Impact of Family Ownership on Financial Decisions of a Firm: An ...

Euro-Asian Journal of Economics and Finance ISSN: 2310-0184 (print) ISSN: 2310-4929 (online) Volume: 3, Issue: 2 (April 2015), Pages: 103-112 © Academy of Business & Scientific Research

http://www.absronline.org/journals

Impact of Family Ownership on Financial Decisions of a Firm: An Analysis of Pharmaceutical and Chemical Sectors in Pakistan Faisal Mehboob1, Safdar Husain Tahir2*, and Tayyab Hussain3 1. MS-Scholar, Department Management & Admin Sciences, Government College University, Faisalabad, Pakistan.

2. Assistant Professor Banking & Finance, Government College University, Faisalabad, Pakistan. 3. MS-Scholar, Department Management & Admin Sciences, Government College University, Faisalabad, Pakistan.

The current study examines the debt and dividend policies of family business (FB) versus non-family Business (NFB). For the identification of FBs from NFBs, two threshold levels of ownership (25% & 50%) were applied. For this purpose, panel data ranging from the period of 2004 to 2013, a sample of 34 firms from pharmaceutical and chemical sectors, listed at Karachi Stock Exchange (KSE) were used. Among many the generalized method of moments (GMM) was found appropriate as an analytical technique. The result drawn through GMM indicated that there was stronger positive relation between internal fund and dividend payout ratio in FBs than NFBs. Moreover, weaker negative relation was found in FBs as compared to NFBs. However, the speeds toward target dividend ratio were (72.20% & 56.80%) for FBs and NFBs respectively. Keywords: Family Business, Dividend policy, debt policy, speed toward Target Dividend INTRODUCTION Family business (FB) plays an important role in financial markets around the globe as indicated in the 8th volume of Baraclays Wealth Insight (Byrne, 2009). A large number of business corporations are owned by families and FB has become important model in the world particularly in emerging economy. About 80-90 percent business of United State of America (U.S.A) consist of FBs. In Europe, 80 percent business corporations are operating in the form of FOBs. The ratios of FOBs range from 70- 90 percent in Middle East and 60-70 percent for Australia. Asia is also dominated by FBs as most of the Chinese and Japanese companies are considered to be

family business. Mostly these firms are based in associated countries. Similarly, in India FBs account for approximately 85 percent of all Indian business firms (Deloitte, 2013). The figures for FBs in Pakistan are not different from India as it is dominant in Pakistan (Ghani and Ashraf, 2002). The corporate performance of FBs and NFBs are not only influenced by investment policy but also financing and dividend decisions. These decisions can play considerable role for value creation. The existing capital structure as well as debt policy also contributes significant role in financing and dividend decisions of a corporation. Miguel, Pindado, and de la Torre (2005) declare after a

*Corresponding author: Safdar Husain Tahir Assistant Professor Banking & Finance, Government College University, Faisalabad, Pakistan. E-Mail: [email protected]

103

Impact of family ownership on financial decisions of a firm

comprehensive analysis that ownership control of corporations ultimately shape the financing policies which help to create value of FBs and NFBs. The main objective of both capital structure theories i.e. pecking order and trade-off theories is to determine and explain the factors that contribute the financial decisions of a firm. These theories play very important role in shaping the financing and dividend policies which ultimately create performance difference regarding ownership structure. Frank and Goyal (2003) initiates to open the debate in finance literature regarding superiority as well as validity of these theories that shape the financing behavior of a firm. Still the debate is going on, as some of the evidences support pecking order theory and show superiority and validity over trade-off theory. Whereas, others studies show superiority as well as validity of trade-off theory over pecking order theory. Recently, Margaritis and Psillaki (2010) investigate linkage between capital structure in terms of ownership structure and corporate performance of the company. They indicate the ownership of family firms is associated with leverage either positively or negatively. If the family firms are seem to be more risky, they tend to use less debt as negatively related while less risky family firms is viewed bold enough to take more monitoring pressure from debt holders as positively related. These arguments are consistent with the results of Anderson and Reeb’s (2003). However, Margaritis and Psillaki conclude a significant positive relation between ownership concentration and debt ratio where benefits of leverage outweigh the bankruptcy cost. Family firms are more careful about their personal and company reputation so they pursue a strategy which focused on long term firm survival instead of strictly adhering to the goal of value creation (Anderson et al, 2003). Dunn and Hughes (1995) find that the owners and the management of family firms want to keep the shares within the family so they avoid external debt and equity financing. Due to the afraid of losing control owners of the family owned businesses avoid debt financing in their capital structure (Elisabete, &Vieira, 2013). Another reason of avoiding debt financing is that the family firms likely to be more

