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THE DIFFERENCES IN THE PAYOUT POLICY OF FAMILY FIRMS …
Transcript of THE DIFFERENCES IN THE PAYOUT POLICY OF FAMILY FIRMS …
THE DIFFERENCES IN THE PAYOUT POLICY OF FAMILY FIRMS AND NON-
FAMILY FIRMS
MANON FRISSEN
636219
MSc Finance
Supervisor : Prof. Dr. L.D.R. Renneboog
-2017-
THE DIFFERENCES IN THE PAYOUT POLICY OF FAMILY FIRMS AND NON-
FAMILY FIRMS
Master thesis Department Finance
MANON FRISSEN
636219
MSc Finance
Supervisor : Prof. Dr. L.D.R. Renneboog
Second reader: Prof. Dr. P.C. de Goeij
Date of completion: 04-08-2017
- 2017 –
This is the thesis “The differences in the payout policy of family firms and non-family firms”. It
has been written to fulfill the graduation requirements of the MSc Finance program at Tilburg
University. This thesis has been written under supervision of professor Renneboog.
Abstract
This study will investigate whether the payout policy of family firms differ from the payout
policy of non-family firms and if there are differences in the payout policy within family
firms. Two different theories can be used to explain differences in setting the payout policy:
tax clientele theory and agency problem theory. Different tax rates on dividends and capital
gains can lead to different preferences to distribute cash to other shareholders. Agency
problems consist of conflicts of interests between small and large shareholders and
expropriation of minority shareholders which can be different in family firms and non-family
firms. It is found that families, individuals and corporations prefer share repurchases over
dividends because of a higher dividend tax rate compared to the capital gains tax rate while it
is likely that pension funds prefer dividends over share repurchases. Furthermore, family
firms pay less dividends in countries with stronger shareholder protection because the
institutional environment acts as an alternative corporate governance mechanism. Besides, it
is found that family firms paid lower dividends than non-family firms during the 2008
financial crisis.
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I. INTRODUCTION
A major part of the publicly traded firms in the world are controlled by a family (La Porta et
al. 1999, Claessens et al. 2000, European Corporate Governance Network 2001, Faccio and
Lang 2002). This group of firms consists of family firms in which family members play an
active role in the management of the firm, but also of family firms in which family members
are not part of the management of the firm.
The payout policy of family firms can be affected by two theories. On the one hand, agency
problems can be essential in family firms which cause conflicts of interests between small and
large shareholders (Maury, 2006; Villalonga and Amit, 2006). This problem can be reduced
by paying dividends because it will reduce the free cash flows and force management to enter
the external capital market which leads to external monitoring by the market (Rozeff, 1982;
Easterbrook, 1984; Jensen, 1986). On the other hand, the tax clientele theory can also play a
role in setting the payout policy. While the tax rates on dividends are higher for families and
individuals compared to the tax rates on capital gains, the reverse is often the case for
corporations and pension funds.
This study will investigate whether the payout policy of family firms differs from the payout
policy of non-family firms. It will also be researched if there are differences in the payout
policy within family firms. A distinction will be made between family firms actively managed
by family members and family firms not actively managed by family members. Besides, it
will be established if the institutional environment affects the payout policy of family firms.
This study will focus on listed firms located in the United Kingdom, Germany, and France.
Different tax rates have to be paid on dividends and capital gains. Mostly, the dividend tax
rates for families and individuals are higher than the tax rates on capital gains. Therefore, it is
expected that families and individuals prefer share repurchases over dividends. This
prediction is tested using a regression model based on families and individuals (1.037
observations). A significant negative relationship between the taxation of families and
individuals and their payout ratio is found. This confirmed the prediction that families and
individuals prefer share repurchases over dividends. On the contrary, dividend tax rates for
corporations and pension funds are often lower than the tax rates on capital gains.
Consequently, it is expected that corporations and pension funds prefer dividends over share
repurchases. Both predictions are tested using a regression model and the taxation of
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corporations is significantly negatively related to their payout ratio while the taxation of
pension funds is insignificantly positively related to their payout ratio.
As already mentioned earlier, there are family firms actively managed by family members and
family firms not actively managed by family members. This can affect the payout policy of
the firm in a different way. In prior research it is found that family control can act as an
alternative corporate governance mechanism since owner families often hold large stakes in
their companies. This will lead to an efficient monitoring mechanism which can reduce the
free cash flow agency problem (Hu, Wang, and Zhang, 2007). Therefore, dividend payments
are less needed to reduce the agency problems within family firms actively managed by
family members and consequently, it is expected that family firms actively managed by
family members pay lower dividends than non-family firms. This prediction is tested by a
regression model based on a sample with all family firms actively managed by family
members and non-family firms (5.069 observations). The results of this regression show an
insignificant relation between the firm type and its dividend payout ratio.
However, in family firms not actively managed by family members agency problems become
an issue. It is possible that firm resources are extracted from the firm due to a lack of good
monitoring (Anderson, Dure and Reeb, 2009). A solution to this problem could be to pay
dividends as this will reduce free cash flows available to invest in poor investments or for
gaining private benefits. Therefore, it is expected that family firms actively managed by
family members pay lower dividends than family firms not actively managed by family
members. This prediction is tested using a regression model based on a sample containing all
family firms (1.037 observations). An insignificant positive relation is found between the
management of family firms and the dividend payout ratio.
It is also expected that family firms not actively managed by family members prefer dividends
over share repurchases as an instrument to distribute cash because dividends are sticky and
are rarely changed by firms (Lintner, 1956). This relation is tested using a regression model
based on a sample containing all family firms (1.037 observations) and tend to be
insignificantly negatively.
Another important governance mechanism is the institutional environment (Xia and Fang,
2005). The organization of corporate rights are regulated by the institutional environment
which also regulates corporate behavior including payout policy. A good institutional
environment can reduce agency problems because this will imply a good monitoring
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mechanism and also tunneling behavior will be reduced (Wei et al., 2011). Therefore, the
institutional environment will act as an alternative corporate governance mechanism and it is
expected that dividend payments by family firms are lower in countries with strong
shareholder protection. This prediction is tested by conducting a regression based on a sample
with all family firms (1.074 observations). It is found that shareholder protection is
significantly negatively related to the dividend payout ratio. Consequently, it can be
concluded that the dividend payout ratio of family firms is lower in countries with stronger
shareholder protection.
Last, it is researched if the dividend payout differed between family firms and non-family
firms during the 2008 financial crisis. Generally, a controlling family is undiversified and has
invested al its wealth in its own firm. During a crisis it is possible that the firm loses a lot of
money which can be dangerous for the family’s empire. Therefore, in family firms it is more
likely that expropriation of minority shareholders takes place to preserve family’s benefits
(Lins et al., 2013). This will lead to less resources available to pay out as dividends to other
shareholders. Consequently, it is expected that family firms paid lower dividends than non-
family firms during the 2008 financial crisis. This prediction is tested using a regression
model based on a sample containing all observations of the 2008 financial crisis (597
observations). The results of this regression show a significant positive relationship between
the firm type and the dividend payout ratio. This implies that family firms paid lower
dividends than non-family firms during the 2008 financial crisis.
This study contributes to the literature by broaden it with more research based on family
firms. There is relatively little literature for family firms compared to literature about non-
family firms. Also, it should be possible to use the results of this study to improve or change
the corporate governance mechanism of a firm. It could help to reduce agency problems.
This paper proceeds as follows. Section II reviews the relevant literature which leads to the
development of the hypotheses. Section III describes the research method, sample
construction and data collection. Section IV provides the empirical results of the study and the
conclusion can be found in section V.
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II. LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT
Generally, firms are controlled by their founders, or by the family and heirs of the founder.
Not only a big part of privately held firms is owned by a family, also publicly traded firms are
often controlled by a family. The majority of publicly traded firms in Western Europe, South
and East Asia, Middle East, Latin America, and Africa are controlled by a family (La Porta et
al. 1999, Claessens et al. 2000, European Corporate Governance Network 2001, Faccio and
Lang 2002). But also some of the largest publicly traded firms of the United States and the
U.K, for example Wal-Mart Stores and Ford Motor, are family controlled.
In literature, family firms are defined in several ways. For this research the definition
proposed by Rosenblatt et al. (1985) will be used. They define family firms as “any business
where the majority is controlled by the family, decisions about management are influenced by
the family, and two or more family members are employed and actively participate in the
management of the firm”. There are also family firms in which the family is the owner of the
firm but the family does not hold positions in (top) management (Hu, Wang, and Zhang,
2007). Two different theories will affect the payout policy of the family firm. First, agency
problems can arise which will influence the firm’s payout policy. In family firms conflicts of
interests between small and large shareholders can be an essential agency problem (Maury,
2006; Villalonga and Amit, 2006). To reduce the minority shareholders’ concern of
expropriation of their wealth, owner families can use their payout policy as a governance
mechanism. Second, the tax clientele theory implies different payout policies due to different
tax rates on dividends and capital gains.
Agency problems and payout policy
When researching the relationship between corporate governance and payout policies, mostly
it is focused on two types of agency problems. The first type of agency problems implies that
there is no difference between the interests of management and shareholders. This is also one
of the assumptions made by Miller and Modigliani (1961) in their proposition of dividend
irrelevance. However, because of information asymmetry and the impossibility of complete
contracting inevitably conflicts of interest between shareholders (principal) and management
(the agent) will occur (Jensen and Meckling, 1976). By paying cash dividends, free cash flows
will be reduced and therefore, management has to enter the external capital market which
exposes them to external monitoring by the market. Consequently, cash dividends reduce the
first type of agency problems (Rozeff, 1982; Easterbrook, 1984; Jensen, 1986).
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The second type of agency problems consists of the expropriation by large shareholders of
minority shareholders (La Porta et al., 1999; Claessens et al., 2000; Faccio and Lang, 2002;
Holderness, 2009). According to Claessens et al. (1999), control of a firm by large
shareholders can lead to expropriation of minority shareholders due to conflicts of interest
between large and minority shareholders. These conflicts of interest can consist of outright
expropriation, which implies that large/controlling shareholders do not pay out dividends, or
they transfer profits to companies they also control to enrich themselves. It can also include
de facto expropriation which means that controlling shareholders strive for nonprofit-
maximizing objectives or taking nonprofit-maximizing projects. When minority shareholders
are protected by strong protection laws, companies will be encouraged to pay cash dividends
to reduce expropriation by large shareholders. By doing this, the interests of the investors will
be protected (La Porta et al., 2000; Faccio et al., 2001; Kalcheva and Lins, 2007; Brockman
and Unlu, 2009).
Tax Clientele Theory and payout policy
According to Miller and Modigliani (1961), a firm’s dividend policy should not matter in a
perfect world. However, due to a difference between tax rates on dividends and tax rates on
capital gains, the dividend policy does matter to investors. On top of that, in some countries
institutions have to pay lower dividend tax rates than individuals (Hu, Wang, and Zhang,
2007). This is due to the fact that dividend payments of institutions and corporations are
dividend tax exempt at different degrees. Consequently, individuals tend to prefer capital
gains over dividends while institutions should prefer dividends over capital gains. The tax
clientele theory is often tested by observing portfolio holdings of investors or their reactions
to a changing dividend policy. It is found that stockholders who have to pay high tax rates
(because they are in higher tax brackets) prefer capital gains over dividends relative to
stockholders who have to pay lower taxes (Elton and Gruber, 1970). Besides, low-income and
older investors prefer dividends over capital gains since they need the money and they are
also in lower tax brackets (Graham and Kumar, 2006).
