The Effect of Corporate Governance on the Relationship between Investment Opportunity and Dividend Policy : Panel Data Analysis and Endogenous Switching Regression Model Approach
Dong Wook Kim
Young Hwan Jeon
Byoung Gon Kim
This study investigates whether the effect of investment opportunities on dividends is influenced by corporate governance. Using cross-sectional data on total 5,119 Korean listed companies, we estimate the relationship between investment opportunity and dividend policy for 9 years, from 2004 to 2012, with panel data analysis and endogenous switching regression model approach. The sample is divided into strong and weak governance regimes to investigate the outcome and substitute effect of La Porta et al. (2000). The results of this study support the substitute model hypothesis, that is, that investment opportunity and dividend are positively related in firms with weak corporate governance but little related in firms with strong governance. In terms of corporate governance, we show that corporate governance significantly influences the relationship between investment opportunity and dividend policy. Regarding dividend policy, we conclude that dividends are utilized as tool to signal their good reputation for firms with high investment opportunity but where corporate governance is weak.
Corporate Governance,Dividend Policy,Investment Opportunity,Panel Data Analysis,Endogenous Switching Regression Model
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