Ownership and dividend policy: new evidence from … ANNUAL MEETINGS/2010-Aarhus old...Ownership and...
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Ownership and dividend policy: new evidence from
Germany
Matthias Smit and Henk von Eije
Abstract
This study examines whether large shareholders influence dividend policy in Germany in
the period 2005-2008. First, we test if the voting power of large shareholders influences
the decision on paying dividends. Second, we examine if the voting power influences the
amount of dividends paid. Third, we study if different shareholder types influence the
amount of dividends differently, and fourth, whether shareholder types in interaction with
their voting power influence the amount of dividends. We find no evidence of the impact
of the holdings of the largest shareholders: neither on the decision to pay cash dividends
nor on the amounts of dividends paid. Banks, and families (including private
blockholders) pay less dividends. When voting power is included, state authorities
increase dividends. Finally, we have indications that families use the recently instituted
instrument of Beteiligungsgesellschaften to receive more dividends than they do without
this tax vehicle.
JEL Classification: G32, G35
Key words: Dividend policy, Ownership structure, Germany, Beteiligungsgesellschaften
November, 30, 2009
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1. Introduction
This paper examines how large shareholders influence the dividend policy of firms. We analyze this
topic with data on German companies that are listed on the major indices DAX, MDAX, SDAX,
TecDax, and GEX for the years 2005 till 2008. This paper focuses entirely on the “classical” way to
distribute cash to shareholders, i.e. cash dividends, and leaves aside share repurchases. Von Eije and
Megginson (2008) find for 15 European countries that the real cash dividends paid increased from
1989 to 2005. Thus cash dividends still play an important role in the business world today despite the
existence of other cash distribution methods.
In this context, this study tries to answer four main questions. First, we study if the relative size of the
voting rights of the large shareholders influences the company’s decision to pay dividends. Second, we
analyze if the size of the voting rights of the large shareholders influences the relative amount of
dividends paid to shareholders. Largest shareholders can be grouped into several categories, namely
banks, financial institutions1, companies, state authorities, Beteiligungsgesellschaften
2, and families
and private blockholders. We, third, analyze whether these different types of largest shareholders
influence the amount of dividends paid, and, fourth, whether the size of the voting right and the type of
the largest shareholder together influence the amount of dividends paid.
This paper adds value to the existent literature in several ways. First, it reveals the influence of large
shareholders on dividend policy on a sample of German firms using very recent data as financial data
from 2005 to 2008 are with ownership data from 2009. The use of recent data is needed, because the
corporate tax system has changed in 20013 and previous studies (like those of Goergen et al. (2005)
and Gugler and Yurtoglu (2003)) are based on the situation that dividends were taxed at a much higher
rate than after the tax change of 2001. Related to this change in the tax system, another contribution of
this paper is the analysis of the dividend preference of Beteiligungsgesellschaften that are used
amongst others by families and other private blockholders for indirect shareholdings. Due to the
sample period, this study is, moreover, able to partly capture the effects of the current financial crisis.
We do not find evidence that the size of the ownership influences the likelihood to pay cash dividends
and the size of the ownership does not influence the amount of cash dividends either. However, if
banks or families are the largest owners, the amount of dividends paid becomes smaller. When voting
power is included, state authorities increase dividends. We, finally, have indications that the recently
instituted instrument of Beteiligungsgesellschaften favors the distribution of dividends in comparison
to companies that are owned directly by families.
1 These are e.g. mutual funds, pension funds, investment companies, and insurance companies.
2 Those will be explained in detail in section 2.2.4.
3 Details about the change in the tax system can be found in section 7.4.
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The rest of this paper is structured as follows. In section 2 we present the special features of the
German economic system. Section 3 provides an overview of the literature that deals with the link
between ownership and dividend policy. Section 4 describes the data and its limitations, and contains
some descriptive statistics. Section 5 outlines the methodology used in this paper. In section 6, the
empirical results are explained in detail before, finally, section 7 concludes this analysis and provides a
recommendation for further research.
2. The German economic system
The German economy is different from other major economies in some areas. One important
difference that matters for dividend policies is the role of capital markets for financing. One may
distinguish between outsider (investors are at arm’s length) and insider systems (close relationship
with investors), both of which are explained by Leuz and Wüstemann (2003).
An outsider system is featured by a heavy reliance of firms on public debt and equity markets for
raising capital. As the corporate ownership of firms is mostly dispersed, investors are at arm’s length
from firms and have no preferred access to company information. Thus, the existence of public debt
and equity markets is very important for monitoring managers and firms (Franks and Mayer, 1994).
Accounting and disclosure regulations are designed to ensure that outside investors are reasonably
well informed, and, hence, willing to invest in the public debt and equity markets. For the same
reason, dividends in outsider systems are more relevant since they convey an important signal to the
market and may help to overcome information asymmetries between management and investors. The
US and UK are quite good examples of outsider systems.
In contrast, the German economy resembles an insider system because the public debt and equity
markets play a minor role for financing. As the main sources of financing are internal and debt
financing, German firms have a strong relationship to a commercial bank, the so-called Hausbank for
the provision of loans. Being a major lender, such a bank has superior access to company information
and can request to get that through debt covenants. The information asymmetry is therefore not as
pronounced as it is in an outsider system. In addition to their function as issuer of debt, banks control
substantial equity stakes in German companies as well, either directly or indirectly through proxy
voting, and, consequently, are often represented on the supervisory board (Aufsichtsrat) which is the
main instrument of German corporate governance. In addition, cross holdings between firms and
families owning controlling stakes are common in Germany. Hence, in Germany corporate governance
and control are primarily in the hands of insiders so that the key contracting and financing parties are
reasonably well informed while outside investors face a lack of transparency. This lack of
transparency is an important feature of the German corporate governance system because it provides
barriers to entry and therefore reduces the threat of competition for control from outside (Rajan and
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Zingales, 1998). This view is supported by Da Silva et al. (2004:132) who report that the control
patterns in Germany have not changed much in the 1980s and 1990s. Legal changes in 1994
(Securities Act) and 1998 (Corporate Control and Transparency Act), however, indicate that the
German financial system is transforming towards an arm’s-length system, according to Leuz and
Wüstemann (2003). They reason that these changes were necessary because the reunified Germany
had an immense refinancing demand and, thus, needed to adapt itself to international capital markets
which have a demand for reliable public information.
These differences in the economic systems between the US and UK on the one hand and Germany on
the other hand may have implications for the dividend policies, too. Lease et al. (2000) report that
shareholders of German firms earn a lower dividend yield than those from the USA or UK. La Porta et
al. (2000) find in a cross-sectional study on 4,103 listed firms from thirty-three countries that in civil
law countries, like Germany, firms offer on average a lower degree of minority shareholder protection
while they at the same time pay lower dividends than firms in common law countries. Da Silva et al.
(2004), however, take a closer look at the data set of La Porta et al. (2000) and show that this pattern
might not be as obvious as the authors indicate. One finding of their review is that, e.g., Germany as a
civil law country has dividend payouts (measured by dividends over earnings) that are higher than the
median payouts of the common law countries. Hence, Germany might be an exception from the group
of civil law countries when it comes to the amount of dividends paid. This might also reflect upon the
dividend preferences of large shareholders in Germany.
With respect to the size of dividend payments in Germany, there are also legal restrictions as to the
amount that a firm has to pay out as dividends. The German Stock Corporation Act (Aktiengesetz,
AktG) regulates the payout policy of Aktiengesellschaften (AG). In its paragraph 150 it states that an
AG has to build up a legal reserve (gesetzliche Rücklage) from 5 percent of its profits until a certain
limit is reached. According to paragraph 58 AktG the management of an AG is allowed to pay at most
50 percent of the profit into another legal reserve (Gewinnrücklage), unless the voting at the annual
general meeting or the charter of the company rules otherwise. In general, the rest of the profit has to
be paid out to the shareholders of the company. However, again, the shareholders can vote for a
different payout policy in the annual general meeting. For owners of preference shares (Vorzugsaktie)
different rules apply. Normally, those preference shares do not bear a voting right for the owner. In
compensation for this the owner of such a share is entitled to a minimum cumulative preferred
dividend. If this higher dividend is not paid out and if this missed payment is not executed in the next
year, the owners of preference shares regain a voting right until all arrears are paid out (§ 140 AktG).
In Germany, dividends are normally declared once a year (Da Silva et al., 2004:73). According to
paragraph 58 AktG, management and the supervisory board make a proposition on how to use the
annual profit, including a proposition on the dividend. The final decision on whether to accept this
proposition or to decide for another way of allocating the profit is made by the voting shareholders in
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the annual general meeting. Da Silva et al. (2004) observe some facts about the actual dividend
behavior of German firms. First, German firms often practice dividend smoothing, i.e. they do not so
often change the dividend per share, irrespective of whether an increase or a decrease in the earnings
per share or in the cash flow per share occurs. They report that after two consecutive years of
increased profitability only 32 percent of German firms increase their dividends, whereas 75 percent of
US-based firms do the same. Second, in 1991-92 approximately 25 percent of all German firms did
not pay any dividends at all, whereas only 10-12 percent of UK firms abstain from paying dividends.
Third, regarding the size of a firm there appears to be a U-shaped curve between firm size and
dividend payout. The largest and the smallest quintiles exhibit below average payout ratios.
3. Literature Review
This literature review consists of two parts. The first one deals with the ownership structure of
companies in conjunction with dividend policy. It outlines findings on how ownership structure
changes after dividend events like initiations, omissions and changes of dividend size and whether
large shareholders prefer different levels of dividend payout ratios. The second part concentrates on
the preference of certain shareholder types concerning dividend policy. The three main types of
shareholders discussed are banks, state authorities, and families and private blockholders.
3.1 Ownership and payout policy
Michaely et al. (1995) investigate market reactions to initiations and omissions of dividends using data
of all companies on the New York Stock Exchange (NYSE) and the American Stock Exchange
(AMEX) that initiated dividends between 1964 and 1988. They investigate whether the share of
institutional ownership changes after a dividend omission4. They use data of the share of institutional
ownership three years before the omissions and three years after the omission. With respect to
ownership, they examine whether dividend omissions lead to a significant change in ownership but
find that this is not the case. The average institutional ownership over all firms in their sample is 30.0
percent (18.1 percent standard deviation) before the omission and 30.9 percent (17.6 percent standard
deviation) after the omission. Michaely et al. (1995) conclude that this adds support to the impression
that dividend omissions do not produce dramatic shifts in ownership.
Crutchley et al. (1999) investigate the simultaneity of the financial variables leverage, dividends,
insider ownership and institutional ownership and the link to agency cost. They use a three-stage least
squares regression with four regression equations, i.e. one for each of the four variables. Their data
4 They also tried to analyze the change in institutional ownership before and after dividend initiations, but failed
to collect a large enough sample.
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consist of New York Stock Exchange and American Stock Exchange listed companies for the periods
1984 to 1987 and 1990 to 1993. In the first sample period, institutional ownership is found to be
determined simultaneously with dividends5 while these two variables have positive impacts on each
other. Interestingly, though, the authors find a different result in the second sample period where
dividends are negatively determined by institutional ownership while the latter is determined
positively by the former. Crutchley et al. (1999) suggested that this change in the influence of
institutional ownership on dividends may be caused by the fact that many institutional investors had
become active monitors in the second sample period.
