cash dividends/earnings ratio because there are some

observations in the sample for which the earnings figure is negative. For that reason we take cash

dividends/market capitalization is used as a second dependent variable. For the construction of these

variables, the financial data are averaged over three years. Data on cash dividends are obtained for the

years 2005 till 2008, but only the years 2006 until 2008 are used here. According to the description of

18 This process is defined in the §§ 21 to 29a of the WpHG.

19 The exact descriptions of the variables can be found in appendix A.

17 / 42

the cash dividend variable in Datastream, the amount that is given for e.g. 2008 shows the amount that

the company paid out in 2008. Hence, this profit was earned in the year before and, accordingly, the

cash dividend component of the two ratios is calculated as a mean of the years 2006 to 2008 while the

market capitalization components were averaged from 2005 to 2007 in order to reflect the relevant

time period in which the profits were earned that were paid out as dividends in the years 2006 to 2008.

Among the independent variables, the most important one is the ownership variable. Mancinelli and

Ozkan (2006) use one variable for the voting rights of the largest shareholder, and another variable for

the voting rights of all shareholders that have more than 2 percent of the voting rights, excluding the

largest shareholder. In addition, they use a dummy variable that equals one if there is a second large

shareholder and another dummy variable that equals one if the other large shareholders have more than

5 percent of the voting rights. In contrast, this paper uses four variables for the size of shareholders.20

The first one contains the relative size of stock ownership of the largest shareholder if it exceeds 3

percent. The second contains the relative size of stock ownership of the second largest shareholder if it

exceeds 3 percent. The third variable adds up the relative size of stock ownership of all other

shareholders that hold at least 3 percent. Finally, the fourth ownership variable is a dummy that takes

the value of one if there is at least one third largest shareholder who owns at least 3 percent of the

stock of a company. As it is explained in the methodology section, combinations of these variables are

used as well. In order to be able to detect the dividend preferences of different types of owners,

dummy variables are used for banks, financial institutions, companies, state authorities,

Beteiligungsgesellschaften, and families and private blockholders. One final dummy variable is used

when the investor is of foreign origin. In the final analysis of this study (table 10), those dummies are

multiplied with the size of the largest shareholder in order to include the shareholders’ size in the

analysis of their influence on cash dividends.

The ownership data for this study were obtained from the Commerzbank’s Wer gehört zu wem? online

service21

. This database collects ownership information on about 12,000 German companies from the

Bundesanzeiger and the German Federal Securities Supervisory Office (Bafin), both of which are

explained in the next section, as well as from the companies themselves22

. For this reason, the

company data of this online service might be considered more complete and up to date than the official

databases of the Bafin or the Bundesanzeiger. The database of the Wer gehört zu wem? online service

was updated on May 11, 2009 before the data for this paper were obtained from it. As it is not possible

to download historic data from this source at reasonable cost, the ownership data could be collected

only for one point in time, namely May 11, 2009. Since the financial data were downloaded for the

20 Size is always measured in percent of the shareholders’ equity.

21 http://wergehoertzuwem.das-buch-im-internet.de

22 In order to determine the ultimate shareholder of some Beteiligungsgesellschaften in the sample, the website

“Hoppenstedt Konzernstrukturen online” (http://www.hoppenstedt- konzernstrukturen.de/ nut_basis.htm) was

used.

18 / 42

years 2005 to 2008, there remains a gap in time between the ownership and the financial variables23

.

The effect of this difference in time might however be not too severe as ownership structures of

German companies were found to be stable in the past, at least in the 1980s and 1990s (Da Silva et al.,

2004:132). Despite there are roughly 12,000 companies listed in the database of the Commerzbank, it

was necessary to obtain the ownership information for 30 companies from the Bafin because those

firms were not listed in the Wer gehört zu wem? database.

In addition to the ownership, several other control variables are used that are based on lagged data,

too. The year in which the company was founded is included in the Age variable. The data for this

control variable are mostly taken from the company websites as the data on the year of incorporation

that AMADEUS provides may be misleading in some cases24

. Size is measured as the mean of the

market capitalizations from 2005 to 2007 and is based on Datastream data. Similar to von Eije and

Megginson (2008), who use the standard deviation of the net income over five years divided by each

year’s sales, this paper uses the standard deviation of EBIT data from 2005 to 2007 divided by the

mean of the revenues from 2005 to 2007 as a proxy for the Risk of the company. The leverage variable

is defined as in Mancinelli and Ozkan (2006) as 2005 to 2007 average of total debt over total assets.

The remaining financial data were obtained from Thomson Financial’s Datastream. Most variables

that are used in this study can be obtained from this source. However, it has become necessary in

multiple cases to add missing data to the dataset to fill the gaps that Datastream left open. In this case,

data from the financial reports that can be found on the companies’ websites mainly filled the missing

data points.

With regard to the control variables, the age of the company can be expected to have a positive impact

on dividend payments. Von Eije and Megginson (2008:363) find this positive impact and reason that

older companies may have lower growth opportunities, whereas their ability to accumulate funds

might be better, compared to younger companies. The EBIT-based risk variable might be expected to

have a negative impact on dividend policy since managers might prefer to pay low dividends during

times of unstable profits. However, Goergen et al. (2005) find that the dividend flexibility in Germany

is higher than, e.g. in the USA. If this effect is still present, then the influence of the risk variable

might be negligible or insignificant. The size of the company will probably have a positive effect on

23 The company that experienced the most dramatic change in ownership that occurred during this gap is the

bank Hypo Real Estate. The German government bought up to 90% of the shares of this bank during the

financial crisis in order to put it under state control and prevent this “system-relevant” bank from going

bankrupt. Since, however, banks are excluded in this study, it does not have any effect here. 24

One example is the Daimler AG (former DaimlerChrysler AG). AMADEUS states the year of incorporation to

be 1998, which is the year of the merger of the former Daimler Benz AG with Chrysler Corporation. The history

of Daimler, however, started much earlier, namely in 1883 when Benz & Cie. was founded – the company that

would merge with the Daimler Motoren Gesellschaft (founded 1890) in 1926 to form the Daimler-Benz AG. If

the AMADEUS data would be used, then Germany’s famous 126-year-old carmaker would misleadingly be put

on one level with some technology start-ups from the “Dot.com” era. Therefore, the age variable reflects the true

economic date of foundation, rather than the legal one.

19 / 42

dividends as mature and large companies have experienced a period of growth already and can now

afford to pay out cash to their shareholders, whereas younger companies might need this cash for their

own growth activities. Leverage is expected to have a negative influence on cash dividends

(Mancinelli and Ozkan, 2006). A possible explanation is given by Jensen (1986) who states that debt

is a substitute for dividends because it is a more credible commitment of the management to pay out

free cash flow and, hence, reduces the agency cost of free cash flow.