Mehboob et al.

opposed to risk than non-family firms therefore they circumventing debt (Storey, 1994; Zhou, 2012).Family ownership have long term commitment and the families wants to pass the firm onto the upcoming generations (James, 1999) therefore this commitment and the desire to pass firm to the upcoming successors can influence the decisions of family firms. The above discussed findings postulate the pecking order theory that a firm first of all prefer to internal financing To our knowledge there is no literature available on the relation between family ownership and financial decisions of a firm in the chemical and pharmaceutical sector of Pakistan. In this context, this study investigated the impact of family ownership on financial decisions of firms in chemical and pharmaceutical sector in Pakistan. This effort will facilitate the financial managers, policy makers and investor in making judicious and rational financial decisions. Objectives 

To get the comparison of dividend policy between family firms and non-family firms.



To know the relationship between internal fund and debt between family and nonfamily firms.



To quantify the speed of adjustment towards target capital structure in family firms.



To get the comparative analysis regarding financial decisions on quantitative terms between family and non-family firms.

LITERATURE REVIEW A decision about dividend policy and capital structure is one of the most important financial decisions for every business organization. The ownership pattern can affect these decisions. There is controversy about the relationship between family ownership and dividend payouts. Of the most extensive literature that examines the relationship between ownership pattern and dividend payout of firms some of the studies postulate the negative association between

104

Euro-Asian j. econ. financ. ISSN: 2310-0184 (print); 2310-4929 (online) Volume: 3, Issue: 2, Pages: 103-112

ownership concentration and dividend policy of a firm. The families expropriate the wealth of minority shareholders through lower dividends (Elisabete &Vieira, 2013). Whereas Hamid et al, (2012) confirmed that the higher has the shareholdings the higher will be the payouts. Afzal and Sehrish (2011) found the evidence of negative association between family firms and dividend payments. They concluded that the family firms prefer to retain earnings and investment opportunities rather to distribute the earnings. It means family firms pay fewer dividends to their shareholders in the context of Pakistan. Jean Philippe (2010) examined that the founding family firms were more likely to use dividend and total payments, and pay higher dividend than non-family firms. They argued that interrelation between the family and firm was strong, especially when the family name appears in the company name, because the family members do not want to destroy their own reputation by exploiting minority shareholders and other stakeholders. Schmid et al, (2010) conducted the study regarding controlling shareholders and payout policies. They found that the family firms exhibit a higher tendency and level for dividend payments. Yan hu, et.al, (2007) concluded that family firms have lower dividends payout ratio than non-family firms. Their findings support the tax clientele theory of dividends. These results support the expropriation hypothesis. In the context of Pakistan, Ahmad & Javid (2008) confirmed that the ownership concentration and market liquidity have the positive impact on the dividend payout policy. Under the trade off theory the firms have a targeted capital structure resulting from balancing the cost and benefits associated with debt financing. Contrary to trade off theory, pecking order theory states that firms prefer to finance with internal funds the choose to debt financing. It chooses issuance of equity as last resort. Under the market timing theory, managers take advantage of windows of opportunities to successfully time their security offerings without consequently undoing the resulting impact on their leverage (Kasbi, 2009). It seems to be difficult to say which one theory is best but empirical evidence supports some of the postulates of pecking order.