Dhaliwal et al. (1999) deal with the theory of tax clienteles for dividend policies and examine changes
in the ownership of the equity of firms that initiate dividends and expect that corporate investors that
are tax-exempt/tax-deferred and for whom dividends are not tax disadvantaged will start buying shares
of companies that initiated a dividend. Aggregate institutional ownership is used in that study as a
proxy for ownership by tax-exempt and tax-deferred corporate investors. Dhaliwal et al. (1999) use a
sample of 203 New York Stock Exchange (NYSE) / American Stock Exchange (ASE) / National
Association of Securities Dealers Automated Quotation System (NASDAQ) listed companies that
initiated or reinitiated6 a dividend payment between 1982 and 1995. Their finding is within their
expectation, namely that institutional ownership increases statistically and economically significantly
after the initiation of the dividend payment.
Short et al. (2002) deal with the link between dividend policy and institutional ownership in the UK.
In contrast to some papers mentioned above, they do not analyze initiations, changes, and omissions of
dividends, but focus on the level of dividends. Their analysis is based on a sample of 211 firms that are
listed on the London Stock Exchange and uses data from 1988 to 1992. The methodology of that paper
uses four different dividend models, namely the Full Adjustment Model, the Partial Adjustment Model
(Lintner, 1956), the Waud Model (1966) and the Earnings Trend Model (Fama and Babiak, 1968). For
all these models they find strong evidence of a positive association between dividend payout policy
and institutional ownership.
Gugler and Yurtoglu (2003) deal with dividends as informative signals that indicate the severity of
conflict between large, controlling owners and small, outside shareholders. They analyze 736 dividend
announcements of 266 companies in Germany between 1992 and 1998 and find that larger holdings of
the largest owner reduce the dividend payout ratio while larger holdings of the second largest owner
increase this ratio. Their study also reveals that substantial deviations from the one-share-one-vote rule
also reduce the dividend payout. This is measured by the cash-flow-right-to-voting-right ratio of the
largest ultimate shareholder and the result indicates that the smaller this ratio is the larger becomes the
incentive of the large and controlling shareholder to seek compensation other than through pro-rata
5 In addition, they find it to be simultaneous with leverage and insider ownership, too.
6 Reinitiation of dividends after not paying cash dividends for at least five years.
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dividends. In line with this result, Gugler and Yurtoglu (2003) also find that the larger the cash flow
right of the controlling shareholder is, the larger are the dividends that are granted to the rest of the
shareholders.
Grinstein and Michaely (2005) examine the relationship between institutional holdings and payout
policy in U.S. public firms. From corporate theory, they name three reasons why ownership structure
and payout policy may be related. First, agency theories suggest that with better monitoring managers
are likely to share more profit with investors. They refer to Jensen (1986) who states that with
enhanced monitoring, firms are more likely to pay out their free cash flow. Grinstein and Michaely
(2005) further state that building on the assumption that institutions are better monitors, agency
theories imply that larger institutional shareholdings will increase payouts. The second reason that is
given by Grinstein and Michaely (2005) is based on Allen et al. (2000) who argue that firms want
institutions to facilitate takeovers or to monitor in order to increase value. Due to common institutional
charter, prudent-man rule restrictions and comparative tax advantages that some institutions have for
dividends, institutional investors prefer higher dividends, and, hence, Grinstein and Michaely (2005)
summarize that this second reason implies that higher dividends will lead to larger institutional
holdings. Finally, their third reason deals with adverse selection problems that might lead uninformed
investors to prefer dividend over repurchases (Barclay and Smith (1988), Brennan and Thakor (1990)).
Grinstein and Michaely (2005) reason that since institutional investors are informed investors they
might not face these problems. Furthermore, they might simply prefer the least costly payout policy,
i.e. share repurchases. In their empirical analysis, Grinstein and Michaely (2005) obtain three major
results. First, they find clear evidence that institutions prefer dividend-paying over non-dividend-
paying stocks. Their second finding is that institutions do not show a preference for firms that pay
higher dividends. Even more so, they find evidence that institutions prefer low-dividend stocks to
high-dividend stocks. Consequently, they show that firms who increase their dividends do not attract
more institutional investors. Third, Grinstein and Michaely (2005) find that institutions prefer firms
that repurchase shares as opposed to firms that do not repurchase their shares. With share repurchases
however, they find that firms that repurchase more as well as firms that repurchase regularly have
higher institutional ownership. Finally, the authors report that they detect a trend for dividend paying
and share repurchasing firms. Before the mid-1980s7 institutions preferred firms that paid more
dividends. However, after that time institutions show an aversion against high dividends and a
preference for repurchasing firms.
Goergen et al. (2005) examine the flexibility and downward flexibility of dividends in Germany
during the period from 1984 to 1993. In this context they also investigate whether ownership and
7 This changed when the SEC rule 10b-18 was enacted in the mid-1980s which enabled firms to freely
repurchase their own stock (Grinstein and Michaely, 2005).
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control have an impact on dividend policy. They find that the presence of a large shareholder has no
impact on the dividend decision.
Lee et al. (2006) investigate the changes in institutional ownership following changes in dividend
policy for a Taiwanese sample8. They find strong evidence of a clientele effect for investors with
different tax brackets, e.g. private investors and institutional investors. In line with Michaely et al.
(1995), they find that institutions as a whole show an insignificant response to dividend changes.
When regarded separately, only foreign institutions show a positive and significant reaction to
dividend increases. Lee et al. (2006) further find that institutions in Taiwan prefer higher dividends
and higher payout ratios while they dislike firms that pay no dividends.
Graham et al. (2006) examine a sample of NYSE firms that make an initial dividend announcement
between 1990 and 1998 and monitor the market reactions to these announcements. They divide their
sample between firms that announce anticipated quarterly dividends on a regular basis and those firms
that initiate unanticipated dividend payments. They find that compared to the unanticipated dividend
initiating firms, the firms with anticipated announcements have a large number of institutional traders
prior to the news release. Furthermore, Graham et al. (2006) find that after firms unexpectedly
announced the initiation of dividend payments, institutional ownership rose from 32.2 percent of
shares outstanding at the end of the quarter before the dividend initiation announcement to 50.6
percent at the end of the quarter after the announcement. In general, their results indicate that the
trading volume increased for dividend-initiating firms after the announcement of dividend initiation
was made public. They state that this is consistent with institutional investors increasing their
ownership in those dividend-initiating firms. Contrary to a common assumption in the literature that
institutional investors are the most informed investors, Graham et al. (2006) do not find evidence for
this hypothesis. They rather find evidence of increased trading prior to unanticipated dividend
announcements for stocks with low institutional ownership.
Similarly to the study of Short et al. (2002), Mancinelli and Ozkan (2006) conduct a study of the
relationship between dividend policy and ownership structure for an Italian sample9. This study uses
2001 data on a sample that consists of 139 listed Italian firms. They use a methodology based on tobit
regression and find that the voting right of the largest shareholder has a significantly negative impact
on the dividend payout ratio. This contradicts the finding of Short et al. (2002) who find exactly the
opposite for their UK sample. Mancinelli and Ozkan (2006) interpret their result as a support for their
prediction that a higher level of concentration of ownership when measured in the voting rights of the
largest shareholder leads to a higher probability of expropriation of minority shareholders. One
possibility of how expropriation can occur in this context is called tunneling. In this approach, the
8 Lee et al. (2006) state that there is no capital gains tax in Taiwan.
9 Mancinelli and Ozkan (2006) state that the ownership structure in Italy is highly concentrated and that this
results in relevant agency problems.
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large shareholders do not only have a majority stake in the firm, but also possess a large portion or
complete ownership of the cash flow rights of other businesses that have relationships with the firm
(Shleifer and Vishny, 1997). In this way, they are able to expropriate corporate wealth by setting
unfair terms for within-group transfers of assets and control stakes or by sales of goods and services
(Faccio et al., 2000). Hence, according to Mancinelli and Ozkan (2006), Italy seems to be a good
example for expropriation of minority shareholders through tunneling. A second interpretation that
they give is the extent to which top managers are related to the largest shareholder. They find support
for the prediction that managers rather hold resources under their own control than distribute returns to
shareholders and reason that this seems likely as in 70 percent10
of Italian firms the top managers come
from the largest shareholder.
______________
Table 1 about here
_____________
3.2 Dividend preferences of different shareholder types
In the literature there is evidence that different types of large shareholders show different preferences
for dividend policies for various reasons. Those shareholders are e.g. banks, financial institutions,
companies, state authorities, and families and private blockholders. One important variable in this
context might also be whether the shareholder is of domestic or foreign origin. The following sections
will summarize the empirical findings that can be found in the literature for the dividend preferences
of banks, state authorities and families.
3.2.1 Banks
Banks play an important role in the German economy. Goergen et al. (2005) state that the German
corporate governance system is sometimes called a ‘bankbased corporate governance system’ that is
characterized by strong relationship banking. Da Silva et al. (2004:51) present three reasons as to why
German banks play such an important role in corporate governance. First, through equity participation
in industrial and commercial companies. Second, and due to the fact that most shares in Germany are
bearer shares that many shareholders deposit with their bank, these banks have control over a
considerable proportion of voting equity of large corporations at the annual general meeting,
especially through proxy voting. Third, banks are well represented on the supervisory board of many
corporations in Germany. Thus, banks are able to influence the outcome of the voting on the annual
general meeting significantly. There is, however, a trend towards lower direct shareholdings by banks.
10 Faccio and Lang (2002)
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Da Silva et al. (2004) show this for a sample of 221 German industrial and commercial quoted firms.
They used the years 1984, 1989, and 1993 to analyze the first-tier and ultimate level ownership
different investor types’ shareholdings exceeding 25 percent and 50 percent11
. The result of this study
is that the percentage of banks within all shareholders that had a first-tier ownership in a company of
at least 25 percent (50 percent) dropped from 12.1 percent (2.7 percent) in 1984 to 7.7 percent (2.4
percent) in 1993. For ultimate control, the figures dropped from 15.9 percent (5.5 percent) in 1984 to
10.1 percent (3.8 percent) in 1993. This development reflects the slight trend of the German economy
away from the huge amount of cross-holdings among firms and towards a more open and foreign
investor-friendly climate (Da Silva et al., 2004). Nonetheless, like France, Italy, and Japan, Germany
is still regarded as a traditionally bank-dominated economy (Da Silva et al., 2004:51)12
.
Regarding the dividend preference of banks as shareholders, Da Silva et al. (2004) further show that
bank-controlled firms have significantly lower dividend payout ratios than firms controlled by
dispersed ownership, or families. They show that bank control has a strongly negative impact on the
dividend payout ratio. Amihud and Murgia (1997) point into the same direction when they conclude
that the low dividend payout level in Germany might be due to the fact that banks are often in control
of majority voting stakes in shareholders’ meetings. They reason that banks who are a major
shareholder and lender of a company at the same time favor low dividend payouts in order to provide
greater security for their debt. In contrast to Da Silva et al. (2004), Gugler (2003) finds target payout
ratios13
of bank-controlled firms to be larger than those of family-controlled companies. Goergen et al.
(2005) find in addition, that if banks are in control this increases the likelihood of dividend omissions
in the wake of earnings losses, mitigates agency costs and reduce the need for dividends as a
monitoring device. Furthermore, Gugler (2003) finds that in bank-controlled corporations lagged
dividends determine this year’s dividend only marginally and that this might reflect the compensating
incentives of holding debt and equity of those firms at the same time.
3.2.2 State authorities
Gugler (2003) reasons that in state-controlled firms there exists a double principal-agent problem,
namely between the managers of the firm and the elected representatives of the government on the one
hand, and between the elected representatives of the government and the citizens on the other hand.
