Emerging Markets Review 30 (2017) 1–18

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Emerging Markets Review

journal homepage: www.elsevier.com/locate/emr

The effect of ownership concentration and

composition on dividends: Evidence from
Latin America
Maximiliano Gonzalez a, Carlos A. Molina b, Eduardo Pablo c,⁎, John W. Rosso d,e
a
INALDE Business School, Universidad de la Sabana, Autopista Norte Km. 7, Chía, Colombia
b
IESA Business School, Ave IESA, San Bernardino, Caracas, Venezuela
c
Paseka School of Business, Minnesota State University Moorhead, 1104 Seventh Ave South, Moorhead, MN, USA
d
Escuela de Administración Universidad Pedagógica y Tecnológica de Colombia (UPTC) Tunja, Colombia
e
Universidad de los Andes, Bogotá, Colombia

a r t i c l e i n f o a b s t r a c t

Article history: We analyze a unique data set of publicly traded firms based in six Latin
Received 9 September 2015 American countries to study the joint effect of ownership concentration
Received in revised form 26 July 2016 and composition on dividend policy. We find that when ownership
Accepted 25 August 2016
concentration is high and the largest investor is identified as an
Available online 1 September 2016
individual, firms tend to pay fewer dividends consistent with individual
investors extracting benefits from minority shareholders. However, if
JEL classification: the largest shareholder is based in a common law country, the dividend
G34
paid is significantly higher. Finally, greater ownership by the second
G35
largest shareholder decreases firm dividends suggesting the monitoring
Keywords: role of a large shareholder.
Dividends
© 2016 Elsevier B.V. All rights reserved.
Ownership concentration
International corporate governance

1. Introduction

Agency theory provides a strong link between dividend policy and ownership structure (Jensen and
Meckling, 1976; Rozeff, 1982; Easterbrook, 1984; Jensen, 1986; Zwiebel, 1996). Managers acting in favor of
the controlling shareholders increase dividends to reduce agency costs, especially when external financing
is needed. Empirically, Moh'd et al. (1995) demonstrate that managers tend to adjust dividends in response
to their agency cost/transaction cost tradeoff.
When ownership concentration is high, a main agency problem arises between the large or controlling
shareholders and minority shareholders. Faccio et al. (2001) find that to reduce the exposure to expropriation

⁎ Corresponding author at: Minnesota State University Moorhead, Moorhead, USA.

E-mail address: eduardo.pablo@mnstate.edu (E. Pablo).

http://dx.doi.org/10.1016/j.ememar.2016.08.018
1566-0141/© 2016 Elsevier B.V. All rights reserved.
2 M. Gonzalez et al. / Emerging Markets Review 30 (2017) 1–18

of outside or minority shareholders, dividend payouts tend to be substantially higher when firms are affiliated
to tightly controlled business groups.
Although the law could prevent or at least reduce agency tension and expropriation risks, the empirical
evidence indicates high heterogeneity around the world regarding legal protection for investors. La Porta
et al. (2000) find that investors in common law countries (high legal protection) use their legal power to
extract dividends from firms. This would not be possible in other regions of the world where other governance
vehicles may be used, such as the presence of a powerful shareholder that can prevent expropriation through
intense monitoring (Truong and Heaney, 2007; Khan, 2006; Short et al., 2002).
In Latin America, the level of investor protection is low (French civil law) and the region ranks lower than
the average civil law countries (Chong and López-de-Silanes, 2007) providing an interesting case study to
test not only the traditional ownership concentration/dividend payout relationship, but also the impact that
powerful shareholders have on this relationship.
We extend the literature regarding the effect of ownership concentration over dividend policy in emerging
markets analyzing a unique sample of Latin American publicly-traded corporations from 2007 to 2014. Our
results indicate a negative relationship between ownership concentration and dividends when the largest
shareholder is an individual investor, consistent with wealth expropriation of minority shareholders. This
result validates the argument of Chong and López-de-Silanes (2007) where the extraction of private benefits
by large controlling managers/owners is detrimental to minority shareholders in countries with lower levels
of investor protection.
A second contribution of the paper is the analysis of the effect of the legal system on the relationship
between ownership concentration and dividend policy. Bris and Cabolis (2008), analyzing a sample of
cross-border M&As, find that better governance practices are transferred through the ownership structure.
We posit that the country of origin of the largest shareholder will affect the level of dividends paid after
controlling for ownership concentration. Consistent with this idea, we find that when the largest shareholder
is based in a common law country, there is a positive association between ownership concentration and the
level of dividends paid by Latin American firms. If the largest shareholder is based in a common law country,
the higher the ownership concentration, the greater the level of dividends paid.
Our third contribution goes one step further arguing the positive monitoring role of a large shareholder in
the ownership structure, even when this shareholder is not the largest or controlling shareholder. A share-
holder with a high percentage of ownership will have the incentive to monitor the behavior of other investors
including the largest shareholder. We find that when the second largest shareholder possesses a strong
position in the ownership of a firm, and ownership concentration is high, the level of dividends paid by the
firm is lower. When ownership is concentrated, the largest shareholder is unable to extract private benefits
due to the vigilant action of another strong shareholder who is not an individual investor. Therefore, other
shareholders will demand a lower level of dividends due to the smaller decrease in wealth expropriation.
This evidence is consistent with Khan (2006) who argues that large shareholders, primarily institutional
investors and financial firms, may influence the dividend policy of a firm. That is, other large shareholders
may mitigate wealth expropriation by monitoring managers (Maury and Pajuste, 2005; Sacristán-Navarro
et al., 2011; Truong and Heaney, 2007; Short et al., 2002).
We organize the remainder of the paper as follows. Section 2 presents the literature review and hypothesis
development. Section 3 describes the procedure followed to gather and select the data and explains the
variables associated to test the dividend-ownership relationship under analysis. Section 4 explains the main
results, while Section 5 provides our conclusions.

2. Literature review and hypothesis development

La Porta et al. (1999) find that the average firm in the world has high ownership concentration levels and,
in most cases, the largest shareholders are highly involved in management duties. La Porta et al. (1998) point
out that ownership is more concentrated in countries with inferior shareholder protection (French civil law
countries). In this scenario, La Porta et al. (2000) test two agency models of dividends. The “outcome”
model, in which dividends are paid due to pressure exerted by minority shareholders for dividends, and
the “substitute” model, in which insiders interested in issuing equity in the future pay dividends to establish
a good reputation. Their results, after examining 4000 firms in 33 countries, tend to support the first model.
Strong shareholders' rights are associated with higher dividend payments. Byrne and O'Connor (2012),
 M. Gonzalez et al. / Emerging Markets Review 30 (2017) 1–18 3

studying a large set of firms in 35 countries, also report evidence in support of the outcome model when the
countries' creditor's rights are strong. When the countries' creditor's rights are weak, dividends tend to be
lower due to pressure by the creditors (not shareholders) on the firm's cash flow.
In the same vein, but analyzing only Asian and European firms, Faccio et al. (2001) find that when share-
holders are subject to more expropriation possibilities (e.g., in companies associated with a business group),
firms tend to pay larger dividends in order to obtain cheaper capital. Alternatively, when firms are not
affiliated with a business group, they pay fewer dividends as outside investors perceive lower expropriation
risk. Esqueda (2016) finds that when firms cross-list in countries with greater corporate governance, they
can afford to decrease dividends as better corporate governance substitutes for the level of dividends as
a monitoring mechanism for corporate behavior. Finally, Athari et al. (2016) find evidence supporting the
substitution agency model of dividends in banks operating under the Sharia law and low levