Dividend Payment Theory

Agency theory Jensen and Meckling (1976) argued that agency relationship takes place when the principals engage the agents to perform some of their duties on their behalf. Agency cost arises because of conflicting interests of the managers and owners. Short et al (2002) argues that Dividend policy performs a crucial role in reducing agency costs, which have arisen from the conflicting interests of both the parties. According to Rozeff (1982) dividend payment is a device to reduce agency cost. Jensen (1986) suggested that dividend payment could create conflicts among the managers and shareholders because managers are more willing to retain resources instead of paying dividends. Managers are interested to follow the growth strategies for their

If profits are not paid to the shareholders in the form of dividend, the managers might change their intentions towards the benefits of the management or they can engage the resources into unprofitable projects. Consequently, the interest conflict arises among them, which can be solved through dividend payout policy. Therefore, Rozeff (1982) called dividend payment as a device to reduce agency costs. Many studies have argued on a point that institutional investors positively impact the agency problems by reducing agency costs and by influencing dividend policies (Han et al., 1999). Han et al. (1999) empirically showed a positive relationship between dividend payout and institutional ownership. Carvalhal-da-Silva and Leal (2004) argued that agency problems between the managers and the shareholders can take place due to the fact that managers may not be maximizing the shareholder value. By observing Japanese firms, Stouraitis and Wu (2004) found that the dividend payout policy can be used to manage the overinvestment problems of the firm and observed that the conflicting interests between the managers and shareholders about the dividend policy vary according to the growth

Institutional investors' intervention may change the attitude of the managers towards dividend policy. Institutional shareholders influence the decisions of InvesteeThe study is expected a significant association between institutional ownership and dividend pay policy. Fama and Babiak (1968) and Short, et al. (2002) suggested that the association between the institutional ownership and dividend policy is significant. Zeckhauser and Pound (1990) and Short, et al. (2002) established a positive association between institutional ownership and dividend payout using four dividend models. Ullah, Fida and Khan (2012) using a sample of the Pakistan market KSE-100 index, found institutional ownership has a positive association with the dividend policy communicating the higher dividend payouts. Al-Nawaiseh (2013) studies the dividend policy and ownership structure using a sample 62 listed firms for the period of 2006 to 2006. The study revealed that institutional ownership is positively and significantly associated to dividend policy. Al-Gharaibeh (2013) using the sample of 35 quoted firms in Jordan found that