4.4 Descriptive statistics

In this sample of 156 companies, there are 122 firms that pay dividends in at least one year from 2006

to 2008, while there are 38 that do not pay any cash dividend in this period. Table 3 shows that state

authorities seem to invest in companies with rather high dividend payout ratios, while banks prefer

companies with low payout ratios. Another interesting fact is that the average market capitalization

(Size) of the companies in which state authorities are the largest shareholder are much higher than the

sample average, while family-controlled companies tend to be the smallest here.

______________

Table 3 about here

_____________

With regard to the ownership situation, table 4 contains the ownership figures of the largest

shareholders of all companies in the sample. 35 firms, or 22.4 percent of the sample are controlled by

shareholders who own more than 50 percent of the company stocks and there are only two firms25

that

have no single shareholder who possesses at least 3 percent of the company stocks.

______________

Table 4 about here

_____________

The data on direct ownership are summarized in table 5 which shows the number companies in which

the different types of shareholders are the largest, second largest or belong to the group of other

shareholders who own at least 3 percent of the company. Apart from the two companies mentioned

above which do not have any shareholder that owns at least 3 percent, there are three other firms

whose largest shareholders do not belong to either of the shareholder types in table 526

. The final

25 BASF SE and Gesco AG do not have any shareholder that holds at least 3 percent.

26 GFK SE has an association (GFK-Nürnberg e.V.) as its largest shareholder, Südzucker AG’s largest

blockholder is an agricultural cooperative society (Süddeutsche Zuckerrübenverwertungs Genossenschaft eG),

and the largest shareholder of ThyssenKrupp AG is a private foundation (Alfried Krupp von Bohlen und

Halbach-Stiftung).

20 / 42

column of table 5 indicates how many shareholders of the other types were found to be foreign-based.

Contrary to the previous literature, banks are far from being the most important shareholder group and

hold the largest block in only three out of the 156 companies. Much more often are companies,

financial institutions, Beteiligungsgesellschaften, and families and individuals found to be the largest

blockholders. The fact that 25.6 percent of the largest blockholders are foreign investors might be seen

as support for the statement of Leuz and Wüstemann (2003) that Germany is transforming its

economic system to attract foreign investors. Another striking fact is the high number of

Beteiligungsgesellschaften that hold large direct equity stakes in other firms. This can be seen as a

direct consequence of the 2001 reform of the Corporate Tax Act that created tax advantages for these

kinds of companies. As one would expect, Beteiligungsgesellschaften are much less often found to be

large ultimate shareholders of other firms. This suggests that these companies are mostly set up and

used as a vehicle for direct shareholdings that can absorb dividend payments 95 percent tax free,

independent of the tax treatment of the owner of the Beteiligungsgesellschaften. That becomes even

more obvious when the ultimate shareholdings are taken into account. Among the 29

Beteiligungsgesellschaften that are the largest direct shareholders, 17 are found to have a family or an

individual as their ultimate shareholder. This figure is by far the highest when compared to those that

have banks (1), companies (3), or state authorities (3) as ultimate shareholders. A similar pattern can

be found for the second largest shareholders. Out of the 27 Beteiligungsgesellschaften there are 11 that

are ultimately owned by families and individuals, whereas 4 are owned by state authorities. Banks,

companies and financial investors are the ultimate shareholders of 2 Beteiligungsgesellschaften each.

______________

Table 5 about here

_____________

Another pattern that can be observed in the data is that banks sometimes own parts of other companies

not only directly, but also through their own mutual trust companies. Evidence therefore is present in 4

cases for the largest shareholders, and in 8 cases for the second largest shareholders.

______________

Table 6 about here

_____________

5. Methodology

For this study it is not possible to use ordinary least squares analysis. Two types of regression

techniques are used in this paper. First, for the regression on the decision whether or not to pay

dividends, the maximum likelihood technique for binary data is used. For the second type of

21 / 42

regression, a method for censored data is used. The reason for that lies in the nature of the data of the

dependent variable. Since dividends cannot be negative the dividend-based ratios that are used as

dependent variables cannot be smaller than zero, too. Using ordinary least squares regression on such

data would lead to biased and inconsistent parameter estimates (Brooks, 2008:533). Tobin (1958)

developed a model to estimate regressions on censored dependent variables, which is known as Tobit

analysis and which will be used in this study.

As it is outlined in the introduction, there are four main questions that shall be answered with this

study. The first one is whether large shareholders have a preference for dividend-paying firms or for

non-dividend-paying firms. To find an answer to this question, a dummy variable (DPNP; dividend

payer / no dividend payer) is created that takes the value of 1 when the average value of cash

dividends paid from 2006 to 2008 is positive, and zero otherwise. This variable then serves as

dependent variable in the following regression equations.

(1) DPNP = α0 +α1 AGE + α2 RISK + α3 SIZE + α4 LEVERAGE + α5 LARGEST

(2) DPNP = α0 +α1 AGE + α2 RISK + α3 SIZE + α4 LEVERAGE + α5 LARGEST

+α6 (2ND

LARGEST + REST)

(3) DPNP = α0 +α1 AGE + α2 RISK + α3 SIZE + α4 LEVERAGE + α5 LARGEST

+α6 2ND

LARGEST + α7 REST(DUMMY)

(4) DPNP = α0 +α1 AGE + α2 RISK + α3 SIZE + α4 LEVERAGE

+ α5 (LARGEST + 2ND

LARGEST + REST)

These regression equations observe the effect of ownership in different combinations. In the first case,

only the relative size of the shareholdings of the largest shareholder is included. In the second case,

two variables, namely the size of the largest shareholder and the size of the all other shareholders who

own at least 3 percent of the company, excluding the largest shareholder. This combinations allows for

a test of whether the largest shareholder has a different dividend preference than the remaining large

shareholders. Third, the size of the largest shareholder, the second largest shareholder, and a dummy

variable that is equal to 1 if there is at least one other large shareholder who owns at least 3 percent of

the company. This combination of ownership variables is used by Mancinelli & Ozkan (2006) as well.

Finally, in the fourth case one variable containing the size of all shareholders that own at least 3

percent of the company is used. To account for the binary data of the dependent variable, an analysis

22 / 42

based on maximum likelihood estimation is used in conjunction with an extreme value distribution of

the residuals to determine the coefficients of this regression equation27

.

The second main question outlined in the introduction deals with the amount of dividends that large

shareholders prefer. Contrary to Short et al. (2002) and rather in line with Gugler and Yurtoglu (2003)

and Mancinelli and Ozkan (2006), it is expected here that large shareholders will prefer lower

dividends and, hence, have a negative influence on the cash dividends. The reason can be found in the

economic system of Germany. Due to the insider system, monitoring the management can be achieved

quite effectively even without high dividend payments because the important outside investors are

reasonably well informed (Leuz and Wüstemann, 2003). In addition, our expectation for the effect of

the second largest shareholder is also in line with Gugler and Yurtoglu (2003) and Mancinelli and

Ozkan (2006), who find it to be dividend increasing. In this way, as Mancinelli and Ozkan (2006)

reason, it might protect the smaller shareholders from expropriation and tunneling. The empirical

analysis of this question is based on a Tobit analysis where the dependent variable (cash

dividends/market capitalization) are censored at the lower end at zero. The control variables used here

are the same as in equations (1) to (4).