It is also studied whether important decision makers and prominent large shareholders can
affect payout policy. In general, the personal income taxes of large shareholders can affect the
payout policy. According to Brav et al. (2007), dividend tax rates are taken into account when
setting the payout policy of a firm.
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Family firms and the payout policy - Taxation
As mentioned earlier, family firms are mainly controlled by a family and there are also family
members who actively participate in the management of the firm. Consequently, the family
members can affect the firm’s payout policy by using their effective control, direct
management and voting power (Hu, Wang, and Zhang, 2007). Therefore, the payout policy is
influenced by the preferences of the founding family.
Over the last decades, the taxation regulation for dividends and share repurchases has changed
substantially. Take for example the UK. Individual investors need to pay income tax on their
dividend income. These dividends are also already taxed at the corporate level as they are part
of the profit. Consequently, this will lead to double taxation (Geiler and Renneboog, 2014).
Therefore, an imputation system was introduced in 1973, which takes into account a so-called
imputation tax credit (Bell and Jenkinson, 2002). This imputation tax credit permits
shareholders to deduct taxes which are already paid at the company level.
Capital gains tax has to be paid on the sale of shares, and applies to both individuals and
corporations. For capital gains, the imputation tax credit is the amount of the distribution
element, which can be calculated by deducting the book value of paid-in capital from the
market value of the repurchases shares. So, the imputation tax system will be used to avoid
double taxation. Geiler and Renneboog (2014) also found that changing tax regulations can
change the choice to pay dividends or repurchase shares and this can be different for different
types of shareholders, such as pension funds or corporations. They concluded that individuals
always preferred share repurchases over dividends, while corporations preferred dividends
over share repurchases. Pension funds changed from a dividend preference to a neutral choice
between dividends and share repurchases.
Mostly, the founder or founder’s descendants are individuals, who are subject to higher
dividend tax rates than large institutional shareholders. Therefore, it is expected that families
and individuals prefer share repurchases over dividends with respect to the tax regulation. The
non-family firms will be split into pension funds and corporations. It is expected that pension
funds and corporations prefer dividends over share repurchases. Consequently, it is expected
that families and individuals prefer share repurchases over dividends and contrarily,
corporations and pension funds prefer dividends over share repurchases.
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H1: Families and individuals prefer share repurchases over dividends, while corporations
and pension funds prefer dividends over share repurchases, because the dividend tax relative
to the capital gains tax is higher for families and individuals than for corporations and
pension funds.
Family firms and the payout policy - Agency problems
According to the literature, when the firm is controlled by a family, agency problems can
occur between the controlling family and minority shareholders under specific circumstances
(Anderson & Reeb, 2003; Mishra, 2011; Villalonga and Amit, 2006, 2010; Wong, Chang and
Chen, 2010). Based on the agency theory, prior research accepts the view that a firm’s
ownership structure can affect companies’ payout policy (Barclay, Holderness, and Sheehan,
2009; Farinha, 2003; Short, Zhang, and Keasey, 2002). One of the agency problems that could
occur is the expropriation of minority investors’ wealth by controlling and powerful
shareholders (Cronqvist and Nilsson, 2003; Shleifer and Vishny, 1997). These conflicts of
interests between small and large shareholders are especially important within family firms
(Maury, 2006; Villalonga and Amit, 2006). To alleviate the anxiety about the expropriation of
other shareholders’ wealth, owner families can use dividends. This implies that family firms
can use their payout policy as a governance mechanism. However, in prior research both
positive as well as negative relationships between family control and dividends are found due
to both potential benefits and costs of family control (Anderson and Reeb, 2003; Miller et al.,
2008).
According to Chen et al. (2010), family ownership can lead to reputation cost concerns of
controlling families, which consequently discourage them from the expropriation of minority
shareholders’ wealth. In this case, family ownership is used as an alternative corporate
governance mechanism to the payout policy. Also, the free cash flow agency problem
(Jensen, 1986) should be lower in family firms and therefore, they do not need to pay out
dividends. This because owner families hold large stakes in their companies, which already
serve as an efficient monitoring mechanism. Consequently, this prevents managers to use
internal funds for unprofitable projects. So, when the founder or founder’s descendants also
actively participate in the firm’s management (holding top positions), there should be no
conflict between the family and top management (Hu, Wang, and Zhang, 2007).
Consequently, it is expected that family firms actively managed by the founding family pay
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lower dividends than non-family firms because family control is used as an alternative
corporate governance mechanism.
However, there are also family firms in which family members do not actively participate in
the management. In those firms the effective management is transferred to managers who are
not part of the family. When this is the case, controlling agency conflicts become an issue
(Hu, Wang, and Zhang, 2007).
Family control can imply an entrenchment effect (Anderson, Dure and Reeb, 2009). This
entrenchment effect implies that family owners have strong incentives to exploit firm opacity,
which makes it easier for them to extract firm resources at the expense of the minority
shareholders. Also, due to a lack of good monitoring, family shareholders can use the firm’s
resources more easily which increases agency costs. Entrenchment can occur because of
transaction costs in shareholder activism and the corporate control market. Besides, managers
can make manager-specific investments to entrench themselves (Shleifer and Vishny, 1989)
and they can strategically improve their voting rights (Stulz, 1988). In the United States, a
positive relationship between the dividend payout level and factors that increase executive
entrenchment is found (Hu and Kamar, 2004). This because dividends reduce cash flows
available for poor investments or for retrieving private benefits. Consequently, managers will
be forced to enter the external financing market which leads to additional monitoring of the
managers (John and Knyazeva, 2006).
Also, dividends can be used as a reward for minority shareholders and to reduce insider
expropriation (Faccio, Land and Young, 2001; Setia-Atmaja, Tanewski and Skully, 2009). In
addition, a positive relationship between family ownership and dividends based on corporate
governance literature suggests that internal control mechanisms should complement each
other, particularly in less protective institutional environments (Miguel et al., 2005).
Consequently, when there is a lack of strong legal protection, family firms can use dividend
payments to create a reputation for good treatment of minority shareholders (Yoshikawa and
Rasheed, 2009). On top of that, it can be suggested that family CEOs can also improve their
wealth by capital gains. However, then they have to sell their shareholdings which will reduce
their control over the firm. Therefore, family owners prefer dividends over capital gains.
Taken altogether, family members can force management to pay out excess cash as dividends
to minimize agency costs. It is expected that family firms which are not actively managed by
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family members pay higher dividends than family firms which are actively managed by
family members.
H2: Family firms actively managed by family members pay lower dividends than non-family
firms and family firms not actively managed by family members, because non-family firms use
dividends as an alternative corporate governance mechanism while family control is used as
an alternative corporate governance mechanism within family firms actively managed by
family members.
Firms can use both dividends and share repurchases to distribute cash. When the family firm
is not actively managed by family members, dividends tend to be a better instrument to
distribute cash than share repurchases. This because dividends are sticky and firms seldomly
change dividend payments (Lintner, 1956). This can be explained by the signaling theory of
dividends. Dividends can be signals to the market about a firm’s cash flow prospects for the
future. For example, when the firm increases its dividends they commit themselves to pay
these dividends for a long period. Investors perceive this as a positive signal of the firm’s
capacity to generate large, positive cash flows in the long run since the firm is willing to make
the commitment to pay dividends in the long run. In contrast, dividend cuts are perceived as a
negative signal of the firm’s future cash flows. Therefore, managers do not want to cut
dividends once they are set. In contrast, share repurchases are a one-time event and therefore,
provide managers with more flexibility (Jagannathan, Stephens, and Weisbach, 2000). Thus,
dividends tend to be an instrument which works for a longer period to distribute cash
compared to share repurchases. Therefore, it is expected that family firms which are not
actively managed by family members prefer dividends over share repurchases.
H3: Family firms not actively managed by family members prefer dividends over share
repurchases (contrarily to family firms actively managed by family members), because
dividends are a sticky instrument to distribute cash.
Legal protection and payout policy
According to Xia and Fang (2005), the institutional environment is an important corporate
governance mechanism. The institutional environment regulates the organization of corporate
control rights and therefore, also regulates corporate behavior including payout policy. La
Porta et al. (2000) conclude that cash dividends are higher when the legal protection of
investors is high, since they found that dividend in common law regions are higher than in
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civil law regions. This is confirmed by Faccio et al. (2001), which found that European
companies pay higher dividends than Asian companies which is caused by the stronger
European investor protection. When there is better legal protection, investors can use legal
rights to obtain dividends in order to reduce agency costs (Bartram et al., 2008).
The institutional environment can reduce both types of agency problems. The first type of
agency problems, between the management and shareholders, will be reduced because a good
institutional environment monitors the management which will encourage them to maximize
the firm value (Wei et al., 2011). The second type of agency problems, the expropriation from
minority shareholders, will be reduced because a good institutional environment will reduce
tunneling behavior. In addition, the entrenchment effect will be reduced due to the prevention
of self-dealing behavior (Shleifer and Vishny, 1997).
Hence, a good institutional environment will reduce agency problems and reduce the
probability of expropriation from minority shareholders. Therefore, it can also be thought that
dividends are less needed as a corporate governance mechanism, since the institutional
environment will work as an alternative corporate governance mechanism. According to Wei
et al. (2011), family firm’s decisions are more affected by the institutional environment than
non-family firm’s decisions. Therefore, it is expected that family firms pay a lower dividend
in countries where minority shareholders are strongly protected.
H4: Family firms pay lower dividends in countries where minority shareholders are more
strongly protected because the institutional environment will act as an alternative corporate
governance mechanism.
Family firm’s payout policy during the 2008 financial crisis
It also have been studied whether unexpected liquidity shocks, such as the 2008 financial
crisis, affects a firm’s payout policy. A liquidity shock can imply a shortage of liquidity.
According to Lins et al. (2013), being a family-controlled firm can both be beneficial and
costly during a liquidity shock. On the one hand, family-controlled firms could be able to
have more access of finance via firms it controls, which could add value when there is
liquidity scarcity. On the other hand, the crisis can also affect the family’s private benefits of
control. In general, the controlling family of the firm is likely to be undiversified with all of
its wealth invested in their firm. Consequently, a liquidity shock can be dangerous for the
family’s empire and therefore, family-controlled firms tend to take more survival-oriented
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actions to preserve the family’s benefits of control at the expense of outside shareholders,
relative to non-family firms controlled by more diversified shareholders. This will lead to
expropriation from minority shareholders’ wealth by using the firm’s resources for private
benefits. Therefore, less resources will be available to distribute as dividends to other
shareholders.
In addition, the family-controlled firm’s equity financing costs increased during the 1997
Asian crisis which supports the view that agency costs are higher during a financial crisis
(Boubakri et al., 2010). This can be due to the entrenchment effect, which implies that a
firm’s resources are extracted from the firm at the expense of minority shareholders. During a
financial crisis, investors may think that the likelihood of entrenchment of controlling families
is higher and therefore, they require a higher equity premium from family firms which results
in higher equity costs. Besides, it is found that the value of poorly governed Asian firms
decreased during the 1997 Asian crisis (Bae et al., 2012). Lastly, Mitton (2002) argues that
corporate governance may be especially important during periods of economic distress. Taken
all these arguments together, it is expected that family firms paid lower dividends during the
2008 crisis because there is more expropriation of minority shareholders by large shareholders
within family firms during a financial crisis.
