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Finance of Organizations. Analysis of Accounting Systems
Translated Articlet
THE IMPACT OF FOREIGN STOCKHOLDERS ON THE DIVIDEND POLICY OF RUSSIAN COMPANIES
Elena A. FEDOROVA
Financial University under Government of Russian Federation, Moscow, Russian Federation
Corresponding author
Elizaveta O. KOMAROVA
Financial University under Government of Russian Federation, Moscow, Russian Federation [email protected]
Article history:
Received 12 April 2017 Received in revised form 12 May 2017 Accepted 15 May 2017 Translated 1 March 2018 Available online 27 March 2018
JEL classification: D31, E25
Abstract
Importance In this article, we consider the dependence of dividend payments of Russian companies on foreign shareholders, and the dividend policy of Russian companies.
Objectives The research determines the correlation of the presence of foreign investors among shareholders and the dividend policy in Russia.
Methods The correlation was studied through the logit model for binary variables and the least squares method. The empirical underpinning consists of data on 122 largest Russian listed companies. Results The main hypothesis of a direct correlation of dividends and the presence of foreign stockholders has not been confirmed. The study verifies an inverse correlation of dividend payments and the presence of foreign shareholders.
Conclusions and Relevance Nowadays Russia is not an attractive country for foreign investments due to Keywords: dividend, foreign, stockholder, the unstable economic situation and political relations with other countries. The findings can be useful for investment attractiveness, dividend managers of the Russian companies to study benefits of foreign shareholding, and investors who are interest in policy Russia to be an actor of the world economy.
The editor-in-charge of this article was Irina M. Vechkanova Authorized translation by Irina M. Vechkanova
Globalization and business focus on transparency for foreign investors has become a noticeable trend in the contemporary market for the recent decades. Therefore, foreign investment thrives worldwide.
For the source article, please refer to: Федорова Е.А., Комарова Е.О. Влияние иностранных акционеров на дивидендную политику российских компаний. Финансовая аналитика: проблемы и решения. 2017. Т. 10. № 8. С. 848-858. URL: https://doi.org/10.24891 /fa.10.8.848
© Publishing house FINANCE and CREDIT, 2017
However, while corporations grow and position new investment opportunities, foreign investors come across geographical issues, lingual and cultural barriers, thus suffering from limited access to respective information unlike local investors.
Furthermore, many emerging economies, including Russia, generally provide little protection to minority
investors. It influences foreign investors' behavior as they stand for their interests.
How much, indeed, do foreign investors influence the dividend policy of a company?
Being shattered by the national and global crisis, Russia has been subsiding as a potential target for investors for the recent years. Furthermore, the Western sanctions obstruct foreign investments in the Russian companies. Few foreign residents hold shares in the Russian companies due to political and diplomatic tensions and distinctive development since Russia has been undiscovered land for the Western businessmen for a long time.
Foreign shareholding has become a talking point in different countries. The issue is of special interest for the Chinese market [1, 2]. As studies reveal, foreign investors play an increasing role in the dividend policy, thus strengthening the dependence on investors.
In addition to researches into the Chinese market from perspectives of local businesses' response to foreign investors as shareholders, there are other studies proceeding from other countries [3-5]. Each of the above articles verifies hypothesis stating that dividend payouts directly depend on the presence of foreign investors in the company.
This research dwells on one of the most popular doctrines of the corporate dividend policies, i.e. the agency theory.
M. Jensen and W.H. Meckling formulated the concept of an ongoing conflict between investors and managers as they have different pursuits and priorities. Many studies highlight [6, 7, etc.] flamboyant evidence of the theory in companies from emerging economies, including Russia.
The conflict of interests between top executives and shareholders arises from free cash distribution. While top executives earmark most of free cash for corporate development and so on, shareholders prefer to use funds for their own benefit, i.e. making dividend payouts.
As mentioned above, minority shareholders do not enjoy sufficient protection of their interests in Russia since foreign investment is rather scarce there. Most foreign investors pertain to minority shareholders.
Foreign investors prudently control whether their rights are respected in companies. The existing situation in Russia makes top executives be more active in searching for foreign investors, thus increasing dividend payouts.
Based on the above statements, such scholars as Naohiko Baba [3] from Japan (2008), S. Kim, W. Sul, S.A. Kang et al. [2] (2010) and J.Q. Jeon, L. Cheolwoo, C.M. Moffett [4] (2011) from South Korea published relevant findings of their researches. Studying the literature on the subject given, we assume that foreign investors in the Russian companies may well have a positive impact on dividend payouts.
Hypothesis 1. Foreign residents as shareholders contribute to dividend payouts.
In this research, we analyze preferences of the Russian top executives concerning the foreign investors' country of origin. Currently, there are a lot of debates about the increasing role of developing countries in the world economy as compared with developed ones. However, some people believe that the economic classification of countries into developed and developing ones displays that the former is economically superior to the latter. It may bias top management in analyzing would-be foreign investors. It engenders the following hypothesis.
Hypothesis 2. Foreign shareholders from developed countries have a more positive impact on dividends than it might be in case of shareholders from developing countries.
Besides, as part of this research, we examine some other hypotheses which our foreign colleagues previously suggested.
Hypothesis 3. Bigger companies has a stronger tendency for dividend payouts [8].
The company size is defined as a natural logarithm of total assets similarly to the research we refer to. This characteristic means that the company has the ability to evolve and pay dividends. We also analyze a relative indicator of cash flow, that is a percentage of cash in total assets so as to assess the company's ability to pay dividends.
Hypothesis 4. The higher profitability, the more probable dividends.
The corporate health is usually measured with profitability. If the company passes through a favorable phase of its life cycle, all resources are effectively used, the company can be considered able to pay dividends to its shareholders.
Hypothesis 5. Companies with the State-owned shares demonstrate a stronger tendency to dividend payouts.
State shareholding is quite a disputable and important issue. F. Adjaound, W. Ben-Amar [8], M. Firth, C. Lin, H. Zou [9], H. Ben-Nasr [10] and other researchers1 delved into this issue, thereby generating a great deal of opinions confirming both direct and inverse relationship.
Hypothesis 6. Operational distinctions of companies influence dividend payouts.
It is generally accepted that it is difficult to determine the single theory of dividend policy making. It is mostly true because companies' operations have their own distinctions and preferences, which can but influence their dividend policy. In this research, we study whether there is any relationship between the dividend policy and type of the company's activity [11].
This research is based on 122 observations of 300 top listed Russian companies during 2015. Data were collected through information and analytical computerassisted systems and datasets, such as Ruslana-Bureau van Dijk and Bloomberg Professional.
The sample comprises relative ratios obtained from financial statements and publicly available data of Bloomberg Professional database. Afterwards we process and examine the information in terms of factors, which are mentioned in scientific literature.
Refer to Table 1 for indicators we used to verify the hypotheses using econometric models.
We initially analyzed the amount of dividends paid, i.e. Y1 - dividend. Results are given in Table 2.
According to estimates, the total model looks as follows:
1 Fedorova E.A., Fedorov F.Yu., Nikolaev A.E., Afanas'ev D.O. [Evaluating the efficiency of foreign direct investment: A cross sectoral comparison]. Finansovaya analitika:problemy i resheniya = Financial Analytics: Science and Experience, 2016, no. 41, pp. 11-23. (I n Russ.); Fedorova E.A., Voronkevich A.B. [The influence of external factors on the dividend policy of Russian companies]. Finansy i kredit = Finance and Credit, 2016, no. 38, pp. 27-36. (In Russ.)
Y = ¿(1.22X5 - 8.05X6 - 2.76X7 - 0.46X9 -- 0.01X10 + 4.87X15 + 17.56X16 + 12.44),
where L is the function of the logistic distribution
Having evaluated the model through the Akaike and Schwartz criteria, it may not be considered the best one since these criteria exceed 4.
If we consider the F-test, it indicates a 95.33 percent-likelihood of the relationship between the variables.
We include the most significant indicators into the table displaying the results of the model assessment using the least square method. The remaining indicators were dismissed.
Signs of the resultant assessment are interpreted as follows. If the ratio is positive, the variables are in direct relationship, while the negative sign mean the inverse relationship.
The second analyzable indicators Y2 is a dummy variable. It characterizes the fact of dividend payout. The results of the analysis are presented in Table 2.