Gugler (2003:1301) assumes that “large numbers lead citizens to shirk on their monitoring role of
politicians, and thus the politicians themselves may not actively monitor the companies the state
owns.” Therefore, higher dividends are needed as a substitution for monitoring in state-controlled
firms. Gugler (2003) finds in his sample of Austrian companies that state-controlled firms have the
highest target payout ratio compared to firms controlled by banks, families and foreign owners. In
11 Their analysis does not take into account the proxy votes that banks can exercise on behalf of their customers.
12 Da Silva et al. (2004) cite Rajan and Zingales (1995) in this point.
13 These target payout ratios are measured as τ = ατ / (1 - (1 - α)), where τ symbolizes the target payout ratio and
α stands for the speed of adjustment coefficient.
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addition, state-controlled companies show significant dividend smoothing. His explanation is that the
elected politicians who are held accountable for all activities of government can be expected to have a
strong interest in a steady flow of dividends. First, dividends may be able to convince citizens that the
government successfully controls the company. Second, the steady flow of dividends will reduce the
free cash flow in the hands of the managers and, hence, reduce the agency problems that can result
from this free cash flow. Gugler (2003) computes the target payout ratios for state-controlled firms and
finds them to be 42.90 percent (33.30 percent for firms doing R&D). In addition, he also looks at the
dividend flexibility of firms. He finds that the ranking in flexibility to cut dividends is ‘family’ >
‘foreign firm’ > ‘bank’ > ‘state’ control. This, again, is consistent with the findings above where state
controlled firms have a strong preference for stable dividends and families are not reliant on dividends
as a means of reducing agency cost. In contrast to Gugler’s (2003) findings, Lee et al. (2006) find for
their Taiwanese dataset that government entities prefer lower positive dividends and payout ratios. A
reason for this is not mentioned by Lee et al. (2006). They only state that during the sample period
some of the companies in the sample were in the process of privatization while the government was
still owning shares and assume that it would be unlikely for a government to sell low dividend paying
shares and buy high dividend paying shares just for the sake of tax-free dividends.
3.2.3 Families
Da Silva et al. (2004:129) also comment on the dividend payout ratios for firms that are family-
controlled in Germany. They find those firms to have the largest dividend payout ratio (24.22 percent)
compared to company-controlled (18.50 percent), bank-controlled (16.60 percent) and widely-held
firms (19.03 percent). Interestingly, though, their analysis reveals that control by families does not
seem to have an impact on dividend policy. Gugler (2003) finds contradictory evidence regarding the
target payout ratios of family-controlled firms in Austria, i.e. that those firms choose significantly
lower target payout ratios (25.00 percent) when compared to bank-controlled firms (34.40 percent) 14
.
Gugler and Yurtoglu (2003) do not find a linear relationship between dividend payout ratios and
family ownership for a sample of German firms. For family ownership, their analysis reveals a U-
shaped relationship between the dividend payout ratio and the cash flow rights of the largest
shareholder (with a minimum at 40.20 percent) and an inverted U-shaped relationship between the
dividend payout ratio and the voting rights of the largest shareholder (maximum at 47.80 percent).
These shapes are consistent with the patterns that were found for the whole sample in Gugler and
Yurtoglu (2003).
14 The target payout ratios for firms that are active in R&D were found to be 13.00 percent for family-controlled
firms and 19.10 percent for bank-controlled firms.
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______________
Table 2 about here
_____________
3.2.4 Other shareholder types
For the remaining shareholder types that are included in this research no empirical evidence was found
in the literature. Thus this paragraph presents the author’s expectations regarding their effect on
dividends.
First, financial institutions are expected to show a preference for lower dividends, as banks do. One
reason therefore is that in four cases out of 35 in the sample of this study, the financial institution that
is a largest shareholder is owned by a bank itself. There, the financial institution is the investment trust
company of the bank. Hence, the dividend preference would be similar. A second reason might be that
financial institutions are able to thoroughly assess a company they want to invest in. Investment
professional have the knowledge to analyze the company and enough experience on how to exercise
control effectively. This might be enough for them to monitor the management closely, so that high
dividends as a substitute for monitoring is not needed in this case.
Second, companies that invest in other firms often do this for strategic reasons. This means, that the
buying company has an interest in a cooperation with the firm it partly bought. In those cases, one can
expect that the management team of the buying company has acquired plenty of information about the
target company. In addition, close relationships between both management teams might also develop
during the preparation of the acquisition. Hence, for the same reasons that are valid for banks and
financial companies, companies are expected to have a negative influence on dividends when
compared to widely-held ownership.
Third, the Beteiligungsgesellschaften are of special interest for this study. In Germany, those firms are
often called Beteiligungsgesellschaften, Vermögensverwaltungsgesellschaften,
Verwaltungsgesellschaften, or Holding. The reason for the special interest is a change in the corporate
tax policy in Germany in 2001 that determines the expectations of the dividend preference of these
companies. Detailed information about the change of the tax regulation is outlined in appendix B.
Before this policy change, dividends that were paid by German companies (Kapitalgesellschaften,
such as AG and KGaA) to other companies (also Kapitalgesellschaften) that owned shares of the
former were fully liable to taxation. The alteration of the paragraph 8b of the Corporate Tax Act
(Körperschaftsteuergesetz) in the course of the tax reform 2001 brought a radical change. From then
on until 2003, dividends that were exchanged between companies were completely tax-free. From
2004 on until today, 95 percent of those dividends are still tax-free and only 5 percent are liable to
taxation. After these changes in tax policy, the possibilities to save taxes rose for companies. In
addition, wealthy families or other private blockholders who set up a Beteiligungsgesellschaft to which
13 / 42
they transferred their shareholdings in other firms could also profit from this new tax regulations. The
dividends, which the Beteiligungsgesellschaft would then receive were 100 percent or 95 percent tax-
free, respectively. This tax incentive might have changed the behavior of families and private
blockholders regarding their dividend preference. Thus, it is expected that while direct holdings of
families and private blockholders will still have a negative influence on dividends, their indirect
holdings through Beteiligungsgesellschaften could have a positive impact on dividends.
Finally, the effect of foreign shareholders on dividends might be a positive one. Lee et al. (2006) and
Gugler (2003) find some evidence for a positive effect. However, there might be a different finding as
there are also different types of foreign shareholders that have different preferences.
4. Data
This section explains the data that are used in this study. It will start with the sample itself, the data
sources and explain which companies are included and which are not. In addition, section 3.2 will
provide an insight into the German law and institutions concerning the transparency of ownership and
explain how the notification system actually works. Section 3.3 describes the variables used in this
study. Finally, section 3.4 will present some descriptive statistics.
4.1 Sample
As mentioned in the introduction, the sample of this study comprises all German companies that were
listed in the German stock indices DAX, MDAX, SDAX, TecDax, and GEX on February 19, 2009.
From these 221 companies 30 belonged to the DAX, 50 to the MDAX, also 50 to the SDAX, 30 to the
TecDAX and 83 to the GEX15
. The stocks of those firms are all traded within the so-called Prime
Standard segment of the Deutsche Börse AG and have to fulfill the highest transparency requirements
on the German stock market16
. Due to the different structure of their financial reports, 6 banks, 3
insurance companies and one other financial institution were deleted from the sample. In addition,
another 51 companies were excluded because they were no German companies or there were not
enough data available. Finally, due to statistical reasons, four other firms were excluded as they were
found to be extreme outliers within the sample. The remaining sample of 156 companies can be
subdivided into seven different industries. 42 firms belong to the manufacturing, petroleum and
technology sector, 20 other represent the electronics, software, and IT business. From the utilities,
telecommunication and energy sector 13 companies are included in the sample and 17 companies are
active in the chemical and agricultural sectors. 32 companies belong to the service and real estate
15 22 out of those 83 were listed in the GEX and in one of the other indices simultaneously.
16 Among those transparency requirements are e.g. quarterly published company reports. Hence, the inclusion of
the earnings reporting frequency as a control variable does not make sense in this study.
14 / 42
industries, 17 are active in food or health care products, while the remaining 15 can be found in the
consumer goods or other businesses.
4.2 Transparency of ownership in Germany and limitations of the data
4.2.1 Regulation
In this study, the most important variable in the analysis of dividend determination is the ownership
variable, i.e. the relative amount of shares that the large shareholders of a company possess. To be able
to acquire these data there are however some difficulties which will be highlighted in this section.
It is said to be a German tradition to preserve the incumbents’ power by emanating as little
information about the firm’s activities as possible (Becht and Boehmer, 1999). Nevertheless, in
Germany the judicative basis for the publication of stockholdings that exceed certain thresholds of
stock ownership in a firm is laid by the law named WpHG (Wertpapierhandelsgesetz). This law was
passed in July 1994 and is the German interpretation of the guidelines 88/627/EWG and 89/592/EWG
of the council of the European Community. The former deals with the information that has to be
published due to acquisitions and dispositions of significant investments in exchange-listed
companies. The latter deals with the coordination regarding the rules on insider trading. Despite the
thirteen sections and 46 paragraphs of this law (details are discussed below), the efficacy of disclosure
regulation is very low (Becht and Boehmer, 1999). Within the context of the “Zweites
Finanzmarktförderungsgesetz”, not only the WpHG was established, but also the Federal Securities
Supervisory Office, that is known as the “Bundesanstalt für Finanzdienstleistungsaufsicht” (BaFin;
http://www.bafin.de) today17
.
In practice, there are different regulations that require the publication of ownership data in Germany.
As this paper only includes stock corporations, the so-called Aktiengesellschaften (AG) or
Kommanditgesellschaft auf Aktien (KGaA), only the applicable regulations will be dealt with here.
Companies that are AGs and KGaAs are not required to reveal the identity of owners who are
individuals in its annual report. In contrast, any company must include in its annual report whether it
owns more than 25 percent in another AG or KGaA itself (Becht and Boehmer, 1999). Furthermore,
AGs and KGaAs are obliged to include their own ownership in other firms if they exceed 20 percent
(§271 Handelsgesetzbuch (HGB)). Apart from the annual report, company statutes and contractual
arrangements provide valuable ownership and control information because German companies
17 In 1994, this entity was established as the Bundesaufsichtsamt für den Wertpapierhandel (BAWe). This
institution was merged together with the “Bundesaufsichtsamt für das Kreditwesen” and the “Bundesaufsichts-
amt für das Versicherungswesen” into the “Bundesanstalt für Finanzdienstleistungsaufsicht” on May 1st, 2002
when the Financial Services Supervisory Law “Finanzdienstleistungsaufsichtsgesetzes” (FinDAG) was passed.
(Becht and Boehmer, 1999)
15 / 42
frequently enter contracts where one company (controlled firm) fully surrenders claims on profits or
decisions to another, controlling firm (Becht and Boehmer, 1999). The most frequent examples of
those contracts are Profit and Loss Agreements (Gewinnabführungsvertrag) and Subordination of
Management Agreement (Beherrschungsvertrag). The former implies a transfer of both profits and
losses to the controlling company, the latter assigns the complete managerial control rights to the
controlling company (Goergen et al., 2004; §291 AktG). If a company entered such a contract this
gives a clear picture about the shareholder that is actually controlling the company. As this study deals
with the largest exchange-listed companies in Germany, however, those kinds of contracts will
probably be of less relevance because the firms in this sample will rather control other firms than be
controlled by others through those kinds of agreements.