H5: Family firms paid lower dividends than non-family firms during the 2008 financial crisis
because there is more expropriation of minority shareholders by large shareholders within
family firms during a financial crisis.
III. RESEARCH METHOD
Regression analysis
To test the hypotheses, several regression analyses will be used. A list with the definitions of
all variables used in the regression models can be found in Table A1.
Tax effect
To determine the impact of the tax regulation on the preference of dividends or share
repurchases, the relationship between the payout ratio and the taxation on dividends relative
to capital gains for family firms, pension funds, and corporations will be tested. To test the
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determinants of the variation in the payout ratio as predicted in Hypothesis 1, the following
regression is specified:
𝑃𝑎𝑦𝑜𝑢𝑡 𝑟𝑎𝑡𝑖𝑜 = 𝛼 + 𝛽1𝑇𝐴𝑋𝐴𝑇𝐼𝑂𝑁𝐹𝑖𝑟𝑚𝑡𝑦𝑝𝑒 + 𝛽2𝑀𝐵𝑅 + 𝛽3𝐹𝐼𝑅𝑀𝑆𝐼𝑍𝐸 + 𝛽4𝐹𝐼𝑅𝑀𝐴𝐺𝐸
+ 𝛽5𝑅𝑂𝐴 + 𝛽6𝐶𝐴𝑆𝐻 + 𝛽7𝑆𝐴𝐿𝐸𝑆𝐺𝑅𝑂𝑊𝑇𝐻 + 𝛽8𝑁𝑂𝑁𝑂𝑃 + 𝜀 (1)
The payout ratio will be used as the dependent variable. The same approach as the study of
Hu, Wang, and Zhang (2007) will be followed. The payout ratio will be calculated by
dividing the dividend payments by the sum of dividends and share repurchases. This variable
can take values between zero and one. Firms which only pay dividends have a value of one,
and firms that only do share repurchases have a value of zero. The higher the value, the more
dividends are paid relative to the amount of share repurchases. TAXATIONFirmtype stand for
the taxation on dividends relative to capital gains whereby Firmtype can be replaced by
families and individuals, corporations and pension funds.
According to Poterba (2004), the dividend tax preference ratio can be calculated by using the
following formula:
𝜃𝑡 = (1 − 𝜏𝑑𝑖𝑣,𝑡)/(1 − 𝜏𝑐𝑔,𝑡)
where τdiv,t denotes the tax rate on dividends at time t and τcg,t denotes the tax rate on capital
gains at time t.
The first control variable is the market-to-book ratio (MBR), which will be used as a proxy
variable for investment opportunities. FIRMSIZE, which is calculated by the log of total
sales, will be used to control for the effects of firm size. Thirdly, FIRMAGE is the age of the
firms, which will be controlled for because the age of a firm might affect its propensity to pay
dividends. For example, older firms may pay higher dividend due to less growth
opportunities. Fourth, Return on Assets (ROA) will be calculated by dividing net income by
total assets, to control for profitability. Fifth, CASH will be included and measured by cash
plus cash equivalents scaled by total assets (Stephens and Weisbach (1998), Dittmar (2000),
Moser (2007), and Skinner (2008)). Sixth, SALESGROWTH will be included to control for
investment opportunities. Lastly, the percentage of non-operating income of the total earnings
(NONOP) will be added. According to Jagannathan, Stephens and Weisbach (2000), the non-
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operating income is an essential element for share repurchases. The error term will include
industry-fixed effects and year-fixed effects to exclude variations in the payout due to the
industry and the year the firm is operating in.
Predicted direction of the beta coefficients
First, β1 with Firmtype families and individuals is expected to be negative, since it is expected
that families and individuals pay lower dividends relative to share repurchases due to higher
dividend taxes. Secondly, β1 with Firmtype corporations and pension funds are expected to be
positive because corporations and pension funds tend to prefer dividends over share
repurchases. Third, firms with high (low) MBRs will pay low (high) dividends. Grullon and
Michaely (2002) argues that firms with high MBR do repurchase shares but do not pay
dividends. Therefore, β2 is expected to be negative. Fourth, according to Jagannathan et al.
(2000), larger firms prefer dividends over share repurchases and therefore, β3 is expected to be
positive. Fifth, it is expected that older firms have less growth opportunities and therefore,
older firms are expected to pay higher dividends (Yoshikawa and Rasheed, 2009). Also, in
prior research it is found that firms that repurchase shares are younger than dividend paying
firms (Grullon and Michaely, 2002). Therefore, β4 is predicted to be positive. Sixth, firms
with a higher ROA are more profitable and therefore, these firms are more likely to pay
dividends. Thus, β5 is also expected to be positive. Seventh, β6 is expected to be positive
because higher cash holdings lead to more internal resources to distribute to shareholders.
Eighth, firms with more investment opportunities pay less dividends (Jacob and Jacob, 2013)
and therefore, β7 is expected to be negative. Last, β8 is expected to be negative since a higher
non-operating income increases the probability to repurchase shares (Jagannathan et al.,
2000).
Family firms actively managed by family members versus non-family firms and family
firms not actively managed by family members
For hypothesis 2, the relationship between family firms actively managed by family members
on the one side and the non-family firms and family firms not actively managed by family
members on the other side and their dividend payout will be tested using the following
specifications:
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑎𝑦𝑜𝑢𝑡 𝑟𝑎𝑡𝑖𝑜
= 𝛼 + 𝛽1𝐴𝐶𝑇𝐼𝑉𝐸𝐹𝐴𝑀𝐼𝐿𝑌𝐹𝐼𝑅𝑀 + 𝛽2𝑀𝐵𝑅 + 𝛽3𝐹𝐼𝑅𝑀𝑆𝐼𝑍𝐸 + 𝛽4𝐹𝐼𝑅𝑀𝐴𝐺𝐸
+ 𝛽5𝑅𝑂𝐴 + 𝛽6𝐶𝐴𝑆𝐻 + 𝛽7𝑆𝐴𝐿𝐸𝑆𝐺𝑅𝑂𝑊𝑇𝐻 + 𝛽8𝑁𝑂𝑁𝑂𝑃 + 𝜀 (2𝑎)
18
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑎𝑦𝑜𝑢𝑡 𝑟𝑎𝑡𝑖𝑜
= 𝛼 + 𝛽1𝑀𝐴𝑁𝐴𝐺𝐸𝑀𝐸𝑁𝑇 + 𝛽2𝑀𝐵𝑅 + 𝛽3𝐹𝐼𝑅𝑀𝑆𝐼𝑍𝐸 + 𝛽4𝐹𝐼𝑅𝑀𝐴𝐺𝐸
+ 𝛽5𝑅𝑂𝐴 + 𝛽6𝐶𝐴𝑆𝐻 + 𝛽7𝑆𝐴𝐿𝐸𝑆𝐺𝑅𝑂𝑊𝑇𝐻 + 𝛽8𝑁𝑂𝑁𝑂𝑃 + 𝜀 (2𝑏)
The dividend payout ratio will be used as the dependent variable. This ratio will be calculated
by dividing the total dividend payments by net income. This ratio is the most frequently used
measure of dividend payouts (La Porta et al., 2000). In equation 2a ACTIVEFAMILYFIRM
will be used to distinguish between family firms actively managed by family members and
non-family firms. This dummy variable will be 1 for family firms actively managed by family
members and 0 for non-family firms. In equation 2b MANAGEMENT will be included to
differentiate between family firms actively managed by family members (1) and family firms
not actively managed by family members (0). The error term will include industry-fixed
effects, year-fixed effects, and country-fixed effect to exclude effects on the dividend payout
according to the industry, year, and country the firm is operating in.
Predicted direction of the beta coefficients
Firstly, the relationship between ACTIVEFAMILYFIRM and dividend payout is expected to
be negative, since it is expected that family firms actively managed by family members pay
lower dividends than non-family firms. Therefore, β1 in equation 2a is expected to be
negative. Secondly, β1 in equation 2b is expected to be negative because it is expected that
family firms not actively managed by family members pay higher dividends than family firms
actively managed by family members. Thirdly, β2 is expected to be negative because firms
with high (low) MBRs will pay low (high) dividends. This is due to the large cash
requirements when the firm has many investment opportunities. Consequently, investment
opportunities negatively affect dividend payout (Chay and Suh, 2009). Fourth, large firms are
more likely to payout dividends (Redding, 1997). Therefore, β3 is predicted to be positive.
Fifth, it is expected that older firms have less growth opportunities and therefore, older firms
are expected to pay higher dividends (Yoshikawa and Rasheed, 2009). Consequently, β4 is
expected to be positive. Sixth, β5 is expected to be positive since firms with a higher ROA are
more likely to pay dividends. Seventh, firms with higher cash holdings are more likely to pay
dividends and therefore, β6 is expected to be positive. Eighth, β7 is expected to be negative as
firms with more investment opportunities will pay less dividends. Last, β8 is expected to be
negative since firms with high non-operating income have a higher probability of
repurchasing shares and therefore, less resources are available to distribute as dividends.
19
Dividends versus share repurchases
To test the determinants of the variation in the payout ratio as predicted in Hypothesis 3, the
following regression is specified and will be tested on family firms only:
𝑃𝑎𝑦𝑜𝑢𝑡 𝑟𝑎𝑡𝑖𝑜 = 𝛼 + 𝛽1𝑀𝐴𝑁𝐴𝐺𝐸𝑀𝐸𝑁𝑇 + 𝛽2𝑀𝐵𝑅 + 𝛽3𝐹𝐼𝑅𝑀𝑆𝐼𝑍𝐸 + 𝛽4𝐹𝐼𝑅𝑀𝐴𝐺𝐸
+ 𝛽5𝑅𝑂𝐴 + 𝛽6𝐶𝐴𝑆𝐻 + 𝛽7𝑆𝐴𝐿𝐸𝑆𝐺𝑅𝑂𝑊𝑇𝐻 + 𝛽8𝑁𝑂𝑁𝑂𝑃 + 𝜀 (3)
To determine the effect of active management of family firms on their choice between
dividends and share repurchases, the payout ratio will be used as dependent variable. The
higher the value, the more dividends are paid relative to the amount of share repurchases. The
error term will include industry-fixed effects, year-fixed effects and country-fixed effects to
exclude effects on the dividend payout according to the industry, year, and country the firm is
operating in.
Since it is expected that family firms not actively managed by family members pay more
dividends than they do share repurchases than family firms actively managed by family
members (Hu, Wang, and Zhang, 2007), β1 is expected to be negative.