(5) RELDIVSIZE = α0 +α1 AGE + α2 RISK + α3 SIZE + α4 LEVERAGE + α5 LARGEST

(6) RELDIVSIZE = α0 +α1 AGE + α2 RISK + α3 SIZE + α4 LEVERAGE + α5 LARGEST

+α6 (2ND

LARGEST + REST)

(7) RELDIVSIZE = α0 +α1 AGE + α2 RISK + α3 SIZE + α4 LEVERAGE + α5 LARGEST

+α6 2ND

LARGEST + α7 REST(DUMMY)

(8) RELDIVSIZE = α0 +α1 AGE + α2 RISK + α3 SIZE + α4 LEVERAGE

RELDIVSIZE in this equations serves as a placeholder for the dependent variable cash

dividends/market capitalization. The ownership variables are used in exactly the same way as in

equations (1) to (4).

A third step in the methodology of this study aims to answer the third main question, namely the

dividend preferences of different types of shareholders. In detail, the investor types included here are

banks, financial institutions, companies, state authorities, Beteiligungsgesellschaften, and families and

private blockholders. A seventh variable contains those of the before mentioned shareholders that are

of foreign origin. All of these ownership variables are dummies that are equal to one if the largest

shareholder belongs to the dummy’s shareholder type. In this analysis of the third question, the size of

the shareholdings does not play any role. This regression is, however, also conducted in a second

27 Following the advice of Brooks (2008:539), robust covariances are computed according to “Huber/White” in

the statistical software package EVIEWS 6.

23 / 42

specification that is designed to uncover the effect of Beteiligungsgesellschaften in detail. Regarding

the change in the tax code of 2001 and the resulting implications, two separate variables for

Beteiligungsgesellschaften are used in the second specification. The first one contains all

Beteiligungsgesellschaften that are ultimately owned by a family or any other private owner. The

second variable contains all remaining Beteiligungsgesellschaften that are not owned by families or

other private owners28

. The regression equations for these two specifications are designed as follows:

(9) RELDIVSIZE = α0 +α1 AGE + α2 RISK + α3 SIZE + α4 LEVERAGE + α5 LARGEST_BANKS +

α6 LARGEST_FINANCIAL INSTITUTIONS + α7 LARGEST_COMPANIES + α8 LARGEST_STATE

AUTHORITIES + α9 LARGEST_BETEILIGUNGSGESELLSCHAFTEN + α10 LARGEST_FAMILIES

AND PRIVATE BLOCKHOLDERS + α11 LARGEST_FOREIGN SHAREHOLDERS

(10) RELDIVSIZE = α0 +α1 AGE + α2 RISK + α3 SIZE + α4 LEVERAGE + α5 LARGEST_BANKS +

α6 LARGEST_FINANCIAL INSTITUTIONS + α7 LARGEST_COMPANIES + α8 LARGEST_STATE

AUTHORITIES + α9 LARGEST_BETEILIGUNGSGES. (FAMILY-OWNED) + α10

LARGEST_BETEILIGUNGSGES. (NOT FAMILY-OWNED) + α11 LARGEST_FAMILIES AND

PRIVATE BLOCKHOLDERS + α12 LARGEST_FOREIGN SHAREHOLDERS

In these equations, RELDIVSIZE again stands for the dependent variable cash dividends/market

capitalization. It needs to be noted that these ownership dummies are not collectively exhaustive. As

mentioned in the section on descriptive statistics, there are 3 companies whose largest shareholder

does not fit one of the dummy variables used here (see footnote 28) and 2 other companies that are

widely-held as they do not have a shareholder that owns at least 3 percent. Hence, it is statistically

sound to use the dummy variables that are included in equations (9) and (10) as they do not cover all

observations in the sample. The dummies essentially measure the effect of those types of largest

shareholder on the dividend amount, as compared to companies that widely held or whose largest

shareholder does not belong to one of the dummies.

In order to answer the fourth question that is mentioned in the introduction, the equations (9) and (10)

are changed in one aspect, namely that each of the ownership dummy variables is multiplied with the

28 Of the 29 Beteiligungsgesellschaften that are the largest shareholder in the sample, 1 is owned by a bank, 17

are owned by families and private blockholders, 3 are owned by state authorities, 3 are owned by companies, and

for 3 the ultimate owner could not be found. In addition, 4 Beteiligungsgesellschaften are owned by foreign

owners. Finally, the ultimate owners of 2 other Beteiligungsgesellschaften do not belong to either of the

ownership variables.

24 / 42

size of the largest shareholder. In this way, not only the dividend preference of the shareholder type is

measured, but also the power that this shareholder has upon the dividend policy of the company.

Similar to the methodology in the previous paragraph, both equations (9) and (10) are estimated with

the dependent variable cash dividends/market capitalization.

6. Empirical results

The regression results of the four specifications of equations (1) to (4) are displayed in table 7. In all

four regressions, the Age variable is the only one that statistically significantly influences the decision

to pay cash dividends. Its positive coefficient reveals that older companies are more likely to pay

dividends than younger, which is expected. Concerning the ownership variables, none of the four

specifications shows significant results. Hence, the answer to the first of the four main questions is that

the size of the large shareholders of a company has no influence on the decision whether or not to pay

dividends in Germany. This result supports the finding of Goergen et al. (2005) who find that in

Germany the decision on dividend payments is not influenced by the presence of a large shareholder.

______________

Table 7 about here

_____________

In order to test the effect of the size of the large shareholders on the amount of dividend paid, the

regressions (5) to (8) are estimated and the results are displayed in table 8. In table 8, both Age and

Leverage have significant positive effects on the cash dividends/market capitalization ratio. For the

Age variable, this effect is expected. The leverage effect, however, is surprising. A higher total

debt/total assets ratio in this result increases the cash dividends/market capitalization ratio, while

Mancinelli & Ozkan (2006) find a strong negative effect of leverage on the same dependent variable

for Italy. Gugler and Yurtoglu (2003) also find a significant negative influence of the same leverage

ratio on the dividend payout ratio in a German sample. One possible explanation for this result is that

the market capitalization of companies with a higher leverage is in general lower, which in turn

increases the cash dividends/market capitalization ratio. Regarding the ownership variables, none of

the combinations of the variables shows statistically significant results. Also the second main question

has to be answered negatively, as the size of the shareholdings of the large shareholders does not have

a significant influence on the cash dividends/market capitalization ratio.

