The evaluation of corporate governance quality effect on dividend policy of companies in Tehran stock exchange market

Transcription

1 International Research Journal of Applied and Basic Sciences 2013 Available online at ISSN X / Vol, 7 (1): Science Explorer Publications The evaluation of corporate governance quality effect on dividend policy of companies in Tehran stock exchange market Maryam karimi 1, Zeinab karimi 2, Zahra Mousavi 3 1.Department of Accounting,Abadan Branch, Islamic Azad University, Abadan, Iran 2.M.A in Accounting,Chamran University 3.Department of Accounting,Andimshk Branch, Islamic Azad University, Andimeshk, Iran Corresponding Author : Maryam karimi ABSTRACT: Companies' ranking presents transparent information about them from the corporate system quality view using criteria drawn from principles and structures of corporate governance system and provides required data for comparison by users. Presentation of corporate governance quality results increases general knowledge level of users regarding frameworks and functions of this system and forms effective expectations and demands for improving management quality in businesses. This will leads to increased transparency and observance of shareholders' rights. Research showed that the quality of corporate governance system can be effective on some financial variables. This study examines the effect of corporate governance quality on business dividends variables. 80 firms in Tehran stock exchange were selected from 200 to 2009 and analyzed by regression analysis. Results of the study showed that there is a significant relationship between corporate governance quality and business dividend variables. Keywords: corporate governance quality, managing director, net profit to dividend ratio, net assets to dividend ratio. INTRODUCTION Corporate governance has widely and critically attracted professionals and groups like managers, shareholders, consulting institutions and other groups from mid 80s. International accountants federation has defined corporate governance in 2004 as: corporate governance is responsibilities and procedures used by board of directors and managers to determine strategic path which guarantees achieving goals, controlling risks and using resources. Transparency, accountability and sufficient disclosure are three basic elements in corporate governance. Therefore, it can be concluded that corporate governance is a set of mechanisms which help confirming fair and correct behavior with all beneficiaries and enhancing transparency and accountability (Hasasyegane, 200). Organization for economic development and cooperation (OE CD) has defined corporate governance as: "a set of relationships between management, board of directors, shareholders and other beneficiaries. Corporate governance also provides a structure which goals of company are established through it and determines access tools to these goals and manner of monitoring managers' performance. Optimal corporate governance should create suitable motivations for board of directors and directors to follow those goals which are useful for the company and shareholders and facilitates effective and efficient monitoring. The existence of such effective and efficient corporate governance in the company and generally, in economy, ensures a degree of trust which is required for the suitable performance of market economy. Establishment of corporate governance mechanism is a basic practice for optimal use of resources, improving accountability, transparency, fairness and observing the rights of all business beneficiaries. High quality corporate governance tools decrease the capital costs, increase liquidity and potential financial possibilities, facilitate the ability of coping with crises and avoid business ejection with suitable management in capital markets. Suitable corporate governance trends for countries prevent internal cash exit, increase foreign investments, increase economy's competiveness, coping with crises, efficient allocation of resources and achieving higher level of development (Kansiller, 2003).