Shareholder protection
To test the determinants of the variation in the dividend payout ratio as predicted in
Hypothesis 4, the following regression is specified:
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑎𝑦𝑜𝑢𝑡 𝑟𝑎𝑡𝑖𝑜
= 𝛼 + 𝛽1𝑆𝐻𝐴𝑅𝐸𝐻𝑂𝐿𝐷𝐸𝑅𝑃𝑅𝑂𝑇𝐸𝐶𝑇𝐼𝑂𝑁 + 𝛽2𝑀𝐵𝑅 + 𝛽3𝐹𝐼𝑅𝑀𝑆𝐼𝑍𝐸
+ 𝛽4𝐹𝐼𝑅𝑀𝐴𝐺𝐸 + 𝛽5𝑅𝑂𝐴 + 𝛽6𝐶𝐴𝑆𝐻 + 𝛽7𝑆𝐴𝐿𝐸𝑆𝐺𝑅𝑂𝑊𝑇𝐻 + 𝛽8𝑁𝑂𝑁𝑂𝑃
+ 𝜀 (4)
For this regression, a subsample will be used which contains family firms only. The variable
SHAREHOLDERPROTECTION will measure the strength of minority investor protection in
different countries. An index will be used which can contain values between zero and ten. A
higher value for this index indicates stronger minority investor protection. The composition
and methodology used to construct this index are presented in Table A2 in the Appendix. This
will be a dummy variable which is 1 for strong minority investor protection (index > sample
mean) and 0 otherwise. It is expected that stronger shareholder protection implies lower
20
dividends and therefore, β1 is expected to be negative. The error term will include industry-
fixed effects and year-fixed effects to exclude effects on the dividend payout according to the
industry and year the firm is operating in.
Family firms versus non-family firms during the 2008 financial crisis
To test the determinants of the variation in the dividend payout ratio as predicted in
Hypothesis 5, the following regression is specified and will be tested on the observations of
the 2008 financial crisis:
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑎𝑦𝑜𝑢𝑡 𝑟𝑎𝑡𝑖𝑜
= 𝛼 + 𝛽1𝐹𝐴𝑀𝐼𝐿𝑌𝐹𝐼𝑅𝑀 + 𝛽4𝑀𝐵𝑅 + 𝛽5𝐹𝐼𝑅𝑀𝑆𝐼𝑍𝐸 + 𝛽6𝐹𝐼𝑅𝑀𝐴𝐺𝐸
+ 𝛽7𝑅𝑂𝐴 + 𝛽8𝐶𝐴𝑆𝐻 + 𝛽9𝑆𝐴𝐿𝐸𝑆𝐺𝑅𝑂𝑊𝑇𝐻 + 𝛽10𝑁𝑂𝑁𝑂𝑃
+ 𝜀 (5)
The variable FAMILYFIRM will be included to differentiate between family firms and non-
family firms. This dummy variable will be 1 for family firms and 0 otherwise. The error term
will include industry-fixed effects and country-fixed effect to exclude variations in the
dividend payout due to the industry and country the firm is operating in.
β1 is expected to be negative since it is expected that the dividend payout ratio of family firms
during the 2008 financial crisis is lower than the payout ratio of non-family firms during the
2008 financial crisis.
Sample construction and data collection to test Hypotheses 1, 2, 3 and 5
This research will compare the dividend payout and share repurchases of family firms with
the dividend payout and share repurchases of non-family firms. The focus will be on listed
firms located in the United Kingdom, Germany and France. Financial firms will be excluded
from the sample because government regulations affect their dividend policies (La Porta et al.,
2000). The Amadeus Database will be used to retrieve all non-financial family and non-
family firms located in the United Kingdom, Germany and France. The sample will contain
firm-specific yearly observations from 2008 to 2015.
When retrieving all listed family firms and non-family firms located in the United Kingdom,
Germany and France, firms of which no data is available about their dividend payout are
excluded from the sample. Consequently, a sample of 1.138 firms with 8 years of firm-
21
specific observations is retrieved from the Amadeus Database. Observations for which data
for the variables MANAGEMENT, MBR, FIRMSIZE, FIRMAGE, ROA, CASH,
SALESGROWTH, and NONOP is not available will be deleted from the sample. Eventually,
the final sample contains 5.672 observations. The sample selection procedure for testing
Hypothesis 1,2,3 and 5 is presented in Table 1.
Information about the tax rates on dividends and capital gains in the United Kingdom,
Germany and France will be retrieved from the World Wide Corporate Tax Guides of EY. A
distinction will be made of dividends paid to individuals, corporations and pension funds. All
tax rates and relative tax burdens per country and per year can be found in Table A3-9 in the
Appendix.
Table 1 Final sample for testing Hypothesis 1,2,3, and 5
Observations
Starting sample 1.138*8 = 9.104
(-) Unavailable data to compute
MANAGEMENT, MBR, FIRMZISE,
FIRMAGE, ROA, CASH,
SALESGROWTH, and NONOP
3.432
Total sample 5.672
Sample construction and data collection to test Hypotheses 4
To measure the impact of shareholder protection on the dividend payout of family firms, a
subsample, which will contain family firms only, will be retrieved from the total sample. The
sample consists of 176 family firms with 8 years of firm-specific observations for the
different variables used in the model. Observations for which data for the variables MBR,
FIRMSIZE, FIRMAGE, ROA, CASH, SALESGROWTH, and NONOP is not available will
be deleted from the sample. Consequently, the final sample contains 1.074 observations. The
sample selection procedure for testing Hypothesis 4 is presented in Table 2.
To measure shareholder protection, the minority investor protection index from Doing
Business from the World Bank will be used. The composition of this index can be found in
Table A2 in the Appendix. The composition of the minority investor protection index of the
22
United Kingdom, Germany and France for the years 2008 to 2015 can be found in Table A10-
12 in the Appendix.
Table 2 Final sample for testing Hypothesis 4
Observations
Starting sample 176*8 = 1.408
(-) Unavailable data to compute MBR,
FIRMSIZE, FIRMAGE, ROA, CASH,
SALESGROWTH, and NONOP
334
Total sample 1.074
IV. RESULTS
Descriptive statistics
The descriptive statistics to test Hypothesis 1,2,3, and 5 are presented in Table 3. A mean of
0.5434 for the payout ratio implies that on average the firms in the sample pay more dividends
than they repurchase shares. The average dividend payout ratio is 0.4063. The mean for the
taxation of family firms (0.8232) is in line with the prediction that dividend tax rates relative
to capital gains tax rates are higher. Comparably, the means for the taxations of corporations
and pension funds (1.1888, 1.2803) implies that their dividend tax rates relative to capital
gains tax rates are lower. 18% of the sample consists of family firms and 42% of those family
firms are actively managed by family members.
23
Table 3 Descriptive statistics to test Hypothesis 1,2,3, and 5
This table provides basic descriptive statistics including the minimum, maximum, mean,
median and standard deviation for the sample firms in the United Kingdom, Germany, and
France from 2008 up to and including 2015.
To test Hypothesis 4, a subsample with only the family firms will be used. The descriptive
statistics can be found in Table 4. The average dividend payout ratio of family firms is
0.3467. The sample consists of 32.03% of family firms located in countries with strong
shareholder protection.
Table 4 Descriptive statistics to test Hypothesis 4
This table provides basic descriptive statistics including the minimum, maximum, mean,
median and standard deviation for the family firms in the United Kingdom, Germany, and
France from 2008 up to and including 2015.
N Minimum Median Maximum Mean Std.
Deviation
Dividend payout ratio 1074 -0.2941 0.2811 1.3244 0.3467 0.3716
SHAREHOLDERPROTECTION 1074 0 0 1 0.3203 0.4668
MBR 1074 0.3434 1.2163 47.2481 1.8758 2.3659
FIRMSIZE 1074 1.7067 6.2477 13.0110 6.3712 1.8837
FIRMAGE 1074 1 45 145 57.09 40.640
ROA 1074 -4.0983 3.9565 15.1750 4.4981 4.5165
CASH 1074 0.0002 0.1176 0.7450 0.1429 0.1095
SALESGROWTH 1074 -0.2143 0.0133 18.3231 0.0741 0.6861
NONOP 1074 -0.3443 0.0060 24.0157 0.1901 1.2039
N Minimum Median Maximum Mean Std.
Deviation
Payout ratio 5672 0 1 1 0.5434 0.4898
Dividend payout ratio 5672 -0.4366 0.3396 1.6145 0.4063 0.4592
TAXATIONFamilies,Individuals 1037 0.7708 0.8065 1.0357 0.8231 0.0581
TAXATIONCorporations 4505 0.9666 1.2658 1.4286 1.1895 0.1832
TAXATIONPensionfunds 129 1.0175 1.3158 1.4286 1.2783 0.1341
FAMILYFIRM 5672 0 0 1 0.18 0.387
ACTIVEFAMILYFIRM 5069 0 0 1 0.09 0.2801
MANAGEMENT 1037 0 0 1 0.42 0.494
MBR 5672 0.4062 1.4596 111.3329 2.3080 3.9405
FIRMSIZE 5672 0 6.4109 13.0110 6.6496 2.2201
FIRMAGE 5672 1 33 145 50.66 42.015
ROA 5672 -6.3798 4.4095 16.0521 4.8076 5.3429
CASH 5672 0 0.0928 0.9007 0.1290 0.1207
SALESGROWTH 5672 -0.2480 0.0165 81.4916 0.0666 1.1534
NONOP 5672 -0.3188 0.0037 126.6078 0.2171 2.3932
24
Correlations
The correlation matrix to test Hypothesis 1,2,3, and 5 is provided in Table 5. The relative tax
burden of families and individuals is significantly negatively related to the payout ratio. This
is in line with the prediction that families and individuals prefer share repurchases over
dividends. However, the relationship between the relative tax burden of corporations and
pension funds and the payout ratio is also negative which is the reverse of the prediction.
Also, the negative relation between MANAGEMENT and the payout ratio implies that family
firms actively managed by family members pay less dividends than family firm not actively
managed by family members. Besides, MBR, FIRMSIZE, and NONOP are significantly
negatively related to the payout ratio while FIRMAGE is significantly positively related to the
payout ratio. FAMILYFIRM is significantly negatively related to the dividend payout ratio
which could imply that family firms pay lower dividends than non-family firms. Besides,
ACTIVEFAMILYFIRM is negatively related to the dividend payout but this relationship is
not significant. The relationship between MANAGEMENT and the dividend payout ratio is
positive but not significant. This could imply that family firms actively managed by family
members pay lower dividends than family firms not actively managed by family members.
The correlations of the variables to test Hypothesis 4 are presented in Table 6.
SHAREHOLDERPROTECTION is insignificantly positively related to the dividend payout
ratio which is contrarily to the prediction that family firms located in countries with stronger
shareholder protection pay lower dividends.
25
Table 5 Correlation matrix to test Hypothesis 1,2,3, and 5
This table provides the correlations between the variables used in the regression models to test Hypothesis 1, 2, 3, and 5. First, the correlation matrix for the
regression models with the payout ratio as dependent variable is shown. Second, the correlation matrix for the regression models with the dividend payout
ratio as dependent variable is shown.