There are no universal findings towards the speed of attaining the target capital structure in family owned businesses. The researchers have argued that the adjustment speed varies across firms because the cost of adjustment varies. The broad factors like financial constraint, external financing cost, financial distress, financial deficit and surplus, distance between the observed and optimal debt ratio and the ownership structure of the firms affect the adjustment cost. So this cost affects the adjustment speed. FIGURE 1 HERE METHODOLOGY To fulfill the targeted objectives of the study, data ranging from the period 2004-2013 were used. A sample of 34 firms from pharmaceutical and chemical sectors, listed at Karachi Stock Exchange (KSE) was taken The main sources of data were the annual reports, financial statements and basic balance sheet analyses published by State Bank of Pakistan (SBP).These data pertaining to the values of variables like dividend payout ratio (DIVit), net earnings (NEit), family business dummy (FB), debt ratio (DRit) and internal fund (IFit) were collected. A set of control variables like Tobin Q (TQit), size of firm (SZit), sales of firm ( Sales it), account receivables ( ARit) and age of firm (Age it) was used. Such types of data contained unobservable problems termed as heterogeneity and endogeneity (McVey and Draho, 2005 and Demsetz and Villalonga, 2001). To resolve these problems, panel data methodology and generalized method of moments were applied. Panel data methodology handles1 the heterogeneity problem while the Generalized Method of Moments (GMM) controls2 the endogeneity problem. Furthermore, the misspecification of the model was tested by Hansen J-statistic and m2 statistics. Also, the Wald tests (w1 and w2) were used to test the joint

1 2

Panel data reduces the heterogeneity ( S. Allegretto, A. Dube, and M. Reich, 2011) GMM resolves the endogeneity problem (Chaussii. P, 2010)

105


significance of reported coefficients and time dummy variables. Hypotheses H1: There is higher dividend payout in FBs as compare to NFBs. H2: There is weaker negative relation between internal fund and debt in FBs than NFBs. H3: FBs adjust speedier towards target capital structure than NFBs Models Specification

Mehboob et al.

and 50% in the firm. 25% cut off point is proposed in the official definition of Group of Owner Managed and Family Enterprises called GEEF by its French name (GEEF, March, 2008). It is also in line with the definition adopted by Board of Family Business Network in April 7, 2008. 50% cut off point is used because ownership at this level confers the unequivocal control rights (Doidge et al., 2005). Also, particularly in Pakistan, owners of family companies hold more than 50% shareholdings (Javid and Iqbal, 2010). In this study both cut off points are used to differentiate family and non-family enterprises and estimate all proposed models for empirical analysis of each classification to obtain robust and reliable results.

DIVit = α + (β1 + β2 FB) NEi-1+ µYit + εit ------------------------------- (1) DRit = α + (γ1 + γ2 FB) IF+ µYit + εit --------------------------------(2) DRit = α +ϕ0 IF+ (ϕ1 + ϕ2 FB) DRit-1 + µYit + εit ---------------------(3)

Where: DIVit = Dividend ratio DR it = Debt Ratio NE it = Net earnings IFit = Internal fund FB = Family business dummy Yit = A set of control variables Variables Description The dividend ratio (DIVit) and debt ratio (DRit) were used as dependent variables. The dividend ratio was obtained dividend payment divided by total assets. Similarly, for debt ratio total long term debt was divided by total assets. As independent variables net earnings (NE it), internal fund (IF it) and lag of debt ratio (DR it-1) were used. Net earnings of corresponding year were divided by total assets. Internal fund (IFit) was obtained by adding back depreciation in net earnings of corresponding year. FB was used as family business dummy took value 1 for family business, 0 otherwise. A firm is said to be family business (FBs), if family directors have managerial ownership or voting rights 25%

Models Description The model (1) shows the relationships between net earnings (NEit) and dividend ratio (DIVit) in terms of family business (BF) versus non-family business (NFBs). High dividend ratio motivates the family managers to use the fund on business operations instead of personal use (De Angelo et al, 2006). It is, therefore, expected that the family firms tend to more dividend payout as compare to non-family firms. So, in accordance of hypothesis-1, it is expected β1 + β2 > β1. The second model (2) represents the relationship between internal fund and debt ratio in terms of family and non-family businesses. The family business less likely tends to use debt financing in their capital structure as compare to non-family firms. Dunn and Hughes (1995) found that the owners and the management of family firms want to keep the shares within the family so they avoid external debt and equity financing. Due to the afraid of losing control of the family businesses avoid debt financing in their capital structure (Elisabete & Vieira, 2013). Also, in line with pecking order theory, the negative impact of cash flow on debt is expected. For the FBs impact is captured (γ1 + γ2) and for NFBs it is (γ1). It is, therefore, expected (γ1 + γ2) < γ1 < 0. In order to test the hypothesis H3, we develop the debt model (3) from previous capital structure’s models used by distinguished authors such like (i.e. Fama & French, 2002). They conclude that the