According to our computations, the final model is expressed as follows:
Y = L(-7.2X4 + 3.09X9 - 0.01X10 - 3.51X14 - 26.79X16 -74.25).
As shown in Table 3, the resultant model reflects the statistically important correlation of the variables. It is proved with the LR test of 0.000012. It means that there is a 99-percent likelihood of the significant relationship between the variable.
The model is also considered as adequate by the t-test. The coefficient of determination approximates 1 (it equals 0.8), thus indicating a good quality of approximation of the model's indicators we observe.
Having assessed the logit-model by the Akaike (0.59) and Schwartz criteria (0.83), we concluded that the model failed since the coefficients are low.
The final model also included only significant variables, i.e. those ones with the lowest likelihood test. According to the way the likelihood indicator is interpreted, we infer that the lower the likelihood, the stronger the effect this variable has on the dependent variable [12-15].
As per assessments given in Tables 2 and 3, some of the above hypotheses proved to be true. Please find the results in Table 4.
The research makes us conclude that the situation in the Russian market does not support the assumption that foreign investors in a company necessarily have a positive impact. On the contrary, it reduces or halts dividend payments. Therefore, companies, where over 15 percent of shares are held by foreign residents, pay less dividends than the ones without foreign shareholders.
It diverges with findings of researches who conducted a similar analysis of companies in other countries [1-5]. It may conceivably stem from the fact that Russia is not an attractive country for foreign investment due to its economic unsustainability and political affairs with other countries.
As for the Russian companies' preferences concerning foreign investors from developed or developing countries, the analysis reveals that shareholders from developing countries have a demonstrably negative impact on the amount of dividend payments.
This conclusions debunks the first and second hypotheses underlining the inverse dependence of dividend payouts on foreign shareholders.
Considering other factors influencing the dividend policy, we should note that almost all the analyzable indicators (size of the company, profitability, operational specifics) proved to be significant for dividend policy making. The factors were analyzed
before by foreign colleagues [16-18]. Their conclusions agree with our own ones based on the assessment as part of this research.
We also validated the hypothesis that large companies have a stronger tendency to dividend payouts. The reason is that the size of a company signifies the possibility of paying dividends to its shareholders.
Moreover, the assumption that dividend payments are more typical of companies with higher profitability appears to be true only to some extent (Return on Assets). It may be evidence of that Return on Equity does not reflect the company's ability to pay dividends.
It is worth mentioning that operational specifics turns out to be a significant indicator. Such dependence signifies that the industry of a company shall be taken into account when the dividend policy is formed. Every company is too specific to be explained with a single uniform model.
As noted above, State shareholding in the Russian companies does not boost dividend payouts like it happened in many other countries. This is due to special conditions for State-owned companies operating in Russia. The theory of agency does not apply completely to them since priorities of top executives and shareholders are often hard to distinguish.
The findings may be of use for the Russian managers to study advantages of foreign shareholders, and for those who promotes Russia as an actor of the world economy and investee.
E.A. Fedorova et al. / Digest Finance, 2018, volume 23, issue 1, pages 55-62
Table 1 Indicators used to verify the hypotheses
Indicator Denotation Calculation formula
Dividend Y Dividends paid/ Total assets
Payer of dividends Y Takes on a value of 1, if payments have been made in the current period, and it is 0, if they are not
Foreign shareholder X Takes on a value of 1, if a foreigner is present among shareholders, and it is 0, if there are no foreigners
Interest of the key foreign shareholders X Interest of the key foreign shareholder
Key foreign shareholder X Takes on a value of 1, if the key foreign shareholder has more than a 15-percent interest, and it is 0, if his/her share is less than 15 percent
Interest of the foreign shareholder from a developing country X If the key foreign shareholder proceeds from a developing country, his/her interest in the company shall be specified, but if he/she is not, then 0 is indicated