Payout ratio as dependent variable
Payout
ratio
FAMILY
FIRM
MANAG-
EMENT
MBR FIRM
SIZE
FIRM
AGE
ROA CASH SALE
S
GRO
WTH
NON
OP
Payout ratio 1
TAXATIONFamilies,Individuals -0.081**
TAXATIONCorporations -0.240**
TAXATIONPensionfunds -0.172
FAMILYFIRM 0.215**
1
MANAGEMENT -0.020 - 1
MBR -0.032*
-0.053**
-0.059
1
FIRMSIZE -0.095**
-0.045**
-0.301**
0.040**
1
FIRMAGE 0.121**
0.074**
-0.180**
-0.063**
0.258**
1
ROA 0.010 -0.020 -0.183**
0.267**
-0.097**
-0.070**
1
CASH 0.075**
0.058**
-0.088**
0.081**
-0.280**
-0.188**
0.254**
1
SALESGROWTH -0.007 0.003 0.039 0.002 -0.004 -0.027*
0.015
-0.002 1
NONOP -0.020*
-0.005 -0.001 -0.019 0.07 0.026 -0.067**
-0.020 0.006 1
Dividend payout ratio as dependent variable
Dividen
d payout
ratio
FAMILY
FIRM
ACTIVE
FAMILY
FIRM
MANAG-
EMENT
MBR FIRM
SIZE
FIRM
AGE
ROA CASH SALES
GROW
TH
NON
OP
Dividend payout ratio 1
FAMILYFIRM -0.040**
1
ACTIVEFAMILYFIRM -0.017 - 1
MANAGEMENT 0.036 - - 1
MBR 0.072**
-0.053**
-0.048**
-0.059
1
FIRMSIZE 0.048**
-0.045**
-0.116**
-0.301**
0.040**
1
FIRMAGE -0.030*
0.074**
-0.003 -0.180**
-0.063**
0.258**
1
ROA 0.161**
-0.020 -0.067**
-0.183**
0.267**
-0.097**
-0.070**
1
CASH 0.035**
0.058**
0.016 -0.088**
0.081**
-0.280**
-0.188**
0.254**
1
SALESGROWTH -0.029*
0.003 0.009 0.039 0.002 -0.004 -0.027*
0.015
-0.002 1
NONOP -0.030*
-0.005 0.003 -0.001 -0.019 0.007 0.026 -0.067**
-0.020 0.006 1 *,**
Correlation is significant at the 0.05, 0.01 level
26
Table 6 Correlation matrix to test Hypothesis 4
This table shows the correlations between the variables used in the regression model to test Hypothesis 4. The sample contains family firms in
the United Kingdom, Germany, and France from 2008 up to and including 2015.
Dividend
payout ratio
SHAREHOLDER
PROTECTION
MBR FIRM
SIZE
FIRM
AGE
ROA CASH SALES
GROWTH
NONOP
Dividend payout ratio 1
SHAREHOLDERPROTECTION 0.009
1
MBR 0.125**
0.132**
1
FIRMSIZE 0.016 -0.046 0.072*
1
FIRMAGE -0.056 -0.072*
-0.038 0.313**
1
ROA 0.143**
0.042
0.407**
0.028 -0.087**
1
CASH 0.087**
0.048 0.153**
-0.229**
-0.232**
0.312**
1
SALESGROWTH -0.065*
-0.076*
-0.015 0.094**
-0.017 0.017 -0.001 1
NONOP 0.042
0.050 -0.035 -0.030 0.006 -0.120**
-0.032 0.002
1
*,** Correlation is significant at the 0.05, 0.01 level
27
Univariate analyses
Some independent samples t-tests are conducted to test whether the means of two groups are
(significantly) different. First, the differences between family firms and non-family firms will
be tested, and second, the differences between family firms actively managed by family
members and family firms not actively managed by family members. Last, a distinction is
made between family firms located in countries with strong shareholder protection and
countries with weak shareholder protection. The results are shown in Table 7, 8, and 9. In
terms of FAMILFIRM differences, there is a significant difference in the payout ratio (t =
16.537), the dividend payout ratio (t = -3.994), FIRMSIZE (t = -3.386), FIRMAGE (t =
5.623), and CASH (t = 4.360). These results imply that FAMILYFIRM has an effect on the
payout ratio, dividend payout ratio, FIRMSIZE, FIRMAGE, and CASH. In terms of
MANAGEMENT, there is a significant difference in MBR (t = -1.776), FIRMSIZE (t = -
10.186), FIRMAGE (t = -5.888), ROA (t = -5.866), and CASH (t = -2.843). However, there is
no significant difference in the payout ratio and dividend payout ratio. These results suggest
that MANAGEMENT has an effect on MBR, FIRMSIZE, FIRMAGE, ROA, and CASH.
Last, in terms of SHAREHOLDERPROTECTION, there is a significant difference in MBR (t
= 3.970), FIRMAGE (t = -2.458), ROA (t = 2.061), and SALESGROWTH (t = -3.168). This
means that SHAREHOLDERPROTECTION has an effect on MBR, FIRMAGE, ROA, and
SALESGROWTH. However, there is no significant difference in the dividend payout ratio.
Table 7 Independent samples t-test FAMILYFIRM
This table provides the results of an Independent samples t-test which compares the mean of
all variables used in the regression models between family firms and non-family firms.
FAMILYFIRM
1 = Family firm 0 = Non-family firm t-statistic
Payout ratio 0.7654 0.4937 16.537***
Dividend payout ratio 0.3677 0.4149 -3.994***
MBR 1.8671 2.4068 -1.494
FIRMSIZE 6.4389 6.6968 -3.386***
FIRMAGE 57.27 49.18 5.623***
ROA 4.5838 4.8577 -1.493
CASH 0.1438 0.1257 4.360***
SALESGROWTH 0.0727 0.0652 0.269
NONOP 0.2418 0.2116 -0.406
*,**,***Significant at 0.1, 0.05, 0.01 level
28
Table 8 Independent samples t-test MANAGEMENT
This table provides the results of an Independent samples t-test which compares the mean of
all variables used in the regression models between family firms actively managed by family
members and family firms not actively managed by family members.
MANAGEMENT
1 = Actively 0 = Not actively t-statistic
Payout ratio 0.7553 0.7726 1.175
Dividend payout ratio 0.3860 0.3545 0.869
MBR 1.7030 1.9854 -1.776*
FIRMSIZE 5.7673 6.9234 -10.168***
FIRMAGE 48.76 63.42 -5.888***
ROA 3.5621 5.3209 -5.866***
CASH 0.1324 0.1519 -2.843***
SALESGROWTH 0.1043 0.0500 1.245
NONOP 0.2383 0.2443 -0.045
*,**,***Significant at 0.1, 0.05, 0.01 level
Table 9 Independent samples t-test SHAREHOLDER PROTECTION
This table provides the results of an Independent samples t-test which compares the mean of
all variables used in the regression models between family firms located in countries with
strong shareholder protection and family firms located in countries with weak shareholder
protection.
*,**,***Significant at 0.1, 0.05, 0.01 level
SHAREHOLDER PROTECTION
1 = Strong 0 = Weak t-statistic
Dividend payout ratio 0.3521 0.3446 0.295
MBR 2.3315 1.6610 4.370***
FIRMSIZE 6.2461 6.4302 -1.477
FIRMAGE 52.84 59.09 -2.356**
ROA 4.7743 4.3679 1.377
CASH 0.1506 0.1392 1.584
SALESGROWTH -0.0018 0.1099 -2.496***
NONOP 0.2778 0.1487 1.641
29
To test for multicollinearity the VIF values for the different variables are used. All VIF values
can be found in Table A13-17 in the Appendix. In all models there is no danger of
multicollinearity as all VIF values are acceptable.
Multivariate analyses
Tax effect
To test the cross-sectional variation in the payout ratio as predicted in Hypothesis 1, three
OLS regressions are conducted using equation 1. To examine whether families and
individuals, corporations, and pension funds prefer share repurchases or dividends, the
variable TAXATIONFirmtype will become TAXATIONFamilies,Individuals, TAXATIONCorporations,
TAXATIONPensionfunds respectively. Each regression will be conducted using the appropriate
subsample which means that three subsamples are used (families and individuals,
corporations, and pension funds). By doing this, the direct relationship between the taxation
of a specific firm type and its payout ratio can be determined. The results of these regressions
are presented in Table 10.
First, it is tested whether families and individuals prefer share repurchases over dividends
because of a higher tax on dividends compared to tax on capital gains. This is done using
equation 1 with Firmtype in the TAXATION variable replaced by Families, Individuals in a
subsample with only the families and individuals. This resulted in a subsample with 1.037
observations. As can be seen in Table 10 in Panel A (families and individuals), there is a
significant negative relationship between the relative taxation of dividends and capital gains
of families and individuals and their payout ratio (p = 0.001). This means that a higher
relative tax burden leads to a lower payout ratio of families and individuals. A lower payout
ratio implies higher share repurchases compared to dividend payments. Consequently, it can
be concluded that families and individuals prefer share repurchases over dividends, because
the dividend tax relative to the capital gains tax is higher for families and individuals.
Second, it is examined whether corporations prefer dividends over share repurchases because
of a lower tax on dividends compared to tax on capital gains. This is done using equation 1
with Firmtype in the TAXATION variable replaced by Corporations in a subsample with
corporations only. This subsample contains 4.506 observations. As can be seen in Table 10 in
Panel B (corporations), TAXATIONCorporations is significantly negatively related to the payout
ratio of corporations (p = 0.000). This would also imply that the payout ratio of corporations
consists of more share repurchases than dividend payments. This in contrast to the prediction
30
that corporations prefer dividends over share repurchase because of a lower relative tax
burden. However, in France is the dividend tax also higher than the tax on capital gains
(comparable to the families and individuals). This could be a possible explanation for the
negative relation between TAXATIONCorporation and the payout ratio of corporations.
Consequently, it cannot be concluded that corporations prefer dividends over share
repurchases because the dividend tax relative to the capital gains tax is lower for corporations.
Third, the relationship between the relative tax burden of pension funds and their payout ratio
is tested. This is done using equation 1 with Firmtype in the TAXATION variable replaced by
Pensionfunds in a subsample with pension funds only. This subsample consists of 129
observations. As can be seen in Table 10 in Panel C (pension funds), there is a positive
relationship between TAXATIONPensionfunds and the payout ratio of pension funds. However,
this relationship is not significant (p = 0.449). This could possibly be caused by the small
subsample for this regression. It could imply that pension funds prefer dividends over share
repurchases but since this relationship is not significant this conclusion cannot be made.
Conclusively, Hypothesis 1 can partly be accepted as it is concluded that families and
individuals prefer share repurchases over dividends, while it is not concluded that
corporations and pension funds prefer dividends over share repurchases. However, it can be
concluded that corporations prefer share repurchases over dividends because in some
countries the dividend tax for corporations is also higher than its capital gains tax.
In all regressions FIRMSIZE is significantly negatively related to the payout ratio which
implies that larger firms will have a lower payout ratio. FIRMAGE is significantly positively
related to the payout ratio and therefore, older firms will have a higher payout ratio.
Furthermore, CASH and NONOP are significantly related to the payout ratio of families and
individuals (positive and negative respectively), CASH is significantly positively related to
the payout ratio of corporations, and MBR is significantly negatively related to the payout
ratio of pension funds.
31
Table 10 Regression results Taxation
This table provides the results of the regression model using equation 1. The dependent
variable is the payout ratio. TAXATION is the tax on dividends relative to the tax on capital
gains calculated by (1 − 𝜏𝑑𝑖𝑣,𝑡)/(1 − 𝜏𝑐𝑔,𝑡). Panel A shows the results for families and
individuals, Panel B for corporations, and Panel C for pension funds.