The sources from which primary ownership data can be obtained are company registers, the
Bundesanzeiger (http://www.bundesanzeiger.de), the BaFin and the Federal Antitrust Office
(Bundeskartellamt) (Becht and Boehmer, 1999). The company registers are managed by local courts
and contain all filed documents from the businesses within the district of the court. Those documents
comprise the statutes, charters, and annual reports. To gain access to their information, there are,
however, four obstacles that have to be overcome (Becht and Boehmer, 1999): First, one must travel to
the potentially distant court in whose district the business is located. Second, the courts mostly only
have the most recent documents on site due to the storage space they have in their court buildings. It
might thus become necessary to request older documents days or weeks in advance to have them on
site when needed. Third, since the documents are sorted by company but not by type of document, it
may require some time and manual search to find the required information. Finally, and most serious,
most companies violate the law by not furnishing mandatory filings. Hansen (1996:56) assumes that
the law is broken in this way by two-third of all German companies. Understaffed courts and fees of
maximum EUR 5,000 are not able to stop or even sanction those business practices (Becht and
Boehmer, 1999). To overcome those obstacles, the German government provides an online portal
(http://www.unternehmensregister.de) where all publications from the electronic version of the
Bundesanzeiger, all filings and documents from the company registers and important company
information of securities-emitting companies can be obtained online. However, despite this appealing
online platform, the final problem mentioned by Becht and Boehmer (1999), the incompleteness of the
filings, persists.
The BaFin publishes all filings that are submitted to it under §21 to §29 WpHG on their website and
makes it possible to search for all filings that were submitted per company. According to §21 WpHG
anyone who reaches, transgresses or falls below 3%, 5%, 10%, 15%, 20%, 25%, 30%, 50%, or 75% of
ownership of voting rights of a German company has to notify this company and the BaFin. From
these filings, it is possible to obtain a good – yet not perfectly precise – impression of the current
ownership structure of an AG or KGaA for all shareholders who possess at least 3% of the voting
rights.
16 / 42
Finally, the Bundeskartellamt publishes a list of all takeovers and large voting block acquisitions that
it approved on its website. As only merger-related activities are included in this data source, it is not
able to provide a complete overview on the ownership structure of all major companies in Germany.
4.2.2 The notification process18
As mentioned above, if a shareholder exceeds, reaches or falls below the thresholds of stock
ownership stated by the WpHG, a notification is required. This notification has to be sent to the
company that issued the shares and the BaFin simultaneously within four trading days. The issuing
company then has to publish this information without any delay but at least within three trading days.
After this publication, the information has to be sent to the company register for storage. Hence, the
maximum time allowed between the actual trade and its publication are seven trading days. Becht and
Boehmer (1999) comment that before reaching the market, this information will have passed through
many hands and, if it is price relevant, could easily be used for illegal insider trades. They further note
that the German filing system appears antiquated, costly, and prone to errors compared to the filing
systems in the United States (Electronic Data Gathering Analysis and Retrieval, EDGAR) and Canada
(System for Electronic Document Analysis and Retrieval, SEDAR).
4.3 Data sources and Variables19
As mentioned before, this study follows the methodology of Mancinelli and Ozkan (2006) but it will
also extend it in some cases. The main feature that distinguishes their methodology from many other
papers is the fact that the ownership variable is collected for only one point in time. This study follows
that approach, too, since it was not possible to obtain historic ownership data.
The dependent variable in this study is the amount of cash dividends paid. In Mancinelli and Ozkan
(2006), the cash dividends are expressed in two ratios, namely cash dividends/earnings and cash
dividends/market capitalization. As a reason for those two ratios they state that although the cash
dividends/earnings ratio is the most commonly used measure of dividend payouts, it might be subject
to earnings manipulation due to accounting practices. For that reason, the cash dividends/market
capitalization ratio is used to provide more robustness to the findings (Mancinelli and Ozkan, 2006).
This paper, however, does not use the cash dividends/earnings ratio because there are some
observations in the sample for which the earnings figure is negative. For that reason we take cash
dividends/market capitalization is used as a second dependent variable. For the construction of these
variables, the financial data are averaged over three years. Data on cash dividends are obtained for the
years 2005 till 2008, but only the years 2006 until 2008 are used here. According to the description of
18 This process is defined in the §§ 21 to 29a of the WpHG.
19 The exact descriptions of the variables can be found in appendix A.
17 / 42
the cash dividend variable in Datastream, the amount that is given for e.g. 2008 shows the amount that
the company paid out in 2008. Hence, this profit was earned in the year before and, accordingly, the
cash dividend component of the two ratios is calculated as a mean of the years 2006 to 2008 while the
market capitalization components were averaged from 2005 to 2007 in order to reflect the relevant
time period in which the profits were earned that were paid out as dividends in the years 2006 to 2008.
Among the independent variables, the most important one is the ownership variable. Mancinelli and
Ozkan (2006) use one variable for the voting rights of the largest shareholder, and another variable for
the voting rights of all shareholders that have more than 2 percent of the voting rights, excluding the
largest shareholder. In addition, they use a dummy variable that equals one if there is a second large
shareholder and another dummy variable that equals one if the other large shareholders have more than
5 percent of the voting rights. In contrast, this paper uses four variables for the size of shareholders.20
The first one contains the relative size of stock ownership of the largest shareholder if it exceeds 3
percent. The second contains the relative size of stock ownership of the second largest shareholder if it
exceeds 3 percent. The third variable adds up the relative size of stock ownership of all other
shareholders that hold at least 3 percent. Finally, the fourth ownership variable is a dummy that takes
the value of one if there is at least one third largest shareholder who owns at least 3 percent of the
stock of a company. As it is explained in the methodology section, combinations of these variables are
used as well. In order to be able to detect the dividend preferences of different types of owners,
dummy variables are used for banks, financial institutions, companies, state authorities,
Beteiligungsgesellschaften, and families and private blockholders. One final dummy variable is used
when the investor is of foreign origin. In the final analysis of this study (table 10), those dummies are
multiplied with the size of the largest shareholder in order to include the shareholders’ size in the
analysis of their influence on cash dividends.
The ownership data for this study were obtained from the Commerzbank’s Wer gehört zu wem? online
service21
. This database collects ownership information on about 12,000 German companies from the
Bundesanzeiger and the German Federal Securities Supervisory Office (Bafin), both of which are
explained in the next section, as well as from the companies themselves22
. For this reason, the
company data of this online service might be considered more complete and up to date than the official
databases of the Bafin or the Bundesanzeiger. The database of the Wer gehört zu wem? online service
was updated on May 11, 2009 before the data for this paper were obtained from it. As it is not possible
to download historic data from this source at reasonable cost, the ownership data could be collected
only for one point in time, namely May 11, 2009. Since the financial data were downloaded for the
20 Size is always measured in percent of the shareholders’ equity.
21 http://wergehoertzuwem.das-buch-im-internet.de
22 In order to determine the ultimate shareholder of some Beteiligungsgesellschaften in the sample, the website
“Hoppenstedt Konzernstrukturen online” (http://www.hoppenstedt- konzernstrukturen.de/ nut_basis.htm) was
used.
18 / 42
years 2005 to 2008, there remains a gap in time between the ownership and the financial variables23
.
The effect of this difference in time might however be not too severe as ownership structures of
German companies were found to be stable in the past, at least in the 1980s and 1990s (Da Silva et al.,
2004:132). Despite there are roughly 12,000 companies listed in the database of the Commerzbank, it
was necessary to obtain the ownership information for 30 companies from the Bafin because those
firms were not listed in the Wer gehört zu wem? database.
In addition to the ownership, several other control variables are used that are based on lagged data,
too. The year in which the company was founded is included in the Age variable. The data for this
control variable are mostly taken from the company websites as the data on the year of incorporation
that AMADEUS provides may be misleading in some cases24
. Size is measured as the mean of the
market capitalizations from 2005 to 2007 and is based on Datastream data. Similar to von Eije and
Megginson (2008), who use the standard deviation of the net income over five years divided by each
year’s sales, this paper uses the standard deviation of EBIT data from 2005 to 2007 divided by the
mean of the revenues from 2005 to 2007 as a proxy for the Risk of the company. The leverage variable
is defined as in Mancinelli and Ozkan (2006) as 2005 to 2007 average of total debt over total assets.
The remaining financial data were obtained from Thomson Financial’s Datastream. Most variables
that are used in this study can be obtained from this source. However, it has become necessary in
multiple cases to add missing data to the dataset to fill the gaps that Datastream left open. In this case,
data from the financial reports that can be found on the companies’ websites mainly filled the missing
data points.
With regard to the control variables, the age of the company can be expected to have a positive impact
on dividend payments. Von Eije and Megginson (2008:363) find this positive impact and reason that
older companies may have lower growth opportunities, whereas their ability to accumulate funds
might be better, compared to younger companies. The EBIT-based risk variable might be expected to
have a negative impact on dividend policy since managers might prefer to pay low dividends during
times of unstable profits. However, Goergen et al. (2005) find that the dividend flexibility in Germany
is higher than, e.g. in the USA. If this effect is still present, then the influence of the risk variable
might be negligible or insignificant. The size of the company will probably have a positive effect on
23 The company that experienced the most dramatic change in ownership that occurred during this gap is the
bank Hypo Real Estate. The German government bought up to 90% of the shares of this bank during the
financial crisis in order to put it under state control and prevent this “system-relevant” bank from going
bankrupt. Since, however, banks are excluded in this study, it does not have any effect here. 24
One example is the Daimler AG (former DaimlerChrysler AG). AMADEUS states the year of incorporation to
be 1998, which is the year of the merger of the former Daimler Benz AG with Chrysler Corporation. The history
of Daimler, however, started much earlier, namely in 1883 when Benz & Cie. was founded – the company that
would merge with the Daimler Motoren Gesellschaft (founded 1890) in 1926 to form the Daimler-Benz AG. If
the AMADEUS data would be used, then Germany’s famous 126-year-old carmaker would misleadingly be put
on one level with some technology start-ups from the “Dot.com” era. Therefore, the age variable reflects the true
economic date of foundation, rather than the legal one.
19 / 42
dividends as mature and large companies have experienced a period of growth already and can now
afford to pay out cash to their shareholders, whereas younger companies might need this cash for their
own growth activities. Leverage is expected to have a negative influence on cash dividends
(Mancinelli and Ozkan, 2006). A possible explanation is given by Jensen (1986) who states that debt
is a substitute for dividends because it is a more credible commitment of the management to pay out
free cash flow and, hence, reduces the agency cost of free cash flow.
4.4 Descriptive statistics
In this sample of 156 companies, there are 122 firms that pay dividends in at least one year from 2006
to 2008, while there are 38 that do not pay any cash dividend in this period. Table 3 shows that state
authorities seem to invest in companies with rather high dividend payout ratios, while banks prefer
companies with low payout ratios. Another interesting fact is that the average market capitalization
(Size) of the companies in which state authorities are the largest shareholder are much higher than the
sample average, while family-controlled companies tend to be the smallest here.
______________
Table 3 about here
_____________
With regard to the ownership situation, table 4 contains the ownership figures of the largest
shareholders of all companies in the sample. 35 firms, or 22.4 percent of the sample are controlled by
shareholders who own more than 50 percent of the company stocks and there are only two firms25
that
have no single shareholder who possesses at least 3 percent of the company stocks.
______________
Table 4 about here
_____________
The data on direct ownership are summarized in table 5 which shows the number companies in which
the different types of shareholders are the largest, second largest or belong to the group of other
shareholders who own at least 3 percent of the company. Apart from the two companies mentioned
above which do not have any shareholder that owns at least 3 percent, there are three other firms
whose largest shareholders do not belong to either of the shareholder types in table 526
. The final
25 BASF SE and Gesco AG do not have any shareholder that holds at least 3 percent.
26 GFK SE has an association (GFK-Nürnberg e.V.) as its largest shareholder, Südzucker AG’s largest
blockholder is an agricultural cooperative society (Süddeutsche Zuckerrübenverwertungs Genossenschaft eG),
and the largest shareholder of ThyssenKrupp AG is a private foundation (Alfried Krupp von Bohlen und
Halbach-Stiftung).
20 / 42
column of table 5 indicates how many shareholders of the other types were found to be foreign-based.