______________

Table 8 about here

_____________

25 / 42

In order to answer the third question of this study concerning the influence of different types of largest

shareholders on the amount of dividends, the equations (9) and (10) are estimated and the output of

those regressions is displayed in table 9. The specifications (1) and (3) are based on equation (9),

whereas the specifications (2) and (4) are based on equation (10). Regarding the control variables,

significant effects can be found for Age, Size and Leverage and, again, the coefficients are similar to

those of table 8. In table 9 there are significant effects for the ownership variables, especially in the

specifications (1) and (2). Compared with widely-held firms, banks, financial institutions and

companies all have a negative influence on the amount of cash dividends. This result supports Da

Silva et al.’s (2004:140) result who find that bank-controlled firms pay lower dividends than widely-

held firms. They reason that banks have a negative effect on the amount of dividends because bank

control is a substitute for dividends since it serves as a monitoring function. As the literature does not

mention any evidence with regard to financial institutions, one might expect that, since they have

almost the same effect on the dividend amount as banks is that in this sample, they follow similar

principles as banks when forming their preferences on dividends. In addition, in four observations the

financial institutions are the investment trust companies (Kapitalanlagegesellschaften) of large

international or German banks. In these cases it is not surprising that their dividend preference is

almost the same. Hence, the investment trust companies appear to conduct the monitoring activities

that are performed by banks as well. Regarding the effect of companies, this is also negative and has

an amplitude that is similar to the one of banks and financial institutions. A possible reason can again

be found in the monitoring function. If companies are the largest shareholder of other companies, they

mainly regard this not only as a financial investment, but often want to exercise control over the partly

acquired company, as well. Only in this way they are able to profit from synergies or integrate the

partly acquired company into its own strategic framework. By exercising control, they also act as a

monitor and are probably reasonably well informed about the company they invested in. The impact of

families and private blockholders, on dividends is –as expected- negative. The expected positive effect

of Beteiligungsgesellschaften, however, does not appear in these results, as it is insignificant. This,

however, still suggests that the dividend preference of families that hold shares of other firms

indirectly through Beteiligungsgesellschaften is different from the dividend preference of families that

have direct shareholdings. For indirect holdings, the effect on dividends is not significantly negative

anymore, while it is significantly negative for direct family owners. Hence, the preference may have

shifted towards a higher dividend payout, at least in some cases of this sample. However, even if

recent data of 2008 (specifications (3) and (4)) is taken into account, this effect is not very strong.

Finally, the regression on the data from 2008 show that the coefficients of financial institutions and

companies are not significantly negative anymore. This might be an indication for a slightly higher

dividend preference of these two shareholder types and it may reflect the impact of the financial crisis.

In contrast, the financial crisis appears to have lowered the dividend preference of banks even further.

26 / 42

______________

Table 9 about here

_____________

Finally, the fourth question of this paper regarding the effect of the type of the largest shareholder in

interaction with the relative size of its shareholdings will be examined. As described in the

methodology part, the equations (9) and (10) are therefore changed and each dummy variable is

multiplied with the relative size of the largest shareholder. In this way, the power of the largest

shareholder is also taken into account and indicates how strong their influence on the companies’

dividend policy is. The results are displayed in table 10. Among the control variables, Size and

Leverage have a statistically significant positive effect on the amount of dividends. This effect has

been observed and discussed in the previous paragraphs already. Regarding the ownership variables,

there are five significant observations that indicate that the relative size of the shareholdings indeed

matters. First, financial institutions have a positive influence on dividends if the relative size of their

shareholdings is taken into account. The reason for this observation, when compared to table 9, might

be that the coefficients in table 10 tend to be more positive in general. In the cases of banks, financial

institutions, companies, and families and private blockholders, the negative significant coefficients of

table 9 (specifications (1) and (2)) become insignificant and, in case of companies, even positive29

.

Hence, it is not as much a change in the dividend preference of financial institutions as well as a

general positive shift in the coefficients if the variables are formed as interaction variables. Second,

and probably due to the same underlying effect, state authorities exert a slightly positive influence on

the amount of dividends when the relative size of the shareholdings of the largest shareholder is

included. This result supports the reasoning of Gugler (2003) who mentions that state authorities

prefer higher dividends. He reasons that there is no effective monitoring for state authorities and that,

hence, they prefer higher dividends to substitute for the lack of monitoring. The third observation is

that foreign shareholders have a negative influence on dividends in this case. The literature offers no

finding on the dividend preference of foreign shareholders of German firms. However, Lee et al.

(2006) find that foreign institutional ownership in Taiwan shows a positive and significant reaction

after dividend increases. It can be concluded, thus, that foreign shareholders have a preference for

higher dividends. Gugler (2003) arrives at a similar result for an Austrian sample. He finds that foreign

firms have the second highest dividend preference behind state authorities (see table 2). Both of these

studies are, however, in contrast to the negative coefficient in our analysis.

Fourth, in the specifications (3) and (4) families and private blockholders exert a significantly negative

influence on dividends. This observation has been observed and discussed before, too. Regarding the

influence of family-owned Beteiligungsgesellschaften, the specifications (2), and (4) do not show

29 The same effects are observed if we measure the impact on cash dividends to revenues (not reported).

27 / 42

significant results. However, a Wald-test indicates that the coefficients of family-owned

Beteiligungsgesellschaften, and families and private blockholders are significantly different from each

other. This result adds some evidence to the before mentioned interpretation of table 9 that indirect

holdings through family-owned Beteiligungsgesellschaften show indeed a preference for slightly

higher dividends than direct holdings of families and private blockholders. The 2001 change in the tax

system may be responsible for this change.

Finally, regarding the specifications (3) and (4), apart from families there is one other change in the

coefficients when compared to specifications (1) and (2), namely that banks have a significant

negative influence again. This result is comparable to table 9 where the coefficient of banks became

more significant when the 2008 data were used.

______________

Table 10 about here

_____________

7. Conclusion

This study examines the link between large shareholders and dividend policy. In detail, it examines

four different questions in this context. First, it aims to answer whether the relative size of the

shareholdings of large shareholders has an influence on a company’s decision to pay or not to pay cash

dividends. Therefore, the relative size of ownership of the largest, second largest and the remaining

shareholders who possess more than 3 percent each is included in the regression in several

combinations. The results, however, show that none of the ownership variables has a significant

influence on the decision to pay dividends. Earlier findings by Goergen et al. (2005) are supported by

this result. Hence, the decision on cash dividends is not influenced by the relative size of the

shareholdings of large shareholders in Germany.

The second question that is answered in this study asks whether these ownership variables have an

effect on the amount of cash dividends. Again, the results do not show any significant ownership

variables. As with the decision on cash dividends, the relative size of the shareholdings of the large

shareholders does not have any influence on the amount of dividends paid.

In a third step, this study examines the influence of different shareholder types on the amount of cash

dividends, as compared to widely-held firms. This question can be answered with significant results,

though. Four major findings emerge from the analysis. First, banks have a negative influence on the

amount of dividends if they are the largest shareholder. Banks, who have an important position as

supplier of loans and credits in Germany appear to have a strong preference for lower dividends since

they do not need them for monitoring purposes. In addition, low dividends are useful in order to

28 / 42

ensure the debt service and interest payments on granted loans. Second, financial institutions exert a

negative influence on cash dividends if they are the largest shareholder. The reasons therefore might

be similar to those of banks as many financial institutions are either owned by banks or might act

according to the same investment principles. Third, companies are also found to have a negative

influence on dividends. They might also have enough insight into the firms they invested in, so that

dividends are not needed as a substitute for monitoring. Fourth, families and private blockholders are

also found to have a negative influence on cash dividends, which is expected, too.