Panel A. Families and Individuals
Variable Predicted sign Coefficient p-value
Constant 1.5022 0.000***
TAXATIONFamilies,Individuals - -0.9403 0.001***
MBR - -0.0058 0.330
FIRMSIZE + -0.0329 0.000***
FIRMAGE + 0.0011 0.008***
ROA + 0.0044 0.171
CASH + 0.3489 0.015**
SALESGROWTH - 0.0031 0.860
NONOP - -0.0144 0.013**
*,**,***Significant at 0.1, 0.05, 0.01 level
N= 1.037, Adjusted R2 = 0.163, F-statistic = 5.031 (p = 0.000)
Panel B. Corporations
Variable Predicted sign Coefficient p-value
Constant 1.3675 0.000***
TAXATIONCorporations + -0.6577 0.000***
MBR - 0.0013 0.462
FIRMSIZE + -0.0422 0.000***
FIRMAGE + 0.0011 0.000***
ROA + -0.0008 0.593
CASH + 0.2364 0.001***
SALESGROWTH - -0.0001 0.993
NONOP - -0.0021 0.451
*,**,***Significant at 0.1, 0.05, 0.01 level
N= 4.506, Adjusted R2 = 0.128, F-statistic = 10.707 (p = 0.000)
Panel C. Pension funds
Variable Predicted sign Coefficient p-value
Constant 0.4368 0.593
TAXATIONPensionfunds + 0.4018 0.449
MBR - -0.0840 0.049**
FIRMSIZE + -0.0950 0.004***
FIRMAGE + 0.0038 0.033**
ROA + 0.0100 0.129
CASH + -0.4967 0.205
SALESGROWTH - 0.0158 0.654
NONOP - -0.0061 0.631
*,**,***Significant at 0.1, 0.05, 0.01 level
N= 129, Adjusted R2 = 0.413, F-statistic = 5.744 (p = 0.000)
32
Table 11 Regression results Family firms actively managed by family members vs Non-
family firms
This table provides the results of the regression model using equation 2a. The dependent
variable is the dividend payout ratio. ACTIVEFAMILYFIRM is a dummy variable which is 1
for family firms actively managed by family members and 0 for non-family firms. The sample
contains family firms actively managed by family members and non-family firms.
Variable Predicted sign Coefficient p-value
Constant 0.2298 0.000**
ACTIVEFAMILYFIRM - 0.0233 0.363
MBR - 0.0001 0.990
FIRMSIZE + 0.0186 0.000***
FIRMAGE + 0.0001 0.499
ROA + 0.0141 0.000***
CASH + 0.0407 0.502
SALESGROWTH - -0.0080 0.132
NONOP - 0.0110 0.001***
*,**,***Significant at 0.1, 0.05, 0.01 level
N= 5.069
Adjusted R2 = 0.059
F-statistic = 4.868 (p = 0.000)
Table 12 Regression results Family firms actively managed by family members vs
Family firms not actively managed by family members
This table provides the results of the regression model using equation 2b. The dependent
variable is the dividend payout ratio. MANAGEMENT is a dummy variable which is 1 for
family firms actively managed by family members and 0 for family firms not actively
managed by family members. The sample contains all family firms.
Variable Predicted sign Coefficient p-value
Constant 0.3360 0.000***
MANAGEMENT - 0.0371 0.304
MBR - 0.0128 0.047**
FIRMSIZE + 0.0082 0.399
FIRMAGE + -0.0012 0.009***
ROA + 0.0042 0.231
CASH + 0.1133 0.467
SALESGROWTH - -0.0375 0.049**
NONOP - -0.0062 0.322
*,**,***Significant at 0.1, 0.05, 0.01 level
N= 1.037
Adjusted R2 = 0.073
F-statistic = 2.394 (p = 0.000)
33
Family firms actively managed by family versus non-family firms and family firms not
actively managed by family members
To test the cross-sectional variation in the payout ratio as predicted in Hypothesis 2, two OLS
regressions are conducted using equation 2a and 2b. To examine the difference in the
dividend payout ratio between family firms actively managed by family members and non-
family firms, a subsample will be used including all family firms actively managed by family
members and non-family firms. This subsample consists of 5.069 observations. To test
whether family firms actively managed by family members pay lower dividends than family
firms not actively managed by family members, a subsample of family firms only will be used
to conduct the regression as stated in equation 2b. This subsample contains 1.037
observations. The results are presented in Table 11 and 12.
Table 11 shows the results of the regression to test whether family firms actively managed by
family members pay lower dividends than non-family firms. The regression shows a small
insignificant positive relationship between ACTIVEFAMILYFIRM and the dividend payout
ratio (p = 0.363). This could imply that family firms actively managed by family members
have a dividend payout ratio that is a little bit higher than that of non-family firms. However,
since this relation is not significant, this cannot be concluded. From the regression results it
cannot be concluded that family firms actively managed by family members pay lower
dividends than non-family firms.
Table 12 provides the results of the regression to test whether family firms actively managed
by family members pay lower dividends than family firms not actively managed by family
members. As can be seen in Table 12, there is a small positive relation between
MANAGEMENT and the dividend payout ratio but this relationship is not significant (p =
0.304). This could imply that family firms actively managed by family members pay higher
dividends than family firms not actively managed by family members.
Since ACTIVEFAMILYFIRM and MANAGEMENT both are (insignificantly) positively
related to the dividend payout ratio, it cannot be concluded that family control is used as an
alternative corporate governance mechanism in family firms actively managed by family
members. Also, it cannot be concluded that non-family firms use dividends as a corporate
governance mechanism. Since both relations are insignificant and the reverse of the
predictions, Hypothesis 2 cannot be accepted.
34
FIRMSIZE, ROA, and NONOP all are significantly positively related to the dividend payout
ratio of family firms actively managed by family members and non-family firms. This means
that larger firms and firms with a higher return on assets and non-operating income will have
a higher dividend payout ratio. MBR is significantly positively related to the dividend payout
ratio of family firms while FIRMAGE and SALESGROWTH are significantly negatively
related to their dividend payout ratio. This implies that firms with a higher MBR will have a
higher dividend payout ratio, while older firms and firms with a higher sales growth will have
a lower dividend payout ratio.
Dividends versus share repurchases
To test the cross-sectional variation in the payout ratio as predicted in Hypothesis 3, an OLS
regression is conducted using equation 3. For this regression a subsample of family firms only
will be used. This subsample contains 1.037 observations. The results are presented in Table
13.
As can be seen in Table 13, there is a negative relation between MANAGEMENT and the
payout ratio. However, this relationship is not significant (p = 0.304). This could imply that
the payout ratio of family firms actively managed by family members is lower than the payout
ratio of family firms not actively managed by family members. This could mean that family
firms not actively managed by family members pay more dividends than they do share
repurchases compared to family firms actively managed by family members. However, the
relationship is not significant so this conclusion cannot be made and therefore, Hypothesis 3
cannot be accepted.
Besides, FIRMSIZE and NONOP both are significantly negatively related to the payout
policy which implies that larger firms and a larger non-operating income leads to a lower
payout ratio. Furthermore, FIRMAGE is significantly positively related to the payout ratio
which means that older firms have a lower payout ratio.
35
Table 13 Regression results payout ratio Family firms actively managed by family
members vs Family firms not actively managed by family members
This table provides the results of the regression model using equation 3. The dependent
variable is the payout ratio. MANAGEMENT is a dummy variable which is 1 for family firms
actively managed by family members and 0 for family firms not actively managed by family
members. The sample contains all family firms.
Variable Predicted sign Coefficient p-value
Contant 0.7006 0.000***
MANAGEMENT - -0.0329 0.304
MBR - -0.0075 0.219
FIRMSIZE + -0.0256 0.004***
FIRMAGE + 0.0010 0.011**
ROA + 0.0034 0.262
CASH + 0.1198 0.140
SALESGROWTH - 0.0037 0.839
NONOP - -0.0155 0.009***
*,**,***Significant at 0.1, 0.05, 0.01 level
N= 1.037
Adjusted R2 = 0.122
F-statistic = 54.791 (p = 0.000)
Shareholder protection
To test the cross-sectional variation in the payout ratio as predicted in Hypothesis 4, an OLS
regression is conducted using equation 4. To examine whether family firms pay lower
dividends in countries with stronger shareholder protection, a subsample of family firms only
will be used in conducting the regression as stated in equation 4. The subsample consists of
1.074 observations. The results are shown in Table 14.
The regression shows a significant negative relation (p = 0.003) between
SHAREHOLDERPROTECTION and the dividend payout ratio. This implies that the
dividend payout ratio of family firms is lower in countries with stronger shareholder
protection. This because the institutional environment will act as an alternative corporate
governance mechanism. This is in line with the prediction stated in Hypothesis 4 and
therefore, Hypothesis 4 can be accepted.
Furthermore, MBR, ROA, and SALESGROWTH are also significantly related to the
dividend payout ratio. However, the sign of the coefficient of MBR is the reverse of the
prediction (positive instead of negative). This implies that for family firms a higher MBR
results in a higher dividend payout ratio. ROA is significantly positively related to the
36
dividend payout ratio which means that a higher ROA leads to a higher dividend payout ratio.
The significant negative relation between the dividend payout ratio and SALESGROWTH
implies that family firms with a larger sales growth will have a lower dividend payout ratio.
Table 14 Regression results Shareholder protection
This table provides the results of the regression model using equation 4. The dependent
variable is the dividend payout ratio. SHAREHOLDERPROTECTION is a dummy variable
which is 1 for strong shareholder protection and 0 for weak shareholder protection. The
sample contains all family firms.
Variable Predicted sign Coefficient p-value
Constant 0.3360 0.000***
SHAREHOLDERPROTECTION - -0.1648 0.003***
MBR - 0.0096 0.075*
FIRMSIZE + 0.0010 0.900
FIRMAGE + -0.0009 0.013
ROA + 0.0083 0.006***
CASH + 0.0783 0.543
SALESGROWTH - -0.0348 0.034**
NONOP - -0.0051 0.581
*,**,***Significant at 0.1, 0.05, 0.01 level
N= 1.074
Adjusted R2 = 0.091
F-statistic = 2.921 (p = 0.000)
Family firms versus non-family firms during the 2008 financial crisis
To test the cross-sectional variation in the payout ratio as predicted in Hypothesis 5, an OLS
regression is conducted using equation 5. Since Hypothesis 5 predicts that family firms paid
less dividends than non-family firms during the 2008 financial crisis, a subsample of the
observations of the year 2008 will be used. This resulted in a subsample with 597
observations. The results are presented in Table 15.
As can be seen in the regression results, there is a significant negative relationship between
FAMILYFIRM and the dividend payout ratio during the 2008 financial crisis (p = 0.096).
This implies that the dividend payout ratio of family firms was lower than the dividend payout
ratio of non-family firms during the 2008 financial crisis. Consequently, it can be concluded
that family firms paid lower dividends than non-family firms during the 2008 financial crisis.
Therefore, Hypothesis 5 can be accepted.
37
ROA is the only control variable which is significantly (positively) related to the dividend
payout ratio during the 2008 financial crisis. This implies that a higher ROA resulted in a
higher dividend payout ratio during the 2008 financial crisis.