Interest of the foreign shareholder from a developed country X If the key foreign shareholder proceeds from a developed country, his/her interest in the company shall be specified, but if he/she is not, then 0 is indicated
The ratio of the market value of shares to par value X Market value of shares/Par value of shares
Size of the company X Natural logarithm of total assets
Cash flow Xo Cash and cash equivalents/ Total assets
Return on Equity Xi Characteristic of the efficiency of the equity use
Leverage X2 Characteristic of the capital structure indicating the ratio of debt to equity
Percentage of intangible assets X3 Intangible assets/ Total assets
State shareholding X4 Share held by the State
Return on Assets X5 The efficiency of assets used
Sectoral specifics Xi6 Company's performance viewing it as a part of a specific industry. It takes on a value of 0.01...0.16 depending on the factor
Source:The Bank of Russia data
Table 2
The results of the model evaluation using the least squares method*
Variable Coefficient Standard error T-test Likelihood
Xo -0.009845 0.006112 -1.61088 0.1157
X5 4.868358 1.997354 2.437404 0.0197
Xi6 17.56364 8.088184 2.171518 0.0364
X5 1.221548 0.886434 1.378047 0.1765
X -2.76055 1.725963 -1.599425 0.1182
X -8.046348 7.293296 -1.103253 0.277
X, -0.459267 0.24042 -1.910272 0.0639
C 12.43629 6.493609 1.915158 0.0632
R-squared 0.306024 Mean of dependent variable 1.362575
Adjusted R-squared 0.174731 Standard deviation of dependent variable 1.994378
Standards error of regression 1.81178 Akaike information criterion 4.186307
Residual sum of squares 121.4542 Schwartz criterion 4.507492
Logarithm of the likelihood function -86.19191 F-test 2.330847
Durbin-Watson statistics 2.333574 Likelihood (F-test) 0.044744
* Dependent variable: Y1, linear regression.
Source : Authoring
Ta be 3
The results of logit model evaluation*
Variable Coefficient Standard error z-test Likelihood
X0 -0.014505 0.012166 -1.192256 0.2332
X6 -26.78873 21.73463 -1.232536 0.2177
Xu -3.506207 3.926253 -0.893016 0.3718
X -7.202182 3.934129 -1.830693 0.0671
X9 3.090394 1.296156 2.384276 0.0171
C -74.25071 32.57643 -2.279277 0.0227
The mean of dependent variable 0.8 Standard deviation of dependent variable 0.40452
Standard error of regression 0.226171 Akaike information criterion 0.590709
Residual sum of squares 1.994974 Schwartz criterion 0.831597
Logarithm of the likelihood function -7.290956 Hannan-Quinn information criterion 0.68051
Logarithm of the likelihood function with -22.51811 Logarithmic mean of the likelihood function -0.162021
restrictions
LR-test 30.45431 McFadden R2 0.676218
Likelihood (LR-test) 1.2E-05
* Dependent variable: K2. Evaluation method: Logit-model for binary variable. Total observations: 145.
Source: Authoring
Table 4
The test results of the hypotheses made in the work
Hypothesis Analyzable indicators Hypothesis verification result
Hypothesis 1. Foreign residents as shareholders contribute Interest of the key foreign Not verified. Inverse dependence
to dividend payouts shareholder X
Hypothesis 2. Foreign shareholders from developed Interest of the foreign shareholder Not verified. There is an inverse correlation of
countries have a more positive impact on dividends than it from a developing country X6 interests held by foreign shareholders from the
might be in case of shareholders from developing two types of countries and the amount of
countries dividends paid
Hypothesis 2. Foreign shareholders from developed Interest of the foreign shareholder
countries have a more positive impact on dividends than it from a developed country X7
might be in case of shareholders from developing
countries
Hypothesis 3. Bigger companies has a stronger tendency Size of the company X9 Verified
for dividend payouts
Hypothesis 4. The higher profitability, the more probable Return on Assets X15. The hypothesis proved to be true in case of
dividends Return on Equity X11 the ROA, with the ROE being insignificant
Hypothesis 5. Companies with the State-owned shares Share of the State X14 Not verified. Inverse correlation
demonstrate a stronger tendency to dividend payouts
Hypothesis 6. Operational distinctions of companies Sectoral specifics X16 Verified. The correlation is in place
influence dividend payouts
Source: Authoring
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Conflict-of-interest notification
We, the authors of this article, bindingly and explicitly declare of the partial and total lack of actual or potential conflict of interest with any other third party whatsoever, which may arise as a result of the publication of this article. This statement relates to the study, data collection and interpretation, writing and preparation of the article, and the decision to submit the manuscript for publication.