106


firm target debt ratio is a function of several characteristics of a firm i.e. DR*it = a + b IFit + c Yit +Eit---------- (A) Where DR*it is the target debt ratio, IFit is the internal fund and Xit is a set of other characteristics that are likely to impact on debt ratio. It is the fact that firms tend to fill the gap between target debt ratio and current level of debt gradually. We can capture the speed by the following model: DRit –DRit-1 = d (DR*it- DRit-1) --------------- (B) Where 0< d > 1 is the speed of firms toward target capital structure over time. By rearranging Eq. (B) we get the Eq. (C) as under: DRit = d DR*it + (1-d) DRit-1--------------- (C) By putting the value of DR*it from Eq. (A) in Eq. (C) we get another equation as under: DRit = d a + (1-d) DRit-1 + bd IFit + cd Yit +d Eit -------------- (D) By Putting da = α,

βo = (1-d), bd = ϕ0

DRit = α0 + ϕ1 DRit-1 + ϕ0 IFit + µ Yit +Eit ------- (E) Adjusting dummy variable FB = 1 for family firms and FB = 0 for non-family firms, the final shape of the model can be seen in Eq. (E). Dit = α + ϕ0 CFit + (ϕ1 + ϕ2 FB) DRit-1 + µ Yit +Eit ------ (3) For family firms the impact is captured (ϕ1 + ϕ2) and for non-family firms (β1). The speed of adjustment is 1- (ϕ1 + ϕ2) and 1- ϕ1 for family firms and for non-family firms respectively. According to hypothesis-3, it is expected (ϕ1 + ϕ2) < ϕ1. REGRESSION RESULTS AT 25% CUT OFF POINT The results drawn by estimating the model (1) as shown in Table-1 provides the in-sight regarding dividend policy in terms of family and non-family businesses. The estimated coefficients found (β1 + β2 = 0.066 + 0.0743= 0.1403) for family firms and for non-family (β1 = 0.066). These coefficients show positive impact of net earnings on dividend payment and statically significant as the 5% level. This positive impact of net earnings on dividend

found stronger in family businesses (FBs) than non-family (NFBs). The results confirm the hypothesis-1 which presents that the FBs as compared to NFBs pay higher portion of net earnings as dividend to shareholders. TABLE 1 HERE Table-1 shows comprehensive analysis of dividend and debt policies of family and nonfamily firms at (25%) cut off points. Generalized method of moments (GMM) was used to test the hypotheses (1-3). The dummy variable FB equal 1 for Family business and zero otherwise. DRit and IF it were the debt and Internal fund ratios of the firms. DIVit and NEit are the dividend and net earnings ratios of the firms. SIZEit, ARit are the size and average account receivables of the companies. AGE it shows age since incorporated. Qit is the Tobin q of firms. The sample consists of 340 observations, 34 firms from pharmaceutical and chemical sectors, listed on Karachi Stock Exchange (KSE) Pakistan for the period ranging from 2004 to 2013. The ***, ** and * denote significance level at 10%, 5% and 1% respectively. T-statistic (t1) shows the linear restriction under the null hypothesis H0: β1 + β2 =0. T-statistic (t2) indicates the linear restriction under the null hypothesis H0: γ1 + γ2 = 0. T-statistic (t3) indicates the linear restriction under the null hypothesis H0: ϕ1 + ϕ2 = 0. w1 shows the Wald Test-1 for the joint significance of the estimated coefficients under null hypothesis H0 (asymptotically distributed) and the value under parenthesis denotes the degree of freedom. w2 is the Wald Test-2 for the joint significance of the times dummies under null hypothesis H0 (asymptotically distributed) and the value under parenthesis shows the degree of freedom. h indicates the Hansen test of over identifying restriction under assumption of null hypothesis as no correlation between instruments and error term and the value in parenthesis is the degree of freedom. TABLE 2 HERE The results drawn by estimating the model (2) as shown in Table-1 provides the in-sight of family ownership on financing behavior of corporations. The current study tends to capture the impact of internal fund on debt ratios in terms of family businesses (FBs) and non-family businesses