Contrary to the previous literature, banks are far from being the most important shareholder group and
hold the largest block in only three out of the 156 companies. Much more often are companies,
financial institutions, Beteiligungsgesellschaften, and families and individuals found to be the largest
blockholders. The fact that 25.6 percent of the largest blockholders are foreign investors might be seen
as support for the statement of Leuz and Wüstemann (2003) that Germany is transforming its
economic system to attract foreign investors. Another striking fact is the high number of
Beteiligungsgesellschaften that hold large direct equity stakes in other firms. This can be seen as a
direct consequence of the 2001 reform of the Corporate Tax Act that created tax advantages for these
kinds of companies. As one would expect, Beteiligungsgesellschaften are much less often found to be
large ultimate shareholders of other firms. This suggests that these companies are mostly set up and
used as a vehicle for direct shareholdings that can absorb dividend payments 95 percent tax free,
independent of the tax treatment of the owner of the Beteiligungsgesellschaften. That becomes even
more obvious when the ultimate shareholdings are taken into account. Among the 29
Beteiligungsgesellschaften that are the largest direct shareholders, 17 are found to have a family or an
individual as their ultimate shareholder. This figure is by far the highest when compared to those that
have banks (1), companies (3), or state authorities (3) as ultimate shareholders. A similar pattern can
be found for the second largest shareholders. Out of the 27 Beteiligungsgesellschaften there are 11 that
are ultimately owned by families and individuals, whereas 4 are owned by state authorities. Banks,
companies and financial investors are the ultimate shareholders of 2 Beteiligungsgesellschaften each.
______________
Table 5 about here
_____________
Another pattern that can be observed in the data is that banks sometimes own parts of other companies
not only directly, but also through their own mutual trust companies. Evidence therefore is present in 4
cases for the largest shareholders, and in 8 cases for the second largest shareholders.
______________
Table 6 about here
_____________
5. Methodology
For this study it is not possible to use ordinary least squares analysis. Two types of regression
techniques are used in this paper. First, for the regression on the decision whether or not to pay
dividends, the maximum likelihood technique for binary data is used. For the second type of
21 / 42
regression, a method for censored data is used. The reason for that lies in the nature of the data of the
dependent variable. Since dividends cannot be negative the dividend-based ratios that are used as
dependent variables cannot be smaller than zero, too. Using ordinary least squares regression on such
data would lead to biased and inconsistent parameter estimates (Brooks, 2008:533). Tobin (1958)
developed a model to estimate regressions on censored dependent variables, which is known as Tobit
analysis and which will be used in this study.
As it is outlined in the introduction, there are four main questions that shall be answered with this
study. The first one is whether large shareholders have a preference for dividend-paying firms or for
non-dividend-paying firms. To find an answer to this question, a dummy variable (DPNP; dividend
payer / no dividend payer) is created that takes the value of 1 when the average value of cash
dividends paid from 2006 to 2008 is positive, and zero otherwise. This variable then serves as
dependent variable in the following regression equations.
(1) DPNP = α0 +α1 AGE + α2 RISK + α3 SIZE + α4 LEVERAGE + α5 LARGEST
(2) DPNP = α0 +α1 AGE + α2 RISK + α3 SIZE + α4 LEVERAGE + α5 LARGEST
+α6 (2ND
LARGEST + REST)
(3) DPNP = α0 +α1 AGE + α2 RISK + α3 SIZE + α4 LEVERAGE + α5 LARGEST
+α6 2ND
LARGEST + α7 REST(DUMMY)
(4) DPNP = α0 +α1 AGE + α2 RISK + α3 SIZE + α4 LEVERAGE
+ α5 (LARGEST + 2ND
LARGEST + REST)
These regression equations observe the effect of ownership in different combinations. In the first case,
only the relative size of the shareholdings of the largest shareholder is included. In the second case,
two variables, namely the size of the largest shareholder and the size of the all other shareholders who
own at least 3 percent of the company, excluding the largest shareholder. This combinations allows for
a test of whether the largest shareholder has a different dividend preference than the remaining large
shareholders. Third, the size of the largest shareholder, the second largest shareholder, and a dummy
variable that is equal to 1 if there is at least one other large shareholder who owns at least 3 percent of
the company. This combination of ownership variables is used by Mancinelli & Ozkan (2006) as well.
Finally, in the fourth case one variable containing the size of all shareholders that own at least 3
percent of the company is used. To account for the binary data of the dependent variable, an analysis
22 / 42
based on maximum likelihood estimation is used in conjunction with an extreme value distribution of
the residuals to determine the coefficients of this regression equation27
.
The second main question outlined in the introduction deals with the amount of dividends that large
shareholders prefer. Contrary to Short et al. (2002) and rather in line with Gugler and Yurtoglu (2003)
and Mancinelli and Ozkan (2006), it is expected here that large shareholders will prefer lower
dividends and, hence, have a negative influence on the cash dividends. The reason can be found in the
economic system of Germany. Due to the insider system, monitoring the management can be achieved
quite effectively even without high dividend payments because the important outside investors are
reasonably well informed (Leuz and Wüstemann, 2003). In addition, our expectation for the effect of
the second largest shareholder is also in line with Gugler and Yurtoglu (2003) and Mancinelli and
Ozkan (2006), who find it to be dividend increasing. In this way, as Mancinelli and Ozkan (2006)
reason, it might protect the smaller shareholders from expropriation and tunneling. The empirical
analysis of this question is based on a Tobit analysis where the dependent variable (cash
dividends/market capitalization) are censored at the lower end at zero. The control variables used here
are the same as in equations (1) to (4).
(5) RELDIVSIZE = α0 +α1 AGE + α2 RISK + α3 SIZE + α4 LEVERAGE + α5 LARGEST
(6) RELDIVSIZE = α0 +α1 AGE + α2 RISK + α3 SIZE + α4 LEVERAGE + α5 LARGEST
+α6 (2ND
LARGEST + REST)
(7) RELDIVSIZE = α0 +α1 AGE + α2 RISK + α3 SIZE + α4 LEVERAGE + α5 LARGEST
+α6 2ND
LARGEST + α7 REST(DUMMY)
(8) RELDIVSIZE = α0 +α1 AGE + α2 RISK + α3 SIZE + α4 LEVERAGE
RELDIVSIZE in this equations serves as a placeholder for the dependent variable cash
dividends/market capitalization. The ownership variables are used in exactly the same way as in
equations (1) to (4).
A third step in the methodology of this study aims to answer the third main question, namely the
dividend preferences of different types of shareholders. In detail, the investor types included here are
banks, financial institutions, companies, state authorities, Beteiligungsgesellschaften, and families and
private blockholders. A seventh variable contains those of the before mentioned shareholders that are
of foreign origin. All of these ownership variables are dummies that are equal to one if the largest
shareholder belongs to the dummy’s shareholder type. In this analysis of the third question, the size of
the shareholdings does not play any role. This regression is, however, also conducted in a second
27 Following the advice of Brooks (2008:539), robust covariances are computed according to “Huber/White” in
the statistical software package EVIEWS 6.
23 / 42
specification that is designed to uncover the effect of Beteiligungsgesellschaften in detail. Regarding
the change in the tax code of 2001 and the resulting implications, two separate variables for
Beteiligungsgesellschaften are used in the second specification. The first one contains all
Beteiligungsgesellschaften that are ultimately owned by a family or any other private owner. The
second variable contains all remaining Beteiligungsgesellschaften that are not owned by families or
other private owners28
. The regression equations for these two specifications are designed as follows:
(9) RELDIVSIZE = α0 +α1 AGE + α2 RISK + α3 SIZE + α4 LEVERAGE + α5 LARGEST_BANKS +
α6 LARGEST_FINANCIAL INSTITUTIONS + α7 LARGEST_COMPANIES + α8 LARGEST_STATE
AUTHORITIES + α9 LARGEST_BETEILIGUNGSGESELLSCHAFTEN + α10 LARGEST_FAMILIES
AND PRIVATE BLOCKHOLDERS + α11 LARGEST_FOREIGN SHAREHOLDERS
(10) RELDIVSIZE = α0 +α1 AGE + α2 RISK + α3 SIZE + α4 LEVERAGE + α5 LARGEST_BANKS +
α6 LARGEST_FINANCIAL INSTITUTIONS + α7 LARGEST_COMPANIES + α8 LARGEST_STATE
AUTHORITIES + α9 LARGEST_BETEILIGUNGSGES. (FAMILY-OWNED) + α10
LARGEST_BETEILIGUNGSGES. (NOT FAMILY-OWNED) + α11 LARGEST_FAMILIES AND
PRIVATE BLOCKHOLDERS + α12 LARGEST_FOREIGN SHAREHOLDERS
In these equations, RELDIVSIZE again stands for the dependent variable cash dividends/market
capitalization. It needs to be noted that these ownership dummies are not collectively exhaustive. As
mentioned in the section on descriptive statistics, there are 3 companies whose largest shareholder
does not fit one of the dummy variables used here (see footnote 28) and 2 other companies that are
widely-held as they do not have a shareholder that owns at least 3 percent. Hence, it is statistically
sound to use the dummy variables that are included in equations (9) and (10) as they do not cover all
observations in the sample. The dummies essentially measure the effect of those types of largest
shareholder on the dividend amount, as compared to companies that widely held or whose largest
shareholder does not belong to one of the dummies.
In order to answer the fourth question that is mentioned in the introduction, the equations (9) and (10)
are changed in one aspect, namely that each of the ownership dummy variables is multiplied with the
28 Of the 29 Beteiligungsgesellschaften that are the largest shareholder in the sample, 1 is owned by a bank, 17
are owned by families and private blockholders, 3 are owned by state authorities, 3 are owned by companies, and
for 3 the ultimate owner could not be found. In addition, 4 Beteiligungsgesellschaften are owned by foreign
owners. Finally, the ultimate owners of 2 other Beteiligungsgesellschaften do not belong to either of the
ownership variables.
24 / 42
size of the largest shareholder. In this way, not only the dividend preference of the shareholder type is
measured, but also the power that this shareholder has upon the dividend policy of the company.
Similar to the methodology in the previous paragraph, both equations (9) and (10) are estimated with
the dependent variable cash dividends/market capitalization.
6. Empirical results
The regression results of the four specifications of equations (1) to (4) are displayed in table 7. In all
four regressions, the Age variable is the only one that statistically significantly influences the decision
to pay cash dividends. Its positive coefficient reveals that older companies are more likely to pay
dividends than younger, which is expected. Concerning the ownership variables, none of the four
specifications shows significant results. Hence, the answer to the first of the four main questions is that
the size of the large shareholders of a company has no influence on the decision whether or not to pay
dividends in Germany. This result supports the finding of Goergen et al. (2005) who find that in
Germany the decision on dividend payments is not influenced by the presence of a large shareholder.
______________
Table 7 about here
_____________
In order to test the effect of the size of the large shareholders on the amount of dividend paid, the
regressions (5) to (8) are estimated and the results are displayed in table 8. In table 8, both Age and
Leverage have significant positive effects on the cash dividends/market capitalization ratio. For the
Age variable, this effect is expected. The leverage effect, however, is surprising. A higher total
debt/total assets ratio in this result increases the cash dividends/market capitalization ratio, while
Mancinelli & Ozkan (2006) find a strong negative effect of leverage on the same dependent variable
for Italy. Gugler and Yurtoglu (2003) also find a significant negative influence of the same leverage
ratio on the dividend payout ratio in a German sample. One possible explanation for this result is that
the market capitalization of companies with a higher leverage is in general lower, which in turn
increases the cash dividends/market capitalization ratio. Regarding the ownership variables, none of
the combinations of the variables shows statistically significant results. Also the second main question
has to be answered negatively, as the size of the shareholdings of the large shareholders does not have
a significant influence on the cash dividends/market capitalization ratio.
