Does Growth Opportunity Moderate the Relationship between Leverage, Dividend Pay-out Ownership Concentration & Firm Value?
Introduction
Back Ground of the Study Corporate finance initially started with the assumption of complete and perfect market. It argued that fund raising is independent of its capital structure by assuming perfect competition cost, no agency cost and no bankruptcy cost, no transaction cost. Modigliani and Miller 1963 also said that dividend policies have no major role in value creation process of firm but with passage of time it was found that it has impact on it.
The most important decision made by financial management is capital structure. It is the mix of debt and equity that how much debt and how much equity is used. It also contain decisions of dividend policies, project financing and issue of long term securities etc. Management use capital structure as a tool to manage the cost of capital. Different results are noted on the relationship between capital structure and firm value .some studies shows negative relation with one another (Huang and song 2006 Chakra borty 2010) while others shows direct and positive relationship ( Abor 2005,khan 2014).
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Myers 1984 said that capital structure is harder than dividend as we have much information about dividend policy through signaling theory but capital structure seems puzzle to us as we don’t know how firm issue equity and debt or hybrid securities, we have less knowledge about capital structure. According to Myer our understanding is insufficient.
As Barclay and smith 2005 said that capital structure is still debatable due to different theories and these theories did not match with one another. Some scholars supports Modigliani and miller. Miller 1984 also said that when a large amount of debt is used then it affects managers and they do not work well in interest of shareholders by ignoring important projects which have positive net present value this is also known as underinvestment problem of debt financing. However Jensen 1986 said that when firms contain more free cash than positive net present value the debt effects positively the value of firm. The reason behind it is that managers are going to pay out funds to debt providers which control managers from misuse of cash resources and if debt is not taken by companies then free cash flow is used in negative net present value investment opportunities.
This is known as over investment problems. This can be solved by giving excess funds in order to service debt if any debt is taken by firm. It arises due to separation between equity and management ownership .this problem can be solved by making managers shareholders too due to which the interest of both will align.
According to jawed and Iqbal 2008 the main problem is not conflicts of managers and shareholders but the exploitation of minority shareholders by majority. Decision are made by majority shareholders and not even bear the full cost. Mostly in cases when a family member is assigned to a high position and he or she don’t know about business which create a lot of problems and gave negative image of the firm to the market.
Problem statement
There are lot of literatures which focused on the relationship between financial decision and value of firm but less information about impact of ownership concentration on firm’s value in the presence or absence of growth opportunities in context of Pakistan.
Cheema et al 2003 only identify the nature of corporate ownership structure without analyzing its impact on corporate finance. The gap was then filled by jawed and Iqbal 2009 in which they found link between corporate ownership, firm’s performance and corporate governance. Wahla also show the influence of managerial ownership and ownership concentration on the performance of non-financial firm which were listed at Karachi stock exchange. In the above studies relationship between firm value and firm ownership structure is study from different directions but none of them show the relationship between firm value and ownership structure in the absence or presence of growth opportunity. Therefore this study aims to explore the relationship between firm’s value and ownership structure concentration in the absence or presence of growth opportunity. Because there are chance of exploitation of minority shareholders by majority shareholders and the influence of dividend leverage on firm value will be also discussed.
The objective of the study
The first objective of this study is to identify that how a future value creation is affected by firm’s leverage, dividend policies and ownership concentration in the absence and presence of growth opportunities?
Secondly to identify whether firms exploits the minority shareholders or not.
To identify the reverse effect or positive and negative impact of ownership concentration on future value of firm in the presence or absence of growth opportunity.
Research questions
How growth opportunity is linked with leverage, dividend, ownership concentration and firm performance?
Is there any turning effect exists on ownership concentration with firm value in the presence or absence of growth opportunity?
Research hypothesis
- H1: No relationship exists between corporate debt and firm value when there are growth opportunities
- H11: Debt is negatively related with firm value when there are growth opportunities
- H12: Corporate debt positively related with firm value when there is no growth or few opportunities
- H02: No relationship exists between dividend payout and firm value in the absence or presence of growth opportunities
- H2: Relationship is uncertain between firm value and dividend when there is growth opportunity but by paying dividend it gave positive impact on firm value when there is no or few growth opportunity
- H03: No relationship exists between firm’s value and ownership concentration
- H3: There is a nonlinear relationship between firm value and ownership concentration. The relationship is initially positive and become negative after a critical threshold level.
Significance of the study
Its help firms in making appropriate decision of dividend and leverage policies. When there is growth opportunity the firm can focus on least debt otherwise all the important decision regarding investment are then taken by debt providers.
It also help the firms in making decisions of dividend policy that in which circumstances they should gave dividend and in which not.
It also help the SECP security and exchange commission of Pakistan to plan policies for the protection of minority shareholders.
Limitation of the study
Financial firms are excluded from study.
Missing information in non-financial firms are also not part of the study.
Only those firms are selected which are listed at Karachi stock exchange.
Dividend data is taken from annual reports of company’s website.
Literature Review:
Ownership structure and growth opportunities: Ownership structure and growth opportunities are negatively related to one another. Block holders or dominant holders take all decision by itself and involve in those activities which gave more benefits to them .e.g. a family member took higher rank and he or she not know how to take decisions then it gave negative impact (king and senator 2007).on the other side efficient boards equally assigned independent and dominant directors which gave positive image to the market. According to Iturriaga and Crisostomo (2010) if growth opportunity is more the exploitation of minority shareholders is more by dominant shareholder. So we expect that when growth opportunity is more than more chances of expropriation is there.
