Hedge Fund Ownership, Board Composition and Dividend Policy in the Telecommunications Industry

Abstract

This paper examines the impact of hedge fund ownership, mutual fund ownership, board composition and large block ownership on the dividend policy of telecommunications firms. The paper is intended to test the agency cost hypothesis for dividends, in which dividends serve as a substitute control mechanism in circumstances in which shareholder control has been attenuated. The evidence suggests that hedge fund ownership serves as a substitute for dividends as a corporate control mechanism to alleviate agency problems. However, the same case cannot be made for mutual fund ownership. The evidence also suggests that board independence increases the likelihood and the magnitude of a dividend payout. Furthermore, the results also indicate that the joint presence of independent boards and large shareholdings reduces the likelihood of a dividend payment. The latter two results suggest that greater independent board representation provides an effective medium for shareholders to extract dividends as well as a complement to top shareholder concentration in relieving agency costs. Overall, the results provide ample support for an agency-theoretic explanation of dividends.