______________
Table 8 about here
_____________
25 / 42
In order to answer the third question of this study concerning the influence of different types of largest
shareholders on the amount of dividends, the equations (9) and (10) are estimated and the output of
those regressions is displayed in table 9. The specifications (1) and (3) are based on equation (9),
whereas the specifications (2) and (4) are based on equation (10). Regarding the control variables,
significant effects can be found for Age, Size and Leverage and, again, the coefficients are similar to
those of table 8. In table 9 there are significant effects for the ownership variables, especially in the
specifications (1) and (2). Compared with widely-held firms, banks, financial institutions and
companies all have a negative influence on the amount of cash dividends. This result supports Da
Silva et al.’s (2004:140) result who find that bank-controlled firms pay lower dividends than widely-
held firms. They reason that banks have a negative effect on the amount of dividends because bank
control is a substitute for dividends since it serves as a monitoring function. As the literature does not
mention any evidence with regard to financial institutions, one might expect that, since they have
almost the same effect on the dividend amount as banks is that in this sample, they follow similar
principles as banks when forming their preferences on dividends. In addition, in four observations the
financial institutions are the investment trust companies (Kapitalanlagegesellschaften) of large
international or German banks. In these cases it is not surprising that their dividend preference is
almost the same. Hence, the investment trust companies appear to conduct the monitoring activities
that are performed by banks as well. Regarding the effect of companies, this is also negative and has
an amplitude that is similar to the one of banks and financial institutions. A possible reason can again
be found in the monitoring function. If companies are the largest shareholder of other companies, they
mainly regard this not only as a financial investment, but often want to exercise control over the partly
acquired company, as well. Only in this way they are able to profit from synergies or integrate the
partly acquired company into its own strategic framework. By exercising control, they also act as a
monitor and are probably reasonably well informed about the company they invested in. The impact of
families and private blockholders, on dividends is –as expected- negative. The expected positive effect
of Beteiligungsgesellschaften, however, does not appear in these results, as it is insignificant. This,
however, still suggests that the dividend preference of families that hold shares of other firms
indirectly through Beteiligungsgesellschaften is different from the dividend preference of families that
have direct shareholdings. For indirect holdings, the effect on dividends is not significantly negative
anymore, while it is significantly negative for direct family owners. Hence, the preference may have
shifted towards a higher dividend payout, at least in some cases of this sample. However, even if
recent data of 2008 (specifications (3) and (4)) is taken into account, this effect is not very strong.
Finally, the regression on the data from 2008 show that the coefficients of financial institutions and
companies are not significantly negative anymore. This might be an indication for a slightly higher
dividend preference of these two shareholder types and it may reflect the impact of the financial crisis.
In contrast, the financial crisis appears to have lowered the dividend preference of banks even further.
26 / 42
______________
Table 9 about here
_____________
Finally, the fourth question of this paper regarding the effect of the type of the largest shareholder in
interaction with the relative size of its shareholdings will be examined. As described in the
methodology part, the equations (9) and (10) are therefore changed and each dummy variable is
multiplied with the relative size of the largest shareholder. In this way, the power of the largest
shareholder is also taken into account and indicates how strong their influence on the companies’
dividend policy is. The results are displayed in table 10. Among the control variables, Size and
Leverage have a statistically significant positive effect on the amount of dividends. This effect has
been observed and discussed in the previous paragraphs already. Regarding the ownership variables,
there are five significant observations that indicate that the relative size of the shareholdings indeed
matters. First, financial institutions have a positive influence on dividends if the relative size of their
shareholdings is taken into account. The reason for this observation, when compared to table 9, might
be that the coefficients in table 10 tend to be more positive in general. In the cases of banks, financial
institutions, companies, and families and private blockholders, the negative significant coefficients of
table 9 (specifications (1) and (2)) become insignificant and, in case of companies, even positive29
.
Hence, it is not as much a change in the dividend preference of financial institutions as well as a
general positive shift in the coefficients if the variables are formed as interaction variables. Second,
and probably due to the same underlying effect, state authorities exert a slightly positive influence on
the amount of dividends when the relative size of the shareholdings of the largest shareholder is
included. This result supports the reasoning of Gugler (2003) who mentions that state authorities
prefer higher dividends. He reasons that there is no effective monitoring for state authorities and that,
hence, they prefer higher dividends to substitute for the lack of monitoring. The third observation is
that foreign shareholders have a negative influence on dividends in this case. The literature offers no
finding on the dividend preference of foreign shareholders of German firms. However, Lee et al.
(2006) find that foreign institutional ownership in Taiwan shows a positive and significant reaction
after dividend increases. It can be concluded, thus, that foreign shareholders have a preference for
higher dividends. Gugler (2003) arrives at a similar result for an Austrian sample. He finds that foreign
firms have the second highest dividend preference behind state authorities (see table 2). Both of these
studies are, however, in contrast to the negative coefficient in our analysis.
Fourth, in the specifications (3) and (4) families and private blockholders exert a significantly negative
influence on dividends. This observation has been observed and discussed before, too. Regarding the
influence of family-owned Beteiligungsgesellschaften, the specifications (2), and (4) do not show
29 The same effects are observed if we measure the impact on cash dividends to revenues (not reported).
27 / 42
significant results. However, a Wald-test indicates that the coefficients of family-owned
Beteiligungsgesellschaften, and families and private blockholders are significantly different from each
other. This result adds some evidence to the before mentioned interpretation of table 9 that indirect
holdings through family-owned Beteiligungsgesellschaften show indeed a preference for slightly
higher dividends than direct holdings of families and private blockholders. The 2001 change in the tax
system may be responsible for this change.
Finally, regarding the specifications (3) and (4), apart from families there is one other change in the
coefficients when compared to specifications (1) and (2), namely that banks have a significant
negative influence again. This result is comparable to table 9 where the coefficient of banks became
more significant when the 2008 data were used.
______________
Table 10 about here
_____________
7. Conclusion
This study examines the link between large shareholders and dividend policy. In detail, it examines
four different questions in this context. First, it aims to answer whether the relative size of the
shareholdings of large shareholders has an influence on a company’s decision to pay or not to pay cash
dividends. Therefore, the relative size of ownership of the largest, second largest and the remaining
shareholders who possess more than 3 percent each is included in the regression in several
combinations. The results, however, show that none of the ownership variables has a significant
influence on the decision to pay dividends. Earlier findings by Goergen et al. (2005) are supported by
this result. Hence, the decision on cash dividends is not influenced by the relative size of the
shareholdings of large shareholders in Germany.
The second question that is answered in this study asks whether these ownership variables have an
effect on the amount of cash dividends. Again, the results do not show any significant ownership
variables. As with the decision on cash dividends, the relative size of the shareholdings of the large
shareholders does not have any influence on the amount of dividends paid.
In a third step, this study examines the influence of different shareholder types on the amount of cash
dividends, as compared to widely-held firms. This question can be answered with significant results,
though. Four major findings emerge from the analysis. First, banks have a negative influence on the
amount of dividends if they are the largest shareholder. Banks, who have an important position as
supplier of loans and credits in Germany appear to have a strong preference for lower dividends since
they do not need them for monitoring purposes. In addition, low dividends are useful in order to
28 / 42
ensure the debt service and interest payments on granted loans. Second, financial institutions exert a
negative influence on cash dividends if they are the largest shareholder. The reasons therefore might
be similar to those of banks as many financial institutions are either owned by banks or might act
according to the same investment principles. Third, companies are also found to have a negative
influence on dividends. They might also have enough insight into the firms they invested in, so that
dividends are not needed as a substitute for monitoring. Fourth, families and private blockholders are
also found to have a negative influence on cash dividends, which is expected, too.
Finally, the fourth question answered here asks whether the relative size and type of the largest
shareholder has any influence on cash dividends. In that way, the voting power of the shareholder
types is included in the analysis. The results show in general slightly more positive coefficients. As a
consequence, financial institutions have a positive effect on dividends in some specifications. Second,
state authorities are found exert a positive influence on cash dividends. This result confirms Gugler’s
(2003) argumentation that state authorities need dividends as a substitute for monitoring. Third,
foreign shareholders are found to exert a negative influence on cash dividends. This result is surprising
since both, Lee et al (2006) and Gugler (2003) report a positive influence of foreign shareholder for
their Taiwanese and Austrian samples, respectively. Families and private blockholders are still found
to have a negative on cash dividends. Finally, family-owned Beteiligungsgesellschaften still have an
insignificant effect which is, however, significantly different from the negative effect of families and
private blockholders. Hence, the tax change in 2001 may have changed the dividend preference of
families and private blockholders for indirect ownership as compared to direct ownership of
shareholdings.
One of the most interesting and relevant results of this study is the slightly more positive effect of
family-owned Beteiligungsgesellschaften on dividend policy in Germany. Hence, the change in the
corporate tax system in 2001 may have influenced the behavior of certain wealthy private investors
with respect to their dividend preference. Families and private blockholders show a marginally higher
dividend preferences for indirect holdings as for direct holdings. The second main result, namely that
the relative size of the large shareholders has no influence on the dividend decision and amount, is
equally important. This finding confirms Goergen et al.’s (2005) earlier result and contrasts Germany
from Italy and the UK where the largest shareholder is found to decrease (Mancinelli and Ozkan,
2006) or increase (Short et al., 2002) dividends, respectively. Finally, this paper shows a slight
influence of the financial crisis on dividend policy, namely that banks preferred even lower dividends
in 2008 than they did before, while financial institutions and companies did not have a significant
negative influence on dividends any more.
29 / 42
7.1 Suggestions for further research
There are some limitations in the design of the methodology of this study. Most importantly, a gap
exists between the time the financial variables were recorded, i.e. between 2005 and 2008, and the
time the ownership variables were taken from, i.e. May 11, 2009. The reason therefore lies, as already
explained, in the costliness of reliable historic ownership data. It would be ideal to use ownership data
for each of the three years of which dividends are used, i.e. 2005 to 2008, and combine the ownership
data with the relevant financial variables instead of using three-year averages of the latter. In addition,
it might also be useful to base future research on different dependent variables. Instead of using the
cash dividends/market capitalization, the use of total assets could be more appropriate than market
capitalization, since total assets and cash dividends are both book values, while market capitalization
is a market value.
Another, yet more complex field of possible future research is the inclusion of all major European
countries in the sample. Until now, most papers from the literature, this one being no exception,
examine the effects of ownership on dividend policy for only one country. An analysis that compares
the results of the four main questions of this paper for all European countries would broaden the
knowledge about the contemporary effects of shareholders on dividend policy significantly. However,
the quest for reliable and recent ownership data might create an obstacle for such a project.
30 / 42
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Table 1: Summary of literature on the link between dividend policy and ownership
Paper Sample period Country Results
Michaely et al. (1995) 1964 – 1988 USA Dividend omissions do not change the
ownership structure significantly.
Crutchley et al. (1999) 1984 – 1993
(in detail:
1984 -1987 and
1990 – 1993)
USA Institutional ownership and dividend policy
are positively related (1984-1987). However,
dividends are negatively related to
institutional ownership (1990-1993) while
institutional ownership is positively
determined by dividends (1990-1993).
Dhaliwal et al. (1999) 1982 – 1995 USA Dividend initiation leads to increased
institutional ownership.
Short et al. (2002) 1988 – 1992 UK Positive association between dividend
payout policy and institutional ownership.
Gugler and Yurtoglu
(2003)
1992 – 1998 Germany Larger holdings of largest shareholder
reduce dividend payout, while larger
holdings of second largest shareholder
increase dividend payout. Substantial
deviations from one-share-one-vote rule
decrease dividend payout.