Finally, the fourth question answered here asks whether the relative size and type of the largest

shareholder has any influence on cash dividends. In that way, the voting power of the shareholder

types is included in the analysis. The results show in general slightly more positive coefficients. As a

consequence, financial institutions have a positive effect on dividends in some specifications. Second,

state authorities are found exert a positive influence on cash dividends. This result confirms Gugler’s

(2003) argumentation that state authorities need dividends as a substitute for monitoring. Third,

foreign shareholders are found to exert a negative influence on cash dividends. This result is surprising

since both, Lee et al (2006) and Gugler (2003) report a positive influence of foreign shareholder for

their Taiwanese and Austrian samples, respectively. Families and private blockholders are still found

to have a negative on cash dividends. Finally, family-owned Beteiligungsgesellschaften still have an

insignificant effect which is, however, significantly different from the negative effect of families and

private blockholders. Hence, the tax change in 2001 may have changed the dividend preference of

families and private blockholders for indirect ownership as compared to direct ownership of

shareholdings.

One of the most interesting and relevant results of this study is the slightly more positive effect of

family-owned Beteiligungsgesellschaften on dividend policy in Germany. Hence, the change in the

corporate tax system in 2001 may have influenced the behavior of certain wealthy private investors

with respect to their dividend preference. Families and private blockholders show a marginally higher

dividend preferences for indirect holdings as for direct holdings. The second main result, namely that

the relative size of the large shareholders has no influence on the dividend decision and amount, is

equally important. This finding confirms Goergen et al.’s (2005) earlier result and contrasts Germany

from Italy and the UK where the largest shareholder is found to decrease (Mancinelli and Ozkan,

2006) or increase (Short et al., 2002) dividends, respectively. Finally, this paper shows a slight

influence of the financial crisis on dividend policy, namely that banks preferred even lower dividends

in 2008 than they did before, while financial institutions and companies did not have a significant

negative influence on dividends any more.

29 / 42

7.1 Suggestions for further research

There are some limitations in the design of the methodology of this study. Most importantly, a gap

exists between the time the financial variables were recorded, i.e. between 2005 and 2008, and the

time the ownership variables were taken from, i.e. May 11, 2009. The reason therefore lies, as already

explained, in the costliness of reliable historic ownership data. It would be ideal to use ownership data

for each of the three years of which dividends are used, i.e. 2005 to 2008, and combine the ownership

data with the relevant financial variables instead of using three-year averages of the latter. In addition,

it might also be useful to base future research on different dependent variables. Instead of using the

cash dividends/market capitalization, the use of total assets could be more appropriate than market

capitalization, since total assets and cash dividends are both book values, while market capitalization

is a market value.

Another, yet more complex field of possible future research is the inclusion of all major European

countries in the sample. Until now, most papers from the literature, this one being no exception,

examine the effects of ownership on dividend policy for only one country. An analysis that compares

the results of the four main questions of this paper for all European countries would broaden the

knowledge about the contemporary effects of shareholders on dividend policy significantly. However,

the quest for reliable and recent ownership data might create an obstacle for such a project.

30 / 42

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33 / 42

Table 1: Summary of literature on the link between dividend policy and ownership

Paper Sample period Country Results

Michaely et al. (1995) 1964 – 1988 USA Dividend omissions do not change the

ownership structure significantly.

Crutchley et al. (1999) 1984 – 1993

(in detail:

1984 -1987 and

1990 – 1993)

USA Institutional ownership and dividend policy

are positively related (1984-1987). However,

dividends are negatively related to

institutional ownership (1990-1993) while

institutional ownership is positively

determined by dividends (1990-1993).

Dhaliwal et al. (1999) 1982 – 1995 USA Dividend initiation leads to increased

institutional ownership.

Short et al. (2002) 1988 – 1992 UK Positive association between dividend

payout policy and institutional ownership.

Gugler and Yurtoglu

(2003)

1992 – 1998 Germany Larger holdings of largest shareholder

reduce dividend payout, while larger

holdings of second largest shareholder

increase dividend payout. Substantial

deviations from one-share-one-vote rule

decrease dividend payout.

Grinstein and Michaely

(2005)

1980 – 1996 USA Institutional investors prefer dividend-paying

over non-dividend-paying stocks, and they

also prefer low dividends to high dividends.

Institutional investors prefer share

repurchases to dividends.

Goergen et al. (2005) 1984 – 1993 Germany Find that the presence of a large shareholder

does not have an influence on the dividend

decision.

Lee et al. (2005) 1995 -1999 Taiwan Institutional investors prefer higher

dividends and payout ratios while they show

an insignificant response to dividend

changes.

Graham et al. (2006) 1990 – 1998 USA Dividend paying firms have a high

percentage and large number of institutional

traders prior to an anticipated dividend

announcement. Institutional investors

increase their stake in firms after the

initiation of dividend payments.

Mancinelli and Ozkan

(2006)

2001 Italy The voting right of the largest shareholder

has a significantly negative impact on

dividend payout.

34 / 42

Table 2: Summary of literature on different shareholder types

Paper Sample size

and period

Shareholder type Country Dividend preference (target

payout ratio in percent)

Gugler and Yurtoglu

(2003)

266

companies.

1992-1998

Families Germany U-shaped relationship between

dividend payout ratio and cash

flow rights (minimum at 40.20)

Gugler (2003) 214 non-

financial

firms.

1991-1999

State Austria 42.90

(33.30 for firms doing R&D)

Banks Austria 34.40

(19.10 for firms doing R&D)

Families Austria 25.00

(13.00 for firms doing R&D)

Foreign firms Austria 34.70

(13.90 for firms doing R&D)

Da Silva et al. (2004) 416 German

industrial and

commercial

companies.

1993

Families Germany 24.22

Companies Germany 18.50

Banks Germany 16.60

Lee et al. (2006) 1,357 trading

days.