107


(NFBs). The results reveal that impact of internal fund on debt ratio is weaker for FBs. The estimated coefficients of hypothesis-2 for nonfamily firms is (γ1 = -0.140) and for family firms is (γ1 + γ2) = (-0.140-0.180 = -0.32). The results drawn by estimating the model (3) captures the impact of family ownership on leverage of firms. The current study tends to capture speed toward capital structure in terms of family businesses (FBs) and non-family businesses (NFBs). The estimated coefficients of hypothesis-3 for non-family firms is (ϕ1 = 0.432) and for family firms is (ϕ1 + ϕ2) = (0.432 -0.134) = 0.298. Therefore, adjustment speed for family firms is 10.298 = 70.20%. For nonfamily firms this speed can be captured as 1-0.432 = 56.80%. It can be seen that family firms adjust speedier towards target capital structure. The results are statistically significant at 10% level. Regression Results at 50% cut off point In order to check the robustness of results, the generalized method of moments (GMM) was applied on 50% cut off point for family and nonfamily ownership. All results were found unchanged. The coefficients of empirical results can be seen from Table-2 attached in appendix-1. CONCLUSIONS To fulfill the targeted objectives of the study, the analyses were divided into several steps. First, the sample of study was divided into two categories 25% shares holder family firms and 50% shareholder’s family firms. Second, three models were used to analyze behavior of family and nonfamily firms regarding dividend and debt policy. As the empirical results indicated the direct positive relation between net earnings and dividend payout ratio. The results also indicated this relation strong in family firms as compared to non-family ones. High dividend payout motivates managers would work for shareholders benefits instead of using funds for their personal use. The management and director of the family firms can manage the dividend and less debt financing in

Mehboob et al.

better way because they do work with more honestly as compare to non-family directors. The above results also represent the relationship between family ownership and capital structure. The family firms use less debt financing in their capital structure as compare to non-family firms. The results shows that the owners and the management of family owned firms want to keep the shares within the family so they avoid external debt and equity financing. Due to the afraid of losing control owners of the family owned businesses avoid debt financing in their capital structure. Another reason of avoiding debt financing is that the family firms likely to be more opposed to risk than non-family firms therefore they circumventing debt. Family ownership have long term commitment and the families wants to pass the firms onto the upcoming generations therefore this commitment and the desire to pass firm to the upcoming successors can influence the decisions of family firms. The result of studies also indicates that family firms can adjust speedier toward target capital structure. Family ownership has long term commitment and the families want to pass the firm onto the upcoming generations. RECOMMENDATIONS 1. The investors were instructed to prioritize the future investments in FOBs due to higher portion of net earnings as dividend payment. 2. Family firms are advised to be reluctant for external debt financing. 3. The Security Exchange Commission of Pakistan (SECP) - regularity authority was requested to monitor the companies regarding stability in their dividend policy especially NFOBs. REFERENCES Afzal, M., & Sehrish, S. (2011). Ownership Structure, Board Composition and Dividend Policy in Pakistan. International Conference on Management, Business Ethics and Economics (ICMBEE). Held on December 2829, 2011 at Pearl-Continental Hotel Lahore, Pakistan.

108


Ahmed, H., & Javid, A. Y. (2008). Dynamics and determinants of dividend policy in Pakistan (evidence from Karachi stock exchange nonfinancial listed firms). MPRA Paper No. 373 posted 21. March 2012 13:39 UTC. Anderson, R.C., Mansi, S.A., and Reeb, D.M. (2003): “Founding family ownership and the agency cost of debt.” Journal of Financial Economics, 68, 263–285. Byrne, F. (2009). Family business: In safe hands? Barclays Wealth Insights (Vol. 8). Available at http://www.barclayswealth.com/research Chausse, P. (2010). Computing generalized method of moments and generalized empirical likelihood with R', Journal of Statistical Software, 34, 1{35. http://www.jstatsoft.org/v34/i11/ De Angelo, H., De Angelo, L., Stulz, R. M., (2006). Dividend policy and the earned/contributed capital mix: A test of the life-cycle theory. Journal of Financial Economics 81 (2006) 227–254. Deloitte (2013). From the Family to the Firm: A view through the Indian Prism. www.deloitte.com/in Demsetz, H. and Villalonga, B. (2001): “Ownership structure and corporate performance”, Journal of Corporate Finance, 7:3, pp. 209233. Doidge, C., Karolyi, G.A., Lins, K.V., and Stulz, R.M. (2005). Private benefits of control, ownership, and the cross-listing decision. NBER working paper series 11162