Grinstein and Michaely
(2005)
1980 – 1996 USA Institutional investors prefer dividend-paying
over non-dividend-paying stocks, and they
also prefer low dividends to high dividends.
Institutional investors prefer share
repurchases to dividends.
Goergen et al. (2005) 1984 – 1993 Germany Find that the presence of a large shareholder
does not have an influence on the dividend
decision.
Lee et al. (2005) 1995 -1999 Taiwan Institutional investors prefer higher
dividends and payout ratios while they show
an insignificant response to dividend
changes.
Graham et al. (2006) 1990 – 1998 USA Dividend paying firms have a high
percentage and large number of institutional
traders prior to an anticipated dividend
announcement. Institutional investors
increase their stake in firms after the
initiation of dividend payments.
Mancinelli and Ozkan
(2006)
2001 Italy The voting right of the largest shareholder
has a significantly negative impact on
dividend payout.
34 / 42
Table 2: Summary of literature on different shareholder types
Paper Sample size
and period
Shareholder type Country Dividend preference (target
payout ratio in percent)
Gugler and Yurtoglu
(2003)
266
companies.
1992-1998
Families Germany U-shaped relationship between
dividend payout ratio and cash
flow rights (minimum at 40.20)
Gugler (2003) 214 non-
financial
firms.
1991-1999
State Austria 42.90
(33.30 for firms doing R&D)
Banks Austria 34.40
(19.10 for firms doing R&D)
Families Austria 25.00
(13.00 for firms doing R&D)
Foreign firms Austria 34.70
(13.90 for firms doing R&D)
Da Silva et al. (2004) 416 German
industrial and
commercial
companies.
1993
Families Germany 24.22
Companies Germany 18.50
Banks Germany 16.60
Lee et al. (2006) 1,357 trading
days.
1995-1999
State Taiwan Low (below sample median
payout ratio)
Table 3: Averages of financial variables of the largest shareholders Banks Financial
institutions
Companies State
authorities
Beteiligungs-
gesellschaften
Families and
private
blockholders
Foreign
shareholders
Number of
observations
3 35 32 3 29 49 40
Cash dividends paid /
revenues
0.015 0.027 0.025 0.040 0.021 0.023 0.021
Cash dividends paid /
market
capitalization
0.010 0.019 0.016 0.038 0.023 0.014 0.018
Age 51 65.143 51.469 30.667 80 42.122 76.775
Size 1,142,040 7,723,079 1,567,767 31,0289,5
3
9,803,808 700,122 6,818,981
Risk 0.087 0.069 0.065 0.019 0.042 0.109 0.055
Leverage 0.396 0.246 0.179 0.304 0.199 0.204 0.218
35 / 42
Table 4: Relative size of ownership of largest shareholder
Ownership in
percent30
0 to 3
3 to 5 5 to 10 10 to 15 15 to 20 20 to 25 25 to 30 30 to 40 40 to 50 > 50
Number of
companies
2 8 22 14 18 7 17 16 17 35
Table 5: Number of companies that are owned by these types of shareholders (direct and ultimate ownership)
Banks Family and
private
blockholders
Beteiligungs-
gesellschaften
State
authorities
Companies Financial
institutions
Foreign
shareholders
Direct ownership
Largest shareholder 3 49 29 3 32 35 40
2nd largest shareholder 12 24 27 1 20 53 60
All others holding at least
3 percent
14 36 11 1 22 73 74
Ultimate ownership
Largest shareholder 8 74 6 11 23 27 40
2nd largest shareholder 21 47 8 7 16 40 61
All others holding at least
3 percent
28 45 4 3 20 65 73
Table 6: Relative size of average equity ownership of largest shareholders (direct and ultimate ownership)
Banks Family and
private
blockholders
Beteiligungs-
gesellschaften
State
authorities
Companies Financial
institutions
Foreign
shareholders
Direct ownership
Largest shareholder 18.4367 36.2446 35.8663 31.2600 33.3357 14.4463 18.8227
2nd largest shareholder 8.0797 9.4027 12.4106 20.2600 14.8455 8.5599 8.3998
All others holding at least
3 percent
21.7088 19.3645 18.7519 21.1600 21.6371 16.7231 16.8254
Ultimate ownership
Largest shareholder 16.1239 36.5623 36.9227 24.9961 31.1634 14.7877 19.3069
2nd largest shareholder 6.4355 11.8656 12.6319 14.5501 12.7886 8.2344 8.2687
All others holding at least
3 percent
18.6226 18.6303 22.5835 20.9567 23.1468 17.5550 17.0110
30 Starting with the lower figure up to, but not including the higher one.
36 / 42
Table 7: Influence of the relative size of the large shareholders on the decision to pay dividends.
Dependent variable: dummy variable (dividend payer / no dividend payer)
Specification
Independent variable (1) (2) (3) (4)
Intercept -0.214 -0.075 -0.128 -0.099
(0.6290) (0.8885) (0.7393) (0.8493)
Age 0.023b 0.023b 0.012c 0.023b
(0.0204) (0.0222) (0.0094) (0.0195)
Risk -1.249 -1.371 -1.170 -1.201
(0.2560) (0.2364) (0.1463) (0.2267)
Size 0.000 0.000 0.000a 0.000
(0.1637) (0.1709) (0.0632) (0.1659)
Leverage 0.714 0.787 0.510 0.645
(0.4460) (0.4050) (0.4666) (0.4795)
Largest 0.007 0.006 0.005 -
(0.3377) (0.4131) (0.4630)
2nd largest - - -0.002 -
(0.8794)
2nd largest +rest - -0.005 - -
(0.6288)
Largest +2nd largest +rest - - - 0.002
(0.7103)
Rest (dummy) - - -0.060 -
(0.8381)
Number of firms 156 156 156 156
Observations with Dep=0 38 38 38 38
Observations with Dep=1 118 118 118 118
McFadden R-squared 0.269696 0.270906 0.248476 0.265610
The estimations of all four specifications are based on EVIEWS’ maximum likelihood BINARY CHOICE (extreme value) estimation
technique.
In these regressions, the dependent variable is a dummy variable that is equal to one if the average cash dividend paid from 2006 to 2008 is
positive, and zero otherwise. “Age” contains the age of the company in years. “Risk” contains the standard deviation of the EBIT over the
years 2005-2007. “Size” contains the average 2005 to 2007 market capitalization. “Leverage” contains the 2005 to 2007 average of the
ratio total debt/total assets. The variable “Largest” contains the size of the shareholdings of the largest shareholder in percent of the
shareholders’ equity. The variable “2nd largest” contains the size of the shareholdings of the second largest shareholder in percent of the
shareholders’ equity. The variable “2nd largest + rest” contains the size of the shareholdings, in percent of the shareholders’ equity, of all
shareholders that own at least 3 percent of the shareholders’ equity each, excluding the largest shareholder. The variable “Largest + 2nd
largest + rest” contains the size of the shareholdings of all shareholders that own at least 3 percent of the shareholders’ equity, in percent of
the shareholders’ equity. The variable “Rest (dummy)” is a dummy variable which equals 1 when there is at least one third-largest
shareholder that owns at least 3 percent of the shareholders’ equity, and zero otherwise.
The letters a, b, and c indicate statistical significance at the 10 percent, 5 percent, and 1 percent level, respectively. The numbers in
parentheses are the p-values of the coefficients.
37 / 42
Table 8: Tobit regression results: Influence of the relative size of the large shareholders on the cash
dividends/market capitalization ratio.
Dependent variable: cash dividends/market capitalization
Specification
Independent variable (1) (2) (3) (4)
Intercept 0.008a 0.012b 0.010a 0.011b
(0.0818) (0.0261) (0.0529) (0.0280)
Age 0.000b 0.000b 0.000b 0.000b
(0.0221) (0.0352) (0.0258) (0.0280)
Risk -0.033 -0.037 -0.034 -0.035
(0.1409) (0.1408) (0.1451) (0.1440)
Size 0.000c 0.000c 0.000c 0.000c
(0.0016) (0.0039) (0.0015) (0.0053)
Leverage 0.018a 0.020b 0.019a 0.019a
(0.0645) (0.0407) (0.0536) (0.0560)
Largest 0.000 -0.000 -0.000 -
(0.9356) (0.8731) (0.9959)
2nd largest - - -0.000 -
(0.6648)
2nd largest +Rest - -0.000 - -
(0.2133)
Largest +2nd largest +Rest - - - -0.000
(0.3625)
Rest (dummy) - - -0.002 -
(0.5625)
Number of firms 156 156 156 156
Left censored observations 39 39 39 39
Log likelihood 268.1037 269.0791 268.3847 268.4803
In these regressions, the dependent variable is computed as the average 2006-2008 cash dividends divided by the average 2005-2007 market
capitalization. “Age” contains the age of the company in years. “Risk” contains the standard deviation of the EBIT over the years 2005-
2007. “Size” contains the average 2005 to 2007 market capitalization. “Leverage” contains the 2005 to 2007 average of the ratio total
debt/total assets. The variable “Largest” contains the relative size of the shareholdings of the largest shareholder in percent of the
shareholders’ equity. The variable “2nd largest” contains the size of the shareholdings of the second largest shareholder in percent of the
shareholders’ equity. The variable “2nd largest + rest” contains the relative size of the shareholdings, in percent of the shareholders’ equity,
of all shareholders that own at least 3 percent of the shareholders’ equity each, excluding the largest shareholder. The variable “Largest +
2nd largest + rest” contains the relative size of the shareholdings of all shareholders that own at least 3 percent of the shareholders’ equity,
in percent of the shareholders’ equity. The variable “Rest (dummy)” is a dummy variable which equals 1 when there is at least one third-
largest shareholder that owns at least 3 percent of the shareholders’ equity, and zero otherwise.
The letters a, b, and c indicate statistical significance at the 10 percent, 5 percent, and 1 percent levels, respectively. The numbers in
parentheses are the p-values of the coefficients.
38 / 42
Table 9: Tobit regression results: Influence of the type of the largest shareholder on the cash dividends/market
capitalization ratio.
Whole period 2008 only
Independent variable (1) (2) (3) (4)
Intercept 0.023c 0.023c 0.023c 0.023c
(0.0003) (0.0003) (0.0002) (0.0002)
Age 0.000b 0.000b 0.000c 0.000c
(0.0266) (0.0272) (0.0071) (0.0074)
Risk -0.030 -0.030 -0.022 -0.022
(0.1679) (0.1672) (0.3338) (0.3320)
Size 0.000a 0.000b 0.000 0.000
(0.0514) (0.0461) (0.7700) (0.7240)
Leverage 0.017a 0.016a 0.011 0.011
(0.0964) (0.0969) (0.3909) (0.3926)
Banks -0.019c -0.018c -0.027c -0.027c
(0.0018) (0.0018) (0.0079) (0.0087)
Financial institutions -0.011a -0.011a -0.008 -0.008
(0.0805) (0.0842) (0.2516) (0.2706)
Companies -0.013b -0.013b -0.009 -0.009
(0.0365) (0.0375) (0.1543) (0.1608)
State authorities 0.002 0.002 0.011 0.010
(0.7667) (0.7726) (0.3255) (0.3274)
Beteiligungsgesellschaften -0.009 - -0.007 -
(0.1229) (0.1928)
Beteiligungsges. (family-owned) - -0.010 - -0.009
(0.1385) (0.1491)
Beteiligungsges. (not family-owned) - -0.008 - -0.004
(0.2189) (0.5355)
Families and private blockholders -0.018c -0.018c -0.020c -0.020c
(0.0045) (0.0045) (0.0010) (0.0011)
Foreign shareholders -0.002 -0.003 -0.003 -0.003
(0.5302) (0.5091) (0.6314) (0.5892)
Number of firms 156 156 156 156
Left censored observations 39 39 39 39
Log likelihood 272.2875 272.3349 227.8854 228.0493
In the specifications (1)- (4) the dependent variable is computed as the average 2006-2008 cash dividends divided by the average 2005-2007
market capitalization. “Age” contains the age of the company in years. “Risk” contains the standard deviation of the EBIT over the years
2005-2007. “Size” contains the average 2005 to 2007 market capitalization. “Leverage” contains the 2005 to 2007 average of the ratio total
debt/total assets. In the specifications (5) and (6), the dependent variable is computed as 2008 cash dividends divided by 2007 market
capitalization, “Size” contains the 2007 market capitalization, and “Leverage” contains the 2007 ratio of total debt/total assets. The
variables “Bank”, “Financial institutions”, “Companies”, “State authorities”, “Beteiligungsgesellschaften”, “Beteiligungsgesellschaften
(family-owned)”, “Beteiligungsgesellschaften (not family-owned)”, and “Families and private blockholders” are dummy variables that are
equal to one if the type of the largest shareholder is equal to the name of the dummy variable. The variable “Foreign shareholders” is a
dummy variable that takes the value of 1 if the largest shareholder, irrespective of the type it may be, is of foreign origin. The dummy
variable “Beteiligungsgesellschaften (family-owned)” is equal to 1 if the ultimate owner of the Beteiligungsgesellschaft is a family or a
private blockholder. The dummy variable “Beteiligungsgesellschaften (not family-owned)” is equal to 1 if the ultimate owner of the
Beteiligungsgesellschaft is neither family nor a private blockholder.