1995-1999

State Taiwan Low (below sample median

payout ratio)

Table 3: Averages of financial variables of the largest shareholders Banks Financial

institutions

Companies State

authorities

Beteiligungs-

gesellschaften

Families and

private

blockholders

Foreign

shareholders

Number of

observations

3 35 32 3 29 49 40

Cash dividends paid /

revenues

0.015 0.027 0.025 0.040 0.021 0.023 0.021

Cash dividends paid /

market

capitalization

0.010 0.019 0.016 0.038 0.023 0.014 0.018

Age 51 65.143 51.469 30.667 80 42.122 76.775

Size 1,142,040 7,723,079 1,567,767 31,0289,5

3

9,803,808 700,122 6,818,981

Risk 0.087 0.069 0.065 0.019 0.042 0.109 0.055

Leverage 0.396 0.246 0.179 0.304 0.199 0.204 0.218

35 / 42

Table 4: Relative size of ownership of largest shareholder

Ownership in

percent30

0 to 3

3 to 5 5 to 10 10 to 15 15 to 20 20 to 25 25 to 30 30 to 40 40 to 50 > 50

Number of

companies

2 8 22 14 18 7 17 16 17 35

Table 5: Number of companies that are owned by these types of shareholders (direct and ultimate ownership)

Banks Family and

private

blockholders

Beteiligungs-

gesellschaften

State

authorities

Companies Financial

institutions

Foreign

shareholders

Direct ownership

Largest shareholder 3 49 29 3 32 35 40

2nd largest shareholder 12 24 27 1 20 53 60

All others holding at least

3 percent

14 36 11 1 22 73 74

Ultimate ownership

Largest shareholder 8 74 6 11 23 27 40

2nd largest shareholder 21 47 8 7 16 40 61

All others holding at least

3 percent

28 45 4 3 20 65 73

Table 6: Relative size of average equity ownership of largest shareholders (direct and ultimate ownership)

Banks Family and

private

blockholders

Beteiligungs-

gesellschaften

State

authorities

Companies Financial

institutions

Foreign

shareholders

Direct ownership

Largest shareholder 18.4367 36.2446 35.8663 31.2600 33.3357 14.4463 18.8227

2nd largest shareholder 8.0797 9.4027 12.4106 20.2600 14.8455 8.5599 8.3998

All others holding at least

3 percent

21.7088 19.3645 18.7519 21.1600 21.6371 16.7231 16.8254

Ultimate ownership

Largest shareholder 16.1239 36.5623 36.9227 24.9961 31.1634 14.7877 19.3069

2nd largest shareholder 6.4355 11.8656 12.6319 14.5501 12.7886 8.2344 8.2687

All others holding at least

3 percent

18.6226 18.6303 22.5835 20.9567 23.1468 17.5550 17.0110

30 Starting with the lower figure up to, but not including the higher one.

36 / 42

Table 7: Influence of the relative size of the large shareholders on the decision to pay dividends.

Dependent variable: dummy variable (dividend payer / no dividend payer)

Specification

Independent variable (1) (2) (3) (4)

Intercept -0.214 -0.075 -0.128 -0.099

(0.6290) (0.8885) (0.7393) (0.8493)

Age 0.023b 0.023b 0.012c 0.023b

(0.0204) (0.0222) (0.0094) (0.0195)

Risk -1.249 -1.371 -1.170 -1.201

(0.2560) (0.2364) (0.1463) (0.2267)

Size 0.000 0.000 0.000a 0.000

(0.1637) (0.1709) (0.0632) (0.1659)

Leverage 0.714 0.787 0.510 0.645

(0.4460) (0.4050) (0.4666) (0.4795)

Largest 0.007 0.006 0.005 -

(0.3377) (0.4131) (0.4630)

2nd largest - - -0.002 -

(0.8794)

2nd largest +rest - -0.005 - -

(0.6288)

Largest +2nd largest +rest - - - 0.002

(0.7103)

Rest (dummy) - - -0.060 -

(0.8381)

Number of firms 156 156 156 156

Observations with Dep=0 38 38 38 38

Observations with Dep=1 118 118 118 118

McFadden R-squared 0.269696 0.270906 0.248476 0.265610

The estimations of all four specifications are based on EVIEWS’ maximum likelihood BINARY CHOICE (extreme value) estimation

technique.

In these regressions, the dependent variable is a dummy variable that is equal to one if the average cash dividend paid from 2006 to 2008 is

positive, and zero otherwise. “Age” contains the age of the company in years. “Risk” contains the standard deviation of the EBIT over the

years 2005-2007. “Size” contains the average 2005 to 2007 market capitalization. “Leverage” contains the 2005 to 2007 average of the

ratio total debt/total assets. The variable “Largest” contains the size of the shareholdings of the largest shareholder in percent of the

shareholders’ equity. The variable “2nd largest” contains the size of the shareholdings of the second largest shareholder in percent of the

shareholders’ equity. The variable “2nd largest + rest” contains the size of the shareholdings, in percent of the shareholders’ equity, of all

shareholders that own at least 3 percent of the shareholders’ equity each, excluding the largest shareholder. The variable “Largest + 2nd

largest + rest” contains the size of the shareholdings of all shareholders that own at least 3 percent of the shareholders’ equity, in percent of

the shareholders’ equity. The variable “Rest (dummy)” is a dummy variable which equals 1 when there is at least one third-largest

shareholder that owns at least 3 percent of the shareholders’ equity, and zero otherwise.

The letters a, b, and c indicate statistical significance at the 10 percent, 5 percent, and 1 percent level, respectively. The numbers in

parentheses are the p-values of the coefficients.

37 / 42

Table 8: Tobit regression results: Influence of the relative size of the large shareholders on the cash

dividends/market capitalization ratio.

Dependent variable: cash dividends/market capitalization

Specification

Independent variable (1) (2) (3) (4)

Intercept 0.008a 0.012b 0.010a 0.011b

(0.0818) (0.0261) (0.0529) (0.0280)

Age 0.000b 0.000b 0.000b 0.000b

(0.0221) (0.0352) (0.0258) (0.0280)

Risk -0.033 -0.037 -0.034 -0.035

(0.1409) (0.1408) (0.1451) (0.1440)

Size 0.000c 0.000c 0.000c 0.000c

(0.0016) (0.0039) (0.0015) (0.0053)

Leverage 0.018a 0.020b 0.019a 0.019a

(0.0645) (0.0407) (0.0536) (0.0560)

Largest 0.000 -0.000 -0.000 -

(0.9356) (0.8731) (0.9959)

2nd largest - - -0.000 -

(0.6648)

2nd largest +Rest - -0.000 - -

(0.2133)

Largest +2nd largest +Rest - - - -0.000

(0.3625)

Rest (dummy) - - -0.002 -

(0.5625)

Number of firms 156 156 156 156

Left censored observations 39 39 39 39

Log likelihood 268.1037 269.0791 268.3847 268.4803

In these regressions, the dependent variable is computed as the average 2006-2008 cash dividends divided by the average 2005-2007 market

capitalization. “Age” contains the age of the company in years. “Risk” contains the standard deviation of the EBIT over the years 2005-

2007. “Size” contains the average 2005 to 2007 market capitalization. “Leverage” contains the 2005 to 2007 average of the ratio total

debt/total assets. The variable “Largest” contains the relative size of the shareholdings of the largest shareholder in percent of the

shareholders’ equity. The variable “2nd largest” contains the size of the shareholdings of the second largest shareholder in percent of the

shareholders’ equity. The variable “2nd largest + rest” contains the relative size of the shareholdings, in percent of the shareholders’ equity,

of all shareholders that own at least 3 percent of the shareholders’ equity each, excluding the largest shareholder. The variable “Largest +

2nd largest + rest” contains the relative size of the shareholdings of all shareholders that own at least 3 percent of the shareholders’ equity,

in percent of the shareholders’ equity. The variable “Rest (dummy)” is a dummy variable which equals 1 when there is at least one third-

largest shareholder that owns at least 3 percent of the shareholders’ equity, and zero otherwise.