2 According on agency theory, it is often expected that managers perform activities which are costly for shareholders and even the contracts between managers and firms could not prevent profit-seeking activities of managers, so the shareholders without control power need a structure for monitoring. Corporate governance is a tool to create balance between shareholders and managers and decreases agency problems and reduces the probability that managers adopt the policy of less optimal dividend. Therefore, we expect that corporate governance system had effect on dividend. Based on agency theory, two hypotheses were presented to justify the behavior of divided in literature: 1-result hypothesis; 2-substitution hypothesis. Result hypothesis is based on fee cash flow. Based on free cash flow?managers use free cashes in investment of projects and works which increase their prestige and reputation (Miton, 2004). Result hypothesis states that dividing profit is the result of corporate governance quality. In fact, firms which have not observed the rights of shareholders suffer from opportunist managers, because these managers have wide power and face low monitoring by shareholders. In this way, managers try to keep the cash in the firm, instead of distributing it among shareholders; so the lower profit payment is the result of weaker management. But if shareholders have sufficient authority, they can influence profit dividing (blue, 2008). Another hypothesis to justify profit distribution is substitution hypothesis. Based on this hypothesis, profit distribution substitutes shareholders rights i.e. business with poor corporate governance pay more dividend as a substitution for weak management. This argument focuses on the need of business to fund from foreign capital markets. Firms must have acceptable credit for foreign funding and one of the ways to create such credit is paying dividend. Good behavior with shareholders in those companies in which the rights of shareholders is weak creates credit for company. Therefore, the payment of dividend is the greatest credit achievement of these companies (Miton, 2004). Regarding above-mentioned, there is question that is there a significant relationship between dividend and corporate governance quality in Iranian firms? Regarding studies in other countries, there is not a study in Iran to determine whether there is a relationship between corporate governance and dividend policy (excepting Fakhari and Youseflitabar), although the corporate governance and dividend construct were studied separately. For that reason and novelty of the subject and necessity of its implementation in the country-which its circulation is presented- this study tries to investigate the subject and the quality of this system in Iran's capital market. The significance of this study is that it shows the relation between dividend and corporate governance system to managers, investors and other decision-makers, so they will make informed decisions and shareholders pay attention to quality of management system. On the other hand, stock exchange can regulate suitable regulations for companies and their management. BACKGROUND Some previous studies have indicated a strong relationship between corporate governance quality and bonds dividend (Renburg & Zilaji, 200; Michali & Roberts, 200; Shelifer & Vishni, 2000). But other researches did not confirm it (Joe & Pen, 2009; Nilsen 200; Jiraporn & Nig 200). Some of the most important studies are: Choi et.al (2009) showed that firms with more effective corporate governance and higher constraints on foreign funding pay less profits while firms with weak governance and less constraints on foreign funding pay more profit. Pronzit et.al (2008) indicated that there is positive relationship between business govern ing and dividend. These results did not change after the control of business attributes like size, profitability, tax and growth opportunities. Renbug and Zilaji (200) selected and studied 150 firms in Germany. Their results showed that firms with poor corporate governance distribute less profit between shareholders. Machilali and Robertz (200) compared the English firms in private and public sectors. They found that public firms with protection system for stronger shareholders' right distribute more dividends, compared with other firms. Lu (2004), in the study about 22 em erging markets, showed that the more improvement in foreign business governing factors including disclosure, trade regulations and stock market regulations, the more decrease the role of dividend in the control of agency costs. He proved substitution relation in his study. Miton (2004), using agency models, showed that companies with higher corporate governance rate pay more gains and in the companies with stronger business governance, the relation between growth and dividend is negative. Fakhari and Yousefalitabar (2010) studied the relationship between dividend policy and corporate governance in Tehran stock exchange companies. They selected 125 companies in stock exchange during as a sample. Business governing index was divided into 8 classes based on a checklist as disclosure, 39

3 commercial ethics, observing legal obligations, auditing, ownership, board of directors' structure, asset' management and liquidity. Their findings show showed that there is an inverse significant relationship between the business governing and dividend i.e. companies in stock exchange use dividend to gain reputation and credit but in spite of a significant relationship between corporate governance and dividend, the effect of corporate governance on dividend is low. Hypotheses There is a significant relationship between corporate governance and net profit to dividend profit ration. There is a relationship between business and dividend to net assets ratio. Variables In order to measure the profit division, this study uses two ratios Dividend to net profit ratio: is calculated through distributed dividend among shareholders on net profit at the end of year. Dividend to net assets ratio: is the product of distributed dividend among shareholders to net assets. In this study, corporate governance quality is calculated based on Dasilveria's (2007) index. This index is composed of four parts: information accessibility, information content, structure of board of directors, ownership and control structure which includes 20 questions related to corporate governance system and each question has one point. If the answer is positive the company will gain a score but if it is negative, the company gains no score. Finally, all the scores of companies sum up that the result shows the corporate governance quality. If the score is 15-20, the governance is strong. If it is 9-15 the governance is intermediate and if it is less than 99, it is weak. This index is presented in appendix. Statistical population Statistical sample of this study is Tehran stock exchange companies during Below criteria are used to select suitable sample: Not belong to investment or financial broker, holding, bank and leasing companies. Fiscal year ends in 29 Esfand for comparability. Financial data is accessible during study. Stock transactions were continuously in Tehran stock exchange without more than 1 month stop. This study data includes combination of data. Required data to hypotheses testing were extracted using Tadbirpardaz software and financial statements, and then they were analyzed in Excel software. Analysis and model estimation and hypothesis testing was done by Eviews7. 20 questions questionnaire was used to evaluate the quality of business governance. This index is composed of four parts: information accessibility, information content, structure of board of directors, ownership and control structure. Meeting each criterion adds one point to the companies score. Study years were 4 years and scores were calculated for 80 firms. Maximum score of companies is 400. Total score of sample companies is 438. Mean rank of companies is 8% i.e. companies meet 8% of governance index criterion. Obtained scores table is as below: Table1. Classes Questions number Companies score Rank mean in all Rank in each class classes Information accessibility % 84% Information content % 49% Structure for board of % 81% directors Ownership and control % 58% structure Total % Regarding table data, it can be concluded that from 8% mean rank, companies in information content obtained the lowest rank in all classes i.e. 12%. This indicates weakness of these companies in information content. The top rank among classes is belonged to class 1 i.e. information accessibility which equals 22%. Among its important causes are high reporting and predicting by companies regarding financial and operational condition. 40