The letters a, b, and c indicate statistical significance at the 10 percent, 5 percent, and 1 percent levels, respectively. The numbers in
parentheses are the p-values of the coefficients.
39 / 42
Table 10: Tobit regression results: Influence of the type and relative size of the largest shareholder on the cash
dividends/market capitalization ratio.
Whole period 2008 only
Independent variable (1) (2) (3) (4)
Intercept 0.010b 0.010b 0.014b 0.014b
(0.0307) (0.0303) (0.0223) (0.0223)
Age 0.000b 0.000b 0.000b 0.000b
(0.0296) (0.0281) (0.0112) (0.0112)
Risk -0.030 -0.030 -0.023 -0.023
(0.1624) (0.1629) (0.2846) (0.2846)
Size 0.000b 0.000b 0.000 0.000
(0.0105) (0.0110) (0.5142) (0.5142)
Leverage 0.017a 0.017a 0.013 0.013
(0.0827) (0.0796) (0.3306) (0.3313)
Banks * Largest -0.000 -0.000 -0.001c -0.001c
(0.1337) (0.1316) (0.0005) (0.0006)
Financial institutions * Largest -0.000 -0.000 -0.000 -0.000
(0.5527) (0.5299) (0.4207) (0.4222)
Companies * Largest 0.000 0.000 0.000 0.000
(0.7534) (0.7722) (0.8952) (0.8952)
State authorities * Largest 0.000b 0.000b 0.001a 0.001a
(0.0395) (0.0406) (0.0663) (0.0664)
Beteiligungsgesellschaften * Largest 0.000 - 0.000 -
(0.4035) (0.6360)
Beteiligungsges. (family-owned) * Largest - 0.000
(0.3829)
- 0.000
(0.6817)
Beteiligungsges. (not family-owned) * Largest - 0.000
(0.7633)
- 0.000
(0.7481)
Families and private blockholders * Largest -0.000 -0.000 -0.000b -0.000b
(0.1803) (0.1760) (0.0180) (0.0181)
Foreign shareholders * Largest -0.000 -0.000 0.000 0.000
(0.4383) (0.4660) (0.9648) (0.9653)
Number of firms 156 156 156 156
Left censored observations 39 39 39 39
Log likelihood 271.5368 271.6502 228.6867 228.6867
In the specifications (1) –(4) the dependent variable is computed as the average 2006-2008 cash dividends divided by the average 2005-2007
market capitalization. “Age” contains the age of the company in years. “Risk” contains the standard deviation of the EBIT over the years
2005-2007 “Size” contains the average 2005 to 2007 market capitalization. “Leverage” contains the 2005 to 2007 average of the ratio total
debt/total assets. In the specifications (5) and (6), the dependent variable is computed as 2008 cash dividends divided by 2007 market
capitalization, “Size” contains the 2007 market capitalization, and “Leverage” contains the 2007 ratio of total debt/total assets. The
variables “Bank”, “Financial institutions”, “Companies”, “State authorities”, “Beteiligungsgesellschaften”, “Beteiligungsgesellschaften
(family-owned)”, “Beteiligungsgesellschaften (not family-owned)”, and “Families and private blockholders” are formed by the product two
variables. The first variable is the relative size of the largest shareholder. The second variables is a dummy variable that is equal to one if
the type of the largest shareholder is equal to the name of the dummy variable, namely “Bank”, “Financial institutions”, “Companies”,
“State authorities”, “Beteiligungsgesellschaften”, “Beteiligungsgesellschaften (family-owned)”, “Beteiligungsgesellschaften (not family-
owned)”, “Families and private blockholders”, and “Foreign shareholders”. The variable “Foreign shareholders” has the just described
value whenever the largest shareholder is of foreign origin, irrespective of its type. The variable “Beteiligungsgesellschaften (family-
owned)” contains only those Beteiligungsgesellschaften whose ultimate owner is a family or a private blockholder. The variable
“Beteiligungsgesellschaften (not family-owned)” contains only those Beteiligungsgesellschaften whose ultimate owner is not a family or a
private blockholder.
The letters a, b, and c indicate statistical significance at the 10 percent, 5 percent, and 1 percent levels, respectively. The numbers in
parentheses are the p-values of the coefficients.
40 / 42
Appendix A Detailed description of variables
Variable Formula Components Source
Cash dividends/revenues Average of 2006-2008
cash dividends divided by
average of 2005-2007
revenues
Cash dividends of the
years 2006 to 2008,
revenues of the years
2005-2007
DATASTREAM:
“WC04551 Cash
dividends paid – total”
and “WC01001 Net sales
or revenues”
Cash dividends/market
capitalization
Average of 2006-2008
cash dividends divided by
average of 2005-2007
market capitalization
Cash dividends of the
years 2006 to 2008,
market capitalization of
the years 2005-2007
DATASTREAM:
“WC04551 Cash
dividends paid – total”
and “WC08001 Market
capitalization”
Age - - Hand-collected from
company websites. In
some cases backed by
AMADEUS (“date of
incorporation”).
Risk Standard deviation of
2005-2007 EBIT
EBIT of the years 2005 to
2007
DATASTREAM:
“WC18191 Earnings
before interest and taxes
(EBIT)”. And hand-
collected correlations.
Size Average of 2005-2007
market capitalization
Market capitalization of
the years 2005 to 2007
DATASTREAM:
“WC08001 Market
capitalization”
Leverage Average of 2005-2007
total debt divided by
average of 2005-2007
total assets
Total debt and total assets
of years 2005-2007
DATASTREAM:
“WC03255 Total debt”
and “WC02999 Total
assets”
Largest Relative size of the
shareholdings of the
largest shareholder, if it
exceeds 3 percent. In
percent of shareholders’
equity
- Commerzbank’s online
service “Wer gehört zu
wem?”; website of the
Bundesamt für
Finanzdienstleistungs-
aufsicht (BaFin;
http://ww2.bafin.de/
database/AnteileInfo/).
2nd
largest Relative size of the
shareholdings of the
second largest
shareholder, if it exceeds
3 percent. In percent of
shareholders’ equity
- ibidem
Rest Relative size of the
shareholdings of all
shareholders that own at
least 3 percent of a
company, excluding the
largest and the second
largest. In percent of
shareholders’ equity
- ibidem
Rest (dummy) Dummy variable that
equals 1 if there is at least
one third largest
shareholder that owns
more than 3 percent of a
company.
- ibidem
Banks Dummy variable that
equals 1 if the largest
shareholder of a company
- ibidem
41 / 42
is a bank.
Financial institutions Dummy variable that
equals 1 if the largest
shareholder of a company
is a financial institution.
- ibidem
Companies Dummy variable that
equals 1 if the largest
shareholder of a company
is a company.
- ibidem
State authorities Dummy variable that
equals 1 if the largest
shareholder of a company
is a state authority.
- ibidem
Beteiligungsgesellschaften Dummy variable that
equals 1 if the largest
shareholder of a company
is a
Beteiligungsgesellschaft.
- ibidem
Beteiligungsges. (family-
owned)
Dummy variable that
equals 1 if the largest
shareholder of a company
is a
Beteiligungsgesellschaft
whose ultimate owner is
a family or another
private owner
- ibidem.
In addition: Hoppenstedt
Konzernstrukturen
online,
http://www.hoppenstedt-
konzernstrukturen.de/
nut_basis.htm
Beteiligungsges. (not
family-owned)
Dummy variable that
equals 1 if the largest
shareholder of a company
is a
Beteiligungsgesellschaft -
whose ultimate owner is
not a family or another
private owner
- ibidem.
In addition: Hoppenstedt
Konzernstrukturen
online,
http://www.hoppenstedt-
konzernstrukturen.de/
nut_basis.htm
Families and private
blockholders
Dummy variable that
equals 1 if the largest
shareholder of a company
is a family or another
private blockholder.
- ibidem
42 / 42
Appendix B Details of the 2001 change of the tax code
Corporate taxes Private taxes
before the
2001 change
From 1999 to 2000, if a company received
dividends, which increased their profit, those
dividends were fully liable to tax. The
amount of taxes that had to be paid differed,
though. If the company kept the profit inside
the company, this was taxed at a different tax
rate than those profits that were paid out. The
tax rates are displayed in the following table:
1977 -
1990
1991 -
1993
1994 -
1998
1999 -
2000
Not
paid out
56 50 45 40
Paid
out
36 36 30 30
after the 2001
change
With the tax reform of 2001, this changed. If
a company received dividends from another
company, then those dividends, even if they
increased profit, were not liable to tax at all.
In early 2004 this was slightly changed so
that from then on only 5 percent of the
dividends were liable to taxation. From those
5 percent the company had to pay 25 percent
as taxes (15 percent since 2008), irrespective
of whether the profit was kept in the firm or
paid out to its owners.
During the same period, the tax burden for
the private persons changed slowly and
moderately from 1999 to 2009. The German
income tax system (Einkommensteuertarif) is
a progressive one and has three main features:
First, there is a certain amount of income that
is tax-free. This rose from approx. EUR 6,681
in 1999 to EUR 7,834 in 2009. From then on,
every additional Euro is liable to taxation,
starting at a rate of 23.9 percent in 1999. In
2009, this rate is 11.0 percent. The marginal
tax rate then rises progressively up to a
maximum rate. In 1999, this rate was 53
percent and had to be paid for each Euro
exceeding an annual income of EUR 61,376.
In 2009, this rate is 42 percent and had to be
paid for each Euro exceeding an annual
income of EUR 52,552. In addition, income
exceeding EUR 250,001 is taxed at a rate of
45% since 2007.
Until December 2008 the German tax system
had another specialty when it comes to
dividends. Private taxpayers only had to pay
taxes over the half amount of dividends (this
is the so-called Halbeinkünfteverfahren). That
means, that the other half is effectively tax-
free. Since early 2009 the taxation of
dividends has changed completely. The
Halbeinkünfteverfahren is not valid any more
and dividends are also excluded from the
above described Einkommensteuertarif. The
new regulations state that the full dividend
amount is taxed with 25 percent, irrespective
of the overall income of the taxpayer.