reliably important? Financial Management, 38, 1–37. Ghani, W. I. and J. Ashraf (2005). Corporate Governance, Business Group Affiliation and Firm Performance: Descriptive Evidence from Pakistan. Lahore University of Management Sciences (CMER Working Paper No 05-35). Hamid Ullah., Fida, A., & Khan, S. (2012). The Impact of Ownership Structure on Dividend Policy Evidence from Emerging Markets KSE-100 Index Pakistan. International Journal of Business and Social Science Vol. 3 No. 9; May 2012. James, H.S. (1999). Owner as manager, extended horizons and the family firm. International Journal of the Economics of Business, 6, 41– 55. Javaid, A, Y., Iqbal, R. (2010). Corporate in Pakistan: Corporate Valuation, Ownership and Financing. Pakistan Institute of Development Economics Jean-Philippe W., (2010). Do not wake sleeping dogs: Payout Policies in Founding Family Firms, November 2010, Boulevard de Pérolles 90 Kasbi, S. (2009). Ownership Concentration and Capital Structure Adjustments. DRMFinance, Université Paris-Dauphine Margaritis, D., and Psillaki, M. (2010). Capital structure, equity ownership, and firm performance. Journal of Banking and Finance, 34, 621–632.

Dunn, B. & Hughes, M. (1995). Family businesses in the United Kingdom. Family Business Review, 8(4), 267-291.

McVey, H., and Draho, J. (2005): “US family-run companies – They may be better than you think.” Journal of Applied Corporate Finance, 17, 134–143.

Elisabete, F., &Vieira, S. (2013). Family Firms and the Market Reaction to Dividend News. Journal of Modern Accounting and Auditing, ISSN 1548-6583 April 2013, Vol. 9, No. 4, 527-541.

Miguel, A., Pindado, J., and de la Torre, C. (2005). How do entrenchment and expropriation phenomena affect control mechanisms? Corporate Governance: An International Review, 13, 505–516.

Frank, M.Z., and Goyal, V.K. (2009). Capital structure decisions: Which factors are

Schmid, T., Ampenberger. M., Kaserer. C. & Achleitner. A-K. (2010). Controlling shareholders and payout policy: do founding

109


Mehboob et al.

families have a special 'taste for dividends’? CEFS working paper series, No. 2010-01. Storey, D. J. (1994). Understanding the small business sector” London: routledge, Journal of Financial Economics, 20, pp. 25-54. Sylvia Allegretto, Arindrajit Dube, and Michael Reich (2011). Do Minimum Wages Really Reduce Teen Employment? Accounting for Heterogeneity and Selectivity in State Panel Data IRLE working paper #166-08 Yan, H., Wang, D., Zhang, S., (2007), Founding Family Ownership, Management and Payout Policy, Journal of Corporate Finance. 11, 228252. Zhou, H. (2012). “Are family firms better performer during financial crisis?” Working paper available at http://ssrn.com/abstract=1990250, 2012.

110


APPENDIX Table-1 Table-1 shows comprehensive analysis of dividend and debt policies of family and non-family firms at (25%) cut off points. Generalized method of moments (GMM) was used to test the hypotheses (1-3). The dummy variable FB equal 1 for Family business and zero otherwise. DRit and IF it were the debt and Internal fund ratios of the firms. DIV it and NEit are the dividend and net earnings ratios of the firms. SIZE it, ARit are the size and average account receivables of the companies. AGE it shows age since incorporated. Qit is the Tobin q of firms. The sample consists of 340 observations, 34 firms from pharmaceutical and chemical sectors, listed on Karachi Stock Exchange (KSE) Pakistan for the period ranging from 2004 to 2013. The ***, ** and * denote significance level at 10%, 5% and 1% respectively. T-statistic (t1) shows the linear restriction under the null hypothesis H0: β1 + β2 =0. T-statistic (t2) indicates the linear restriction under the null hypothesis H 0: γ1 + γ2 = 0. T-statistic (t3) indicates the linear restriction under the null hypothesis H 0: ϕ1 + ϕ2 = 0. w1 shows the Wald Test-1 for the joint significance of the estimated coefficients under null hypothesis H 0 (asymptotically distributed) and the value under parenthesis denotes the degree of freedom. w2 is the Wald Test-2 for the joint significance of the times dummies under null hypothesis H 0 (asymptotically distributed) and the value under parenthesis shows the degree of freedom. h indicates the Hansen test of over identifying restriction under assumption of null hypothesis as no correlation between instruments and error term and the value in parenthesis is the degree of freedom.

