Debt and dividends: Evidence from an emerging market, istanbul stock exchange
In the broadest sense, this study aims to investigate likely costs and benefits of a particular type of control structure; -pyramidal ownership- (or vertically integrated diversified business groups) which is a prevalent form of indirect ownership, a control concentrating mechanism peculiar to insider system countries in which the controlling shareholder has typically more control rights than cash flow rights by means of building the ownership in vertical layers and usually under a holding company. In the narrowest sense, it aims to examine the relationship between the control structure of pyramidal ownership (control wedge or ratio of control rights to cash flow rights and group affiliation) and capital structure decisions ( usage of leverage from internal or external capital market sources) and dividend payout policies of 150 companies listed on Istanbul Stock Exchange over the years 2007-2008, using 300 firm-year data in total.
In this realm, theoretically, we expect the relations between pyramidal business structure and capital structure and dividend policy (in conjunction with capital structure) to be as follows:We expect that within a pyramidal structure of business groups, from top to bottom of the chain, external leverage ratio should be decreased because the main company has a more collateralized debt capacity (non-financial assets); parent company takes the debt from external capital markets and allocates it to it’s subsidiaries rather than each firm’s going to the external capital market and finding debt with higher cost. In support of this capital structure, dividend payouts should increase from bottom to top of the pyramid which in turn will increase internal capital market funds to service external debt. The parent company pays out less to maximize the retained earnings and affiliated subsidiaries pays out more dividends to parent. This view (debt service hypothesis) is used and tested by both Lee (2011;2010) and Hege, DeJong, Jong and Mertens (2010).
The paper proceeds as follows; Section 2 summarizes the literature on the costs and benefits of business groups with special emphasis on their capital structure and dividend policies. Section 3 presents hypothesis building and motivations. Section 4 presents empirical testings and implications and Section 5 concludes.