The letters a, b, and c indicate statistical significance at the 10 percent, 5 percent, and 1 percent levels, respectively. The numbers in

parentheses are the p-values of the coefficients.

38 / 42

Table 9: Tobit regression results: Influence of the type of the largest shareholder on the cash dividends/market

capitalization ratio.

Whole period 2008 only

Independent variable (1) (2) (3) (4)

Intercept 0.023c 0.023c 0.023c 0.023c

(0.0003) (0.0003) (0.0002) (0.0002)

Age 0.000b 0.000b 0.000c 0.000c

(0.0266) (0.0272) (0.0071) (0.0074)

Risk -0.030 -0.030 -0.022 -0.022

(0.1679) (0.1672) (0.3338) (0.3320)

Size 0.000a 0.000b 0.000 0.000

(0.0514) (0.0461) (0.7700) (0.7240)

Leverage 0.017a 0.016a 0.011 0.011

(0.0964) (0.0969) (0.3909) (0.3926)

Banks -0.019c -0.018c -0.027c -0.027c

(0.0018) (0.0018) (0.0079) (0.0087)

Financial institutions -0.011a -0.011a -0.008 -0.008

(0.0805) (0.0842) (0.2516) (0.2706)

Companies -0.013b -0.013b -0.009 -0.009

(0.0365) (0.0375) (0.1543) (0.1608)

State authorities 0.002 0.002 0.011 0.010

(0.7667) (0.7726) (0.3255) (0.3274)

Beteiligungsgesellschaften -0.009 - -0.007 -

(0.1229) (0.1928)

Beteiligungsges. (family-owned) - -0.010 - -0.009

(0.1385) (0.1491)

Beteiligungsges. (not family-owned) - -0.008 - -0.004

(0.2189) (0.5355)

Families and private blockholders -0.018c -0.018c -0.020c -0.020c

(0.0045) (0.0045) (0.0010) (0.0011)

Foreign shareholders -0.002 -0.003 -0.003 -0.003

(0.5302) (0.5091) (0.6314) (0.5892)

Number of firms 156 156 156 156

Left censored observations 39 39 39 39

Log likelihood 272.2875 272.3349 227.8854 228.0493

In the specifications (1)- (4) the dependent variable is computed as the average 2006-2008 cash dividends divided by the average 2005-2007

market capitalization. “Age” contains the age of the company in years. “Risk” contains the standard deviation of the EBIT over the years

2005-2007. “Size” contains the average 2005 to 2007 market capitalization. “Leverage” contains the 2005 to 2007 average of the ratio total

debt/total assets. In the specifications (5) and (6), the dependent variable is computed as 2008 cash dividends divided by 2007 market

capitalization, “Size” contains the 2007 market capitalization, and “Leverage” contains the 2007 ratio of total debt/total assets. The

variables “Bank”, “Financial institutions”, “Companies”, “State authorities”, “Beteiligungsgesellschaften”, “Beteiligungsgesellschaften

(family-owned)”, “Beteiligungsgesellschaften (not family-owned)”, and “Families and private blockholders” are dummy variables that are

equal to one if the type of the largest shareholder is equal to the name of the dummy variable. The variable “Foreign shareholders” is a

dummy variable that takes the value of 1 if the largest shareholder, irrespective of the type it may be, is of foreign origin. The dummy

variable “Beteiligungsgesellschaften (family-owned)” is equal to 1 if the ultimate owner of the Beteiligungsgesellschaft is a family or a

private blockholder. The dummy variable “Beteiligungsgesellschaften (not family-owned)” is equal to 1 if the ultimate owner of the

Beteiligungsgesellschaft is neither family nor a private blockholder.

The letters a, b, and c indicate statistical significance at the 10 percent, 5 percent, and 1 percent levels, respectively. The numbers in

parentheses are the p-values of the coefficients.

39 / 42

Table 10: Tobit regression results: Influence of the type and relative size of the largest shareholder on the cash

dividends/market capitalization ratio.

Whole period 2008 only

Independent variable (1) (2) (3) (4)

Intercept 0.010b 0.010b 0.014b 0.014b

(0.0307) (0.0303) (0.0223) (0.0223)

Age 0.000b 0.000b 0.000b 0.000b

(0.0296) (0.0281) (0.0112) (0.0112)

Risk -0.030 -0.030 -0.023 -0.023

(0.1624) (0.1629) (0.2846) (0.2846)

Size 0.000b 0.000b 0.000 0.000

(0.0105) (0.0110) (0.5142) (0.5142)

Leverage 0.017a 0.017a 0.013 0.013

(0.0827) (0.0796) (0.3306) (0.3313)

Banks * Largest -0.000 -0.000 -0.001c -0.001c

(0.1337) (0.1316) (0.0005) (0.0006)

Financial institutions * Largest -0.000 -0.000 -0.000 -0.000

(0.5527) (0.5299) (0.4207) (0.4222)

Companies * Largest 0.000 0.000 0.000 0.000

(0.7534) (0.7722) (0.8952) (0.8952)

State authorities * Largest 0.000b 0.000b 0.001a 0.001a

(0.0395) (0.0406) (0.0663) (0.0664)

Beteiligungsgesellschaften * Largest 0.000 - 0.000 -

(0.4035) (0.6360)

Beteiligungsges. (family-owned) * Largest - 0.000

(0.3829)

- 0.000

(0.6817)

Beteiligungsges. (not family-owned) * Largest - 0.000

(0.7633)

- 0.000

(0.7481)

Families and private blockholders * Largest -0.000 -0.000 -0.000b -0.000b

(0.1803) (0.1760) (0.0180) (0.0181)

Foreign shareholders * Largest -0.000 -0.000 0.000 0.000

(0.4383) (0.4660) (0.9648) (0.9653)

Number of firms 156 156 156 156

Left censored observations 39 39 39 39

Log likelihood 271.5368 271.6502 228.6867 228.6867

In the specifications (1) –(4) the dependent variable is computed as the average 2006-2008 cash dividends divided by the average 2005-2007

market capitalization. “Age” contains the age of the company in years. “Risk” contains the standard deviation of the EBIT over the years

2005-2007 “Size” contains the average 2005 to 2007 market capitalization. “Leverage” contains the 2005 to 2007 average of the ratio total

debt/total assets. In the specifications (5) and (6), the dependent variable is computed as 2008 cash dividends divided by 2007 market

capitalization, “Size” contains the 2007 market capitalization, and “Leverage” contains the 2007 ratio of total debt/total assets. The

variables “Bank”, “Financial institutions”, “Companies”, “State authorities”, “Beteiligungsgesellschaften”, “Beteiligungsgesellschaften

(family-owned)”, “Beteiligungsgesellschaften (not family-owned)”, and “Families and private blockholders” are formed by the product two

variables. The first variable is the relative size of the largest shareholder. The second variables is a dummy variable that is equal to one if

the type of the largest shareholder is equal to the name of the dummy variable, namely “Bank”, “Financial institutions”, “Companies”,

“State authorities”, “Beteiligungsgesellschaften”, “Beteiligungsgesellschaften (family-owned)”, “Beteiligungsgesellschaften (not family-

owned)”, “Families and private blockholders”, and “Foreign shareholders”. The variable “Foreign shareholders” has the just described

value whenever the largest shareholder is of foreign origin, irrespective of its type. The variable “Beteiligungsgesellschaften (family-

owned)” contains only those Beteiligungsgesellschaften whose ultimate owner is a family or a private blockholder. The variable

“Beteiligungsgesellschaften (not family-owned)” contains only those Beteiligungsgesellschaften whose ultimate owner is not a family or a

private blockholder.