4 Rank of board of directors is 20%. Among causes of high governance rank is this class; we can mention the distinguishing of managing director role and head of board of directors and ownership and control structure is 14%. In accessibility class, 84% of member companies meet the corporate governance criteria. In second class, it was 49%, 81% in third class and 58% in fourth class. Based on scores division in this study, if the scores were 15-20, the governance is strong. If it were 9-15 the governance is average and if it were less than 9, the governance is weak. Regarding scores, 3% of sample countries have strong governance and 37% have average governance. Descriptive statistics Descriptive statistics, which present a general view of data, are presented in table (2-4). Results in table (4-1) indicated that in study interval, mean score of corporate governance is 13.7 (14.00), dividend to net profit rations (0.24) and mean dividend to net assets is Maximum (minimum) score of corporate governance is 1.00; ratio of divided to net profit is 7/109 and ratio of divided to net assets ratio is 84/3. SD 1/3.32 0/51 Definition of variables Min 11/ /00 CGM: corporate governance mark which is between 0-20 X1: ratio of divided to net profit X2: ratio of divided to net assets. Table2. Max 1/ Median 14/00 0/24 0/14 Mean 13/7 0/92 0/34 Variables CGM X1 X2 Dispersion (standard deviation) of company governing mark is 1.3, ratio of divided to net profit.32 and the dispersion of divided to net assets profit is RESULTS OF REGRESSION MODELS AND HYPOTHESES TESTING In order to estimate regression models of the study, least square was used. Results of this test are shown in below table: Table 3. Prob. t-statistic Std. Error Coefficien t Variable X1+X Mean dependent Var. S.D. dependent Var. Akaike info criterion Schwarz criterion Hannan-Quinn criter R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood Durbin-Watson stat As can be seen from the table, it can be concluded that there is a significant relationship between corporate governance quality and ratio of divided to net profit and ratio of dividend to net assets, because the significance level is below %5 (0.0012). Correlation coefficient of variables is

5 CONCLUSION According to research, if the companies try to improve corporate governance condition, this has positive effect on capital structure and company's performance. For example, if companies improve their reporting regarding board of directors number, their differentiating and duties of head for board of directors, transparency and information accessibility and observing rights of shareholders and have internal audit and auditing committee, they would see ling term improvement in performance. An optimal company corporate governance creates sustainable growth because this system improves the performance of company and increase access to foreign fund. Establishment of this system increases trust in financial system and investment which in turn increases economic growth and optimal allocation of resources and profitability. On the other hand, the main purpose of corporate governance is reducing capital costs by improving the trust of investors which can gain their capital in a suitable interval. It is expected that companies with better future growth conditions apply corporate governance procedures usefully (Dasilveria, 2007). It is recommended to investors to pay attention to corporate governance when evaluating the condition of each company, because weak managers use divided as a tool to cover their weakness. In order to use results of the study, below subjects can be studied in the future: To study the effect of industry type on governance quality relation and company performance. To measure the knowledge and awareness of those involved in market of concepts and obligations of company governance. Ownership structure effect on company governance. To study the relation of governance quality with liquidity and capital structure. ACKNOWLEDGMENT The Islamic Azad University, Abadan Branch have financed budget of this research plan. REFERENCES Alexandre Di Miceli DS Evaluation and Determinants of Firm-Level Corporate Governance Quality in Brazil. Ananchotikul N Does foreign direct investment really improve corporate governance? Evidence from Thailand. Bank of Thailand discussion paper DP / 03 / 2008 BHAGAT, Sanjai, JEFFERIS, Richard. The Econometrics of Corporate Governance Studies. 1 st ed. Massachusetts Institute of Technology, p. Black B The corporate governance behavior and market value of Russian firms. Emerging Markets Review 2, Bozec Y, Bozec R CG quality and the cost of capital. University of Ottawa Chakrabarti R CG in India Evolation and Challenges. Chang YW, Chang RD, Wei JT The effects of CG mechanisms on investment decisions. Chen WP, Chung H, Liao WL Corporate Governance and equity liquidity : An analysis of S & P Transparency and Disclosure Ranking. Deminor R The deminor CG rating service ( ed. ). European report 2000 ( http : // Deminor rating.com ) DENIS D, McCONNELL J International corporate governance. Journal of Financial and Quantitative Analysis. v. 38, n. 1, p. 1-3, March, Drobaetz W, Gugler K, Hirschvolg S, Drobetz W, Schillhofer A, Zimmerman H CG and expected stock returns : Evidence from Germany. Heenetigala K CG practices and firm performance of listed companies in Sri Lanka. Thesis of the degree of doctor of business administration. Victoria Graduate School, Victoria University, Melbourne. Javed A, Iqabal R CG an firm performance : Evidence from Karachi Stock Exchauge. Lokman N, Cotter J, Mula J CG quality, incentive factors and voluantary CG disclisures in annual reports of Malaysian publicly listed companies. Lombordo D, Pagano M Law and equity markets : A simple model. In mccahery, Joseph a ( ed ), CG regimes : Convergence and diversity Oxford university press, London. Mitton T Across frim analysis of the impact of CG on the East Asian financial crisis. Journal of Financial Economics,NO. 4, pp Murya H The effectiveness of CG and external audit on constraining earnings management practice in the UK. Durhan university. http : // Ethesses. ac. uk. The Determinants of the German CG rating