Table 15 Regression results Financial crisis
This table provides the results of the regression model using equation 5. The dependent
variable is the dividend payout ratio. FAMILYFIRM is a dummy variable which is 1 for
family firms and 0 for non-family firms. The sample contains observations of the 2008
financial crisis.
Variable Predicted sign Coefficient p-value
Constant 0.2277 0.002***
FAMILYFIRM - -0.0799 0.096*
MBR - 0.0028 0.437
FIRMSIZE + 0.0176 0.054*
FIRMAGE + 0.0003 0.467
ROA + 0.0111 0.000***
CASH + 0.0173 0.920
SALESGROWTH - -0.0375 0.609
NONOP - -0.0063 0.661
*,**,***Significant at 0.1, 0.05, 0.01 level
N= 597
Adjusted R2 = 0.074
F-statistic = 6.914 (p = 0.000)
V. CONCLUSION
This study examined the relationship between a specific firm type and its payout policy. It is
researched whether the payout policy differs between family firms and non-family firms.
Besides, it is tested if the payout policy is different for family firms actively managed by
family members and family firms not actively managed by family members.
Several regression models are used to test the variations in the payout ratio and dividend
payout ratio. First, the impact of the relative tax burden of dividends and capitals gains on the
payout ratio has been investigated. It is found that families and individuals prefer share
repurchases over dividends because they are exposed to higher dividend tax rates than tax
rates on capital gains. Although it was expected that corporations prefer dividends over share
repurchases because their dividend tax rates are lower than their tax rates on capital gains, the
results show a significant positive relationship. This can possibly be caused by the higher
dividend tax rates compared to tax rates on capital gains in France. Besides, a positive relation
between the relative tax burden of pension funds and their payout ratio is found, although not
38
significant. Second, it is tested whether family firms actively managed by family members
pay lower dividends than non-family firms and family firms not actively managed by family
members. Both relationships are found to be positive instead of negative which was expected,
although they were not significant. Third, it is researched whether family firms not actively
managed by family members prefer dividends over share repurchases. The results show a
negative relation, although not significant. Fourth, the impact of the institutional environment
on the dividend payout ratio of family firms has been tested. It is found that family firms pay
lower dividends in countries with stronger shareholder protection because the institutional
environment act as an alternative corporate governance mechanism. Last, the impact of the
2008 financial crisis on the dividend payout ratio has been investigated. A significant negative
relationship has been found which implies that family firms paid lower dividends than non-
family firms during the 2008 financial crisis. This can be due to survival-oriented actions by
the family firm at the cost of minority shareholders.
This study contributed to the literature by expanding it with research based on family firms.
There are a lot family-controlled firms in the world but the research about family firms is
relatively little compared to research about non-family firms. This creates opportunities to do
research in a relatively new field. Also, the results of this study can help firms in improving or
changing their corporate governance. It is also found that an institutional environment plays
an important role for firms and their minority shareholders. This can be helpful for countries
with weak shareholder protection in creating a better institutional environment.
A first limitation of this study is that the sample consists of little observations of pension
funds. The results of the analysis done on this small sample are less generalizable. Future
research should try to create a larger sample of pension funds. Second, to calculate the relative
tax burden for families and individuals an average tax rate on dividends is used. In future
research the dividend tax rates could be investigated more deeply and more specific dividend
tax rates could be assigned to the families and individuals. Third, this study focused on listed
firms. Future research could also take into account non-listed firms and for example,
investigate difference between listed and non-listed family firms.
39
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43
APPENDIX
Table A1 Variable definitions used in equation 1-5
Variable Equation Definition
Payout ratio 1, 3 The proportion of dividends paid relative to total
payout (dividends and share repurchases),
calculated by dividing dividends by dividends
plus share repurchases.
Dividend payout ratio 2a, 2b, 4 The dividend paid by the firm scaled by their net
income.
TAXATIONFirmtype 1 The relative tax burden for families and
individuals, corporations, and pension funds,
calculated by (1 − 𝜏𝑑𝑖𝑣,𝑡)/(1 − 𝜏𝑐𝑔,𝑡)
MBR 1, 2a, 2b, 3, 4, 5 The market-to-book ratio, calculated by dividing
the market value of the firm by its book value.
FIRMSIZE 1, 2a, 2b, 3, 4, 5 The size of the firm, calculated by the log of
total sales.
FIRMAGE 1, 2a, 2b, 3, 4, 5 The age of the firm.
ROA 1, 2a, 2b, 3, 4, 5 The return on assets, calculated by dividing net
income by total assets.
CASH 1, 2a, 2b, 3, 4, 5 The cash and cash equivalents of the firm scaled
by total assets.
SALESGROWTH 1, 2a, 2b, 3, 4, 5 The growth of sales of the firm.
NONOP 1, 2a, 2b, 3, 4, 5 The non-operating income of the firms as a
percentage of total earnings.
ACTIVEFAMILYFIRM 2a A dummy variable; 1 for family firms actively
managed by family members and 0 for non-
family firms.
FAMILYFIRM 5 A dummy variable; 1 for family firms and 0 for
non-family firms.
MANAGEMENT 2b, 3 A dummy variable; 1 for family firms actively
managed by family members, 0 for family firms
not actively managed by family members.
SHAREHOLDER
PROTECTION
4 A dummy variable; 1 for strong shareholder
protection, 0 for weak shareholder protection.
CRISIS 5 A dummy variable; 1 for the 2008 financial
crisis, 0 for 2009 up to and including 2015.
FAMILYFIRM*CRISIS 5 A dummy variable; 1 for family firms during the
2008 financial crisis, 0 for non-family firms
during the financial crisis.
44
Table A2 Composition of the Minority Investor Protection Index
Extent of disclosure index (0-10) Extent of shareholders rights index (0-10)
Review and approval requirements for
related-party transactions
Shareholders’ rights and role in major
corporate decisions
Internal, immediate and periodic disclosure
requirements for related-party transactions
Extent of director liability (0-10) Extent of ownership and control index (0-
10)
Minority shareholders’ ability to sue and
hold interested directors liable for prejudicial
related-party transactions
Governance safeguards protecting
shareholders from undue board control and
entrenchment
Available legal remedies (damages,
disgorgement of profits, fines, imprisonment,
rescission of transactions)
Ease of shareholder suits index (0-10) Extent of corporate transparency index (0-
10)
Access to internal corporate documents Corporate transparency on significant
owners, executive compensation, annual
meetings and audits.
Evidence obtainable during trial
Allocation of legal expenses
Extent of conflict of interest regulation
index (0-10)
Extent of shareholder governance index
(0-10)
Simple average of the extent of disclosure,
extent of director liability and ease of
shareholders suits indices
Simple average of the extent of shareholder
rights, extent of ownership and control and
extent of corporate transparency indces
Strength of minority investor protection index (0-10)
Simple average of the extent of conflict of interest regulation and extent of shareholder
governance indices
Source: http://www.doingbusiness.org/data/exploretopics/protecting-minority-investors/what-measured
45
Table A3 Tax regulation United Kingdom1
Year Dividends to Capital gains Year Dividends to Capital gains
2015 Individuals Tax credit 10% 21% 2011 Individuals Tax credit 10% 28%
Basic rate taxpayers 10% Basic rate taxpayers 10%
Higher rate taxpayers 32.5% Higher rate taxpayers 32.5%
Additional rate taxpayers 37.5% Additional rate taxpayers 42.5%
Average 26.67% Average 28.33%
Corporations 0% Corporations 0%
Pension funds 0% Pension funds 0%
2014 Individuals
Tax credit 10% 23% 2010 Individuals Tax credit 10% 28%
Basic rate taxpayers 10% Basic rate taxpayers 10%
Higher rate taxpayers 32.5% Higher rate taxpayers 32.5%
Additional rate taxpayers 37.5% Additional rate taxpayers 42.5%
Average 26.67% Average 28.33%
Corporations 0% Corporations 0%
Pension funds 0% Pension funds 0%
2013 Individuals Tax credit 10% 24% 2009 Individuals Tax credit 10% 28%
Basic rate taxpayers 10% Basic rate taxpayers 10%
Higher rate taxpayers 32.5% Higher rate taxpayers 32.5%
Additional rate taxpayers 37.5% Additional rate taxpayers 40%
Average 26.67% Average 27.5%
Corporations 0% Corporations 0%
Pension funds 0% Pension funds 0%
2012 Individuals Tax credit 10% 26% 2008 Individuals Tax credit 10% 30%
Basic rate taxpayers 10% Basic rate taxpayers 10%
Higher rate taxpayers 32.5% Higher rate taxpayers 32.5%
Additional rate taxpayers 37.5% Additional rate taxpayers 40%
Average 26.67% Average 27.5%
Corporations 0% Corporations 0%
Pension funds 0% Pension funds 0%
1 Retrieved from http://www.ey.com/gl/en/services/tax/global-tax-guide-archive
46
Table A4 Tax regulation Germany2
Year Dividends to Capital gains Year Dividends to Capital gains
2016 Individuals 25%* 5% non-
deductible
expense, 95%
tax exemptΔ
2011 Individuals 25%* 5% non-
deductible
expense, 95%
tax exemptΔΔ
Corporations 5% non-deductible expense,
95% tax exempt+
Corporations 5% non-deductible expense,
95% tax exempt+
Pension funds 0% Pension funds 0%
2014 Individuals 25%* 5% non-
deductible
expense, 95%
tax exemptΔ
2010 Individuals 25%* 5% non-
deductible
expense, 95%
tax exemptΔΔ
Corporations 5% non-deductible expense,
95% tax exempt+
Corporations 5% non-deductible expense,
95% tax exempt+
Pension funds 0% Pension funds 0%
2013 Individuals 25%* 5% non-
deductible
expense, 95%
tax exemptΔ
2009 Individuals 25%* 5% non-
deductible
expense, 95%
tax exemptΔΔ
Corporations 5% non-deductible expense,
95% tax exempt+
Corporations 5% non-deductible expense,
95% tax exempt+
Pension funds 0% Pension funds 0%
2012 Individuals 25%* 5% non-
deductible
expense, 95%
tax exemptΔ
2008 Individuals 25%* 5% non-
deductible
expense, 95%
tax exemptΔΔ
Corporations 5% non-deductible expense,
95% tax exempt+
Corporations 5% non-deductible expense,
95% tax exempt+
Pension funds 0% Pension funds 0% * Investment income is tax-free in an amount of EUR801 per year for a single taxpayer (EUR1,602 per year for a married couple filing jointly).
** Investment income is tax-free in an amount of EUR750 per year for a single taxpayer (EUR1,500 per year for a married couple filing jointly).
+ Only tax exempt with a minimum shareholding of 10%. Also, the parent is required to have a minimum shareholding of 10% as of 1 January of the calendar
year in which the dividend distribution takes place. Otherwise, the dividends are subject to trade tax. ++
The parent is required to have a minimum shareholding of 10% as of 1 January of the calendar year in which the dividend distribution takes place.
Otherwise, the dividends are subject to trade tax.