The letters a, b, and c indicate statistical significance at the 10 percent, 5 percent, and 1 percent levels, respectively. The numbers in

parentheses are the p-values of the coefficients.

40 / 42

Appendix A Detailed description of variables

Variable Formula Components Source

Cash dividends/revenues Average of 2006-2008

cash dividends divided by

average of 2005-2007

revenues

Cash dividends of the

years 2006 to 2008,

revenues of the years

2005-2007

DATASTREAM:

“WC04551 Cash

dividends paid – total”

and “WC01001 Net sales

or revenues”

Cash dividends/market

capitalization

Average of 2006-2008

cash dividends divided by

average of 2005-2007

market capitalization

Cash dividends of the

years 2006 to 2008,

market capitalization of

the years 2005-2007

DATASTREAM:

“WC04551 Cash

dividends paid – total”

and “WC08001 Market

capitalization”

Age - - Hand-collected from

company websites. In

some cases backed by

AMADEUS (“date of

incorporation”).

Risk Standard deviation of

2005-2007 EBIT

EBIT of the years 2005 to

2007

DATASTREAM:

“WC18191 Earnings

before interest and taxes

(EBIT)”. And hand-

collected correlations.

Size Average of 2005-2007

market capitalization

Market capitalization of

the years 2005 to 2007

DATASTREAM:

“WC08001 Market

capitalization”

Leverage Average of 2005-2007

total debt divided by

average of 2005-2007

total assets

Total debt and total assets

of years 2005-2007

DATASTREAM:

“WC03255 Total debt”

and “WC02999 Total

assets”

Largest Relative size of the

shareholdings of the

largest shareholder, if it

exceeds 3 percent. In

percent of shareholders’

equity

- Commerzbank’s online

service “Wer gehört zu

wem?”; website of the

Bundesamt für

Finanzdienstleistungs-

aufsicht (BaFin;

http://ww2.bafin.de/

database/AnteileInfo/).

2nd

largest Relative size of the

shareholdings of the

second largest

shareholder, if it exceeds

3 percent. In percent of

shareholders’ equity

- ibidem

Rest Relative size of the

shareholdings of all

shareholders that own at

least 3 percent of a

company, excluding the

largest and the second

largest. In percent of

shareholders’ equity

- ibidem

Rest (dummy) Dummy variable that

equals 1 if there is at least

one third largest

shareholder that owns

more than 3 percent of a

company.

- ibidem

Banks Dummy variable that

equals 1 if the largest

shareholder of a company

- ibidem

41 / 42

is a bank.

Financial institutions Dummy variable that

equals 1 if the largest

shareholder of a company

is a financial institution.

- ibidem

Companies Dummy variable that

equals 1 if the largest

shareholder of a company

is a company.

- ibidem

State authorities Dummy variable that

equals 1 if the largest

shareholder of a company

is a state authority.

- ibidem

Beteiligungsgesellschaften Dummy variable that

equals 1 if the largest

shareholder of a company

is a

Beteiligungsgesellschaft.

- ibidem

Beteiligungsges. (family-

owned)

Dummy variable that

equals 1 if the largest

shareholder of a company

is a

Beteiligungsgesellschaft

whose ultimate owner is

a family or another

private owner

- ibidem.

In addition: Hoppenstedt

Konzernstrukturen

online,

http://www.hoppenstedt-

konzernstrukturen.de/

nut_basis.htm

Beteiligungsges. (not

family-owned)

Dummy variable that

equals 1 if the largest

shareholder of a company

is a

Beteiligungsgesellschaft -

whose ultimate owner is

not a family or another

private owner

- ibidem.

In addition: Hoppenstedt

Konzernstrukturen

online,

http://www.hoppenstedt-

konzernstrukturen.de/

nut_basis.htm

Families and private

blockholders

Dummy variable that

equals 1 if the largest

shareholder of a company

is a family or another

private blockholder.

- ibidem

42 / 42

Appendix B Details of the 2001 change of the tax code

Corporate taxes Private taxes

before the

2001 change

From 1999 to 2000, if a company received

dividends, which increased their profit, those

dividends were fully liable to tax. The

amount of taxes that had to be paid differed,

though. If the company kept the profit inside

the company, this was taxed at a different tax

rate than those profits that were paid out. The

tax rates are displayed in the following table:

1977 -

1990

1991 -

1993

1994 -

1998

1999 -

2000

Not

paid out

56 50 45 40

Paid

out

36 36 30 30

after the 2001

change

With the tax reform of 2001, this changed. If

a company received dividends from another

company, then those dividends, even if they

increased profit, were not liable to tax at all.

In early 2004 this was slightly changed so

that from then on only 5 percent of the

dividends were liable to taxation. From those

5 percent the company had to pay 25 percent

as taxes (15 percent since 2008), irrespective

of whether the profit was kept in the firm or

paid out to its owners.

During the same period, the tax burden for

the private persons changed slowly and

moderately from 1999 to 2009. The German

income tax system (Einkommensteuertarif) is

a progressive one and has three main features:

First, there is a certain amount of income that

is tax-free. This rose from approx. EUR 6,681

in 1999 to EUR 7,834 in 2009. From then on,

every additional Euro is liable to taxation,

starting at a rate of 23.9 percent in 1999. In

2009, this rate is 11.0 percent. The marginal

tax rate then rises progressively up to a

maximum rate. In 1999, this rate was 53

percent and had to be paid for each Euro

exceeding an annual income of EUR 61,376.

In 2009, this rate is 42 percent and had to be

paid for each Euro exceeding an annual

income of EUR 52,552. In addition, income

exceeding EUR 250,001 is taxed at a rate of

45% since 2007.

Until December 2008 the German tax system

had another specialty when it comes to

dividends. Private taxpayers only had to pay

taxes over the half amount of dividends (this

is the so-called Halbeinkünfteverfahren). That

means, that the other half is effectively tax-

free. Since early 2009 the taxation of

dividends has changed completely. The

Halbeinkünfteverfahren is not valid any more

and dividends are also excluded from the

above described Einkommensteuertarif. The

new regulations state that the full dividend

amount is taxed with 25 percent, irrespective

of the overall income of the taxpayer.