Dividend and growth opportunities: In the literature of finance the dividend policy is a broad topic. Brealey and Mayer (2005) said that dividend policy is unsolved problem. This statement supports black’s 1976 statement dividend seems puzzle to us. Modigliani and Miller 1961also said in perfect market dividend not affect value of firm. But this claim was later challenged by (LINTER 1962 and GORDON 1963) that because of imperfect information high dividend leads high firm value .there are a lot of factors through which we explained dividend behavior.
Through signaling theory we can determine whether growth opportunity is there or not. It gives signals to shareholders that firms have growth opportunity and having positive net present value projects but Iturriaga and Crisostomo (2010) said both activities, growth opportunity and distribution of dividend if working on same time would harm the investment projects then how we said that dividend payment increases the value of firm .so the positive relation is uncertain.
Therefore according to them when firms distribute dividend and having no growth opportunity it can reduce the misuse of firm’s resources and when positive relation is expected between firm’s value and dividend there will be poorest growth opportunity.
Leverage and growth opportunity: Modigliani and Miller assumed perfect market where no transaction cost, no taxes, no risk free debts is present .they modifies old Modigliani and Miller model and include tax deductibility of interest in their new model Tthey argued that interest is now a tax deductible expense and firm value is increased by taking leverage. If we want to increase our firm value we can take 100% of debt to finance a project which is not possible in reality. Warner talk about financial distress here he define as those firms which are mainly compose of debt leads towards bankruptcy, firm failed to meet his current obligations and stop firm from taking correct measures.
McConnell and Servaes 1995 also argued when a firm have few growth opportunities debt financing impact positive at firm’s performance and vice versa.
Methodology
Conceptual Framework
Moderator
Growth
Opportunities
Growth
Opportunities
Independent Variables
Leverage
Leverage
Dependent Variable
Dividend
Payout
Dividend
Payout
Firm Value
Firm Value
Family
Ownership
Family
Ownership
Data and sample selection
Annual panel data of 110 will be used which are listed at Pakistan stock exchange sector wise data from year2008 -2018 will be taken.
Study will be done on non-financial and in those sectors of which market capitalization is above the average at Pakistan stock exchange.
Missing information and financial firm will be not included in studies.
Balance sheets of state bank, annual reports from company website and official website of the Pakistan stock exchange is used as data sources.
Empirical Model This study follow iturriaga and Crisostomo model with more extension in the model.
SMBVRit=βₒ+β1(LEV)it+β2(DPV)it+β(OC)it+β4(OC)2it+β5(OCVS)it+Ƞi + єit error term
Where βₒ =intercept term
Β= coefficient of independent variable
Ƞi= firms fixed effect
Є= error term
i is used for firm and t is used for time
Panel data method is used to control unseen heterogeneity and fixed effects are used for firm’s characteristics it is denoted by Ƞi .through error term omitted variables are controlled.
Dependent variable: Main purpose of this study is to identify and measure growth opportunity with value of firm. In past different studies are done to measure the growth opportunity. Like price to earnings ratio, market to book ratio, profitability etc. An investment opportunities can be captured good through MBA ratio argued by ADAM and GOYAL 2008 as it contain high information data .now we are taken SMBA ratio that is sector market to book ratio. Question arises why we used it the answer is many studies in past mentioned sectorial issue it impact major on growth opportunity. For example different sectors contain different risks some of them are dealing with tangible assets while others with non-tangible asset and others factors too. (King and senator 2008) said that it not only gave efficient proxy but also contrast new research with past one.
So we are using SMBA, it is the main variable. We will calculate it through different steps first we are going to calculate market to book asset ratio after this we calculate average of each sector and in last average will be subtracted from MBA market to book ratio on specific year and of specific company.
Independent variable: Independent variable are dividend payout ratio leverage and ownership concentration. Leverage ratio can be calculated by two ways. One method is book value of debt /total asset and the other method is total debt/equity it is also called debt to equity ratio.
In this research debt to equity ratio will be used to find out leverage ratio. In higher growth firm relationship between leverage and corporate firm will be negative, while in lower growth firm relationship between them is positives. (MC ConnelL and Servaes 1995).
Dividend payout will be calculated by total dividend share / shareholders’ equity .the firm value can be judged through free cash flow and signaling theory that growth opportunity is present or not. Dividend payment provide signals to shareholders that growth opportunities are present. Firm contain positive net present value project and both are positively related.
Now according to iturriaga and Crisostomo 2010 relationship between them is uncertain in case of growth opportunity, they also argued that relation is positive between firm value and dividend when there is no or few growth opportunities.
Number of shares hold by owner is used to measure the concentration of ownership said by jawed and Iqbal .A block holder is the one who holds more than 10% of firm’s equity. According to ordinance 1984 of Pakistan it needs 75% vote to pass resolution to change in companies activities. Here 10% equity holder is given that right. Square of ownership concentration will be used to figure out any nonlinear effect of concentrated ownership. ABBAS ET AL 2013 said firm performance is affected positively by large shareholders but when it exceeds from 50% ownership concentration become pest and large shareholders influence decisions as a result their own personal benefits maximize while minority shareholders suffer for their own rights .according to iturriaga and Crisostomo 2010 there is a positive relationship between ownership concentration and firm value due to close check on manager and negative effect due to exploitation.
To avoid multicolinerity with ROA (that is used to measure profitability) log of market capitalization is used to measure the size of firm instead of total asset.
The sample is divided into two sub parts to analyze the impact of growth opportunities ,criteria of distribution is that those which have positive SMBA considered having growth opportunities in future and those which have negative SMBA will be considered having no growth opportunities in future.
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