Δ The 95% tax exemption for capital gains received by a corporate shareholder is not granted to banks, financial services institutions and financial enterprises
(including holding companies) that purchase shares with the intention of realizing short-term profits for their own account. ΔΔ
If the shares were acquired before 2007 through a tax-free contribution of a qualifying business or a partnership interest in exchanges for changes, a seven
year holding period is required to qualify for the capital gain exemption. The exemption does not apply to capital gains derived from sales of shares that were
acquired before 2007 in a tax-free contribution of a qualifying business or a partnership interest within a period of seven years before the sale.
2 Retrieved from http://www.ey.com/gl/en/services/tax/global-tax-guide-archive
47
Table A5 Tax regulation France3
3 Retrieved from http://www.ey.com/gl/en/services/tax/global-tax-guide-archive
Year Dividends to Capital gains
2015 Individuals From EUR To EUR Percent For tax years closed on or
after 31 December 2012,
the corporate income tax
applies to 12% of the
gross capital gains
realizing on qualifying
participations.
Consequently, the
effective tax rate is 4%Δ
0 9,699 0
9,700 26,790 14
26,791 71,825 30
71,826 152,107 41
152,108 No limit 45
Average 26%
Corporations 5% service charge, 95% tax
exempt+
Pension funds 0%
2014 Individuals From EUR To EUR Percent For tax years closed on or
after 31 December 2012,
the corporate income tax
applies to 12% of the
gross capital gains
realizing on qualifying
participations.
Consequently, the
effective tax rate is 4%Δ
0 9,689 0
9,690 26,763 14
26,764 71,753 30
71,754 151,955 41
151,956 No limit 45
Average 26%
Corporations 5% service charge, 95% tax
exempt+
Pension funds 0%
2013 Individuals From EUR To EUR Percent For tax years closed on or
after 31 December 2012,
the corporate income tax
applies to 12% of the
gross capital gains
realizing on qualifying
participations.
Consequently, the
effective tax rate is 4%Δ
0 6,010 0
6,011 11,990 5.5
11,991 26,630 14
26,631 71,396 30
71,397 151,199 41
151,200 No limit 45
Average 22.58%
Corporations 5% service charge, 95% tax
exempt+
Pension funds 0%
2012 Individuals From EUR To EUR Percent 10% of the net capital
gains realized on
qualifying participations
during a fiscal year is
added back to profits
taxable at the standard rate
of corporate income tax.
Consequently, the
effective tax rate is 3.4%Δ
0 5,962 0
5,963 11,895 5.5
11,896 26,419 14
26,420 70,829 30
70,830 149,999 41
150,000 No limit 45
Average 22.58%
Corporations 5% service charge, 95% tax
exempt+
Pension funds 0%
48
Table A6 Tax regulation France cont’d
* For a married couple, the first EUR3,050 of total taxable dividend income is exempt. The exempt
amount for single individuals is EUR1,525. +
Only tax exempt with a minimum shareholding of 5% for at least two years. Δ
When holding at least 10% of the share capital.
Year Dividends to Capital gains
2011 Individuals From EUR To EUR Percent 5% of the net capital gains
realized on qualifying
participations during a
fiscal year is added back
to profits taxable at the
standard rate of corporate
income tax. Consequently,
the effective tax rate is
1.72%Δ
0 5,962 0
5,963 11,895 5.5
11,896 26,419 14
26,420 70,829 30
70,830 No limit 41
Average 18.1%
Corporations 5% service charge, 95% tax
exempt+
Pension funds 0%
2010 Individuals*
From EUR To EUR Percent 5% of the net capital gains
realized on qualifying
participations during a
fiscal year is added back
to profits taxable at the
standard rate of corporate
income tax. Consequently,
the effective tax rate is
1.72%Δ
0 5,962 0
5,963 11,895 5.5
11,896 26,419 14
26,420 70,829 30
70,830 No limit 41
Average 18.1%
Corporations 5% service charge, 95% tax
exempt+
Pension funds 0%
2009 Individuals*
From EUR To EUR Percent 5% of the net capital gains
realized on qualifying
participations during a
fiscal year is added back
to profits taxable at the
standard rate of corporate
income tax. Consequently,
the effective tax rate is
1.72%Δ
0 5,874 0
5,875 11,719 5.5
11,720 26,029 14
26,030 69,782 30
69,783 No limit 40
Average 17.9%
Corporations 5% service charge, 95% tax
exempt+
Pension funds 0%
2008 Individuals*
From EUR To EUR Percent 5% of the net capital gains
realized on qualifying
participations during a
fiscal year is added back
to profits taxable at the
standard rate of corporate
income tax. Consequently,
the effective tax rate is
1.72%Δ
0 5,851 0
5,852 11,672 5.5
11,673 25,925 14
25,926 69,504 30
69,505 No limit 40
Average 17.9%
Corporations 5% service charge, 95% tax
exempt+
Pension funds 0%
49
Table A7 Relative tax burden United Kingdom
Year Individuals Corporations Pension Funds
2015 0.9282 1.2658 1.2658
2014 0.9523 1.2987 1.2987
2013 0.9649 1.3158 1.3158
2012 0.9909 1.3514 1.3514
2011 0.9954 1.3889 1.3889
2010 0.9954 1.3889 1.3889
2009 1.0069 1.3889 1.3889
2008 1.0357 1.4286 1.4286
Table A6 Relative tax burden Germany
Year Individuals Corporations Pension Funds
2015 0.7895 1 1.0526
2014 0.7895 1 1.0526
2013 0.7895 1 1.0526
2012 0.7895 1 1.0526
2011 0.7895 1 1.0526
2010 0.7895 1 1.0526
2009 0.7895 1 1.0526
2008 0.7895 1 1.0526
Table A8 Relative tax burden France
Year Individuals Corporations Pension Funds
2015 0.7708 0.9896 1.0417
2014 0.7708 0.9896 1.0417
2013 0.8065 0.9896 1.0417
2012 0.8014 0.9834 1.0352
2011 0.8333 0.9666 1.0175
2010 0.8333 0.9666 1.0175
2009 0.8354 0.9666 1.0175
2008 0.8354 0.9666 1.0175
50
Table A9 Shareholder Protection Index United Kingdom
Year Extent of
conflict of
interest
regulation
index (0-10)
Extent of
disclosure
index (0-10)
Extent of
director
liability index
(0-10)
Ease of
shareholder
suits index (0-
10)
Extent of
shareholder
governance
index (0-10)
Extent of
shareholder
rights index
(0-10)
Extent of
ownership
and control
index (0-10)
Extent of
corporate
transparency
index (0-10)
Strength of
minority
investor
protection
index (0-10)*Δ
2016 8.3 10.0 7.0 8.0 7.3 8.0 6.0 8.0 7.8
2015 8.3 10.0 7.0 8.0 7.3 8.0 6.0 8.0 7.8
2014 8.3 10.0 7.0 8.0 7.3 8.0 6.0 8.0 7.8
2013 10.0 7.0 7.0 8.0
2012 10.0 7.0 7.0 8.0
2011 10.0 7.0 7.0 8.0
2010 10.0 7.0 7.0 8.0
2009 10.0 7.0 7.0 8.0
2008 10.0 7.0 7.0 8.0
* This is calculated as the simple average of the extent of conflict of interest regulation and extent of shareholder governance indices.
Δ The higher the value of the minority investor protection index, the stronger minority investor protection.
51
Table A10 Shareholder Protection Index Germany
Year Extent of
conflict of
interest
regulation
index (0-10)
Extent of
disclosure
index (0-10)
Extent of
director
liability index
(0-10)
Ease of
shareholder
suits index (0-
10)
Extent of
shareholder
governance
index (0-10)
Extent of
shareholder
rights index
(0-10)
Extent of
ownership
and control
index (0-10)
Extent of
corporate
transparency
index (0-10)
Strength of
minority
investor
protection
index (0-10)*Δ
2016 5.0 5.0 5.0 5.0 7.0 8.0 6.0 7.0 6.0
2015 5.0 5.0 5.0 5.0 7.0 8.0 6.0 7.0 6.0
2014 5.0 5.0 5.0 5.0 7.0 8.0 6.0 7.0 6.0
2013 5.0 5.0 5.0 5.0
2012 5.0 5.0 5.0 5.0
2011 5.0 5.0 5.0 5.0
2010 5.0 5.0 5.0 5.0
2009 5.0 5.0 5.0 5.0
2008 5.0 5.0 5.0 5.0
* This is calculated as the simple average of the extent of conflict of interest regulation and extent of shareholder governance indices.
Δ The higher the value of the minority investor protection index, the stronger minority investor protection.
52
Table A11 Shareholder Protection Index France
Year Extent of
conflict of
interest
regulation
index (0-10)
Extent of
disclosure
index (0-10)
Extent of
director
liability index
(0-10)
Ease of
shareholder
suits index (0-
10)
Extent of
shareholder
governance
index (0-10)
Extent of
shareholder
rights index
(0-10)
Extent of
ownership
and control
index (0-10)
Extent of
corporate
transparency
index (0-10)
Strength of
minority
investor
protection
index (0-10)*Δ
2016 5.7 8.0 3.0 6.0 7.3 6.0 8.0 8.0 6.5
2015 5.7 8.0 3.0 6.0 7.3 6.0 8.0 8.0 6.5
2014 5.7 8.0 3.0 6.0 7.3 6.0 8.0 8.0 6.5
2013 8.0 3.0 5.0 5.3
2012 8.0 3.0 5.0 5.3
2011 8.0 3.0 5.0 5.3
2010 8.0 3.0 5.0 5.3
2009 8.0 3.0 5.0 5.3
2008 8.0 3.0 5.0 5.3
* This is calculated as the simple average of the extent of conflict of interest regulation and extent of shareholder governance indices.
Δ The higher the value of the minority investor protection index, the stronger minority investor protection
53
Table A12 VIF values 1
Table A13 VIF values 2
Variable VIF VIF
ACTIVEFAMILYFIRM 1.111
-
1.031
1.190
1.109
1.074
1.157
1.002
1.002
-
1.179
1.322
1.207
1.367
1.227
1.021
1.035
1.102
MANAGEMENT
MBR
FIRMSIZE
FIRMAGE
ROA
CASH
SALESGROWTH
NONOP
Table A14 VIF values 3
Variable VIF
MANAGEMENT 1.182
MBR 1.259
FIRMSIZE 1.323
FIRMAGE 1.208
ROA 1.375
CASH 1.231
SALESGROWTH 1.032
NONOP 1.038
Family firms Corporations Pension funds
Variable VIF VIF VIF
TAXATION 2.494 1.285 6.727
MBR 1.427 1.059 3.949
FIRMSIZE 1.912 1.660 3.135
FIRMAGE 1.919 1.355 6.671
ROA 1.650 1.132 1.276
CASH 1.694 1.291 7.481
SALESGROWTH 1.066 1.017 1.258
NONOP 1.051 1.018 1.287
54
Table A15 VIF values 4
Variable VIF
SHAREHOLDERPROTECTION 5.865
MBR 1.369
FIRMSIZE 1.881
FIRMAGE 1.996
ROA 1.543
CASH 1.654
SALESGROWTH 1.091
NONOP 1.057
Table A16 VIF values 5
Variable VIF
FAMILYFIRM 1.467
MBR 1.064
FIRMSIZE 1.607
FIRMAGE 1.369
ROA 1.131
CASH 1.301
SALESGROWTH 1.012
NONOP 1.014