Model-1

Model-2

DIVit = α + (β1 + β2 FB) NEi-1+ µYit + εit

SE 0.011 0.002 0.002

Model-1

DRit = α + (γ1 + γ2 FB) IF+ µYit + εit

Variables constant NEit FBNE it IFit FBIFit DRit-1 FBDRit-1 TQ it SZ it Sales it

Co α β1 β2 γ1 γ2 ϕ1 Φ2 µ1 µ2 µ3

Value 0.482** 0.057* 0.104*

Value 1.291*

SE 0.002

-0.201* -0.018*

0.003 0.001

-0.081* 0.003* 0.024*

0.001 0.001 0.003

0.006* 0.002** 0.022**

ARit

µ4

-0.051*

0.001

AGEit

µ5

0.004

0.003

T-statistics T-statistics T-statistics T-statistics Wald Test-1 Wald Test-2 Hansen Speed toward target Dividend Policy

t1 t2 t3 t4 w1 w2 h

4.44

DRit

= α + γ1 IF+ (ϕ1 + ϕ2 FB) DRit-1 + µYit + εit

Value 0.982**

SE 0.002

-0.971*

0.005

0.001 0.001 0.001

0.422* -0.121* -0.079* 0.009* 0.005*

0.002 0.003 0.001 0.002 0.001

0.003*

0.000

-0.086*

0.003

0.002

0.001

0.001

0.002

154.11 89.09 633.57 (6) 21.01 (5) 58.78

16

538.67 (6) 11.01 (5) 98.72

16

634.17 (6) 27.01 (5) 48.28 NFOB=57.80% FOB=69.90%

16

111


Mehboob et al.

Table 2 Model-1

Model-2

DIVit = α + (β1 + β2 FB) NEi-1+ µYit + εit

SE 0.021 0.003 0.002

Model-1

DRit = α + (γ1 + γ2 FB) IF+ µYit + εit

Variables constant NEit FBNE it IFit FBIFit DRit-1 FBDRit-1 TQ it SZ it Sales it

Co α β1 β2 γ1 γ2 ϕ1 Φ2 µ1 µ2 µ3

Value 0.396** 0.066 0.0743

Value 0.266*

SE 0.007

-0.140* -0.180*

3.871* 2.99*

-0.016* 0.006* 0.018*

0.001 0.000 0.002

0.005* 0.001** 0.021**

ARit

µ4

-0.026*

0.001

AGEit

µ5

0.003

0.004

T-statistics T-statistics T-statistics T-statistics Wald Test-1 Wald Test-2 Hansen Speed toward target Dividend Policy

t1 t2 t3 t4 w1 w2 h

2.44

DRit

= α + γ1 IF+ (ϕ1 + ϕ2 FB) DRit-1 + µYit + εit

Value 0.396**

SE 0.780

-0.671*

0.009

0.000 0.000 0.001

0.432* -0.134* -0.076* 0.006* 0.003*

0.001 0.002 0.001 0.000 0.000

0.005*

0.000

-0.016*

0.002

0.001

0.002

0.002

0.002

74.11 65.69 633.57 (6) 21.01 (5) 58.78

16

538.67 (6) 11.01 (5) 98.72

634.17 (6) 27.01 (5) 48.28 NFOB=56.80% FOB=70.20%

16

16

Figure 1: Theoretical Framework Net Earning Debt

Family Ownership

Internal Fund

Dividend Payout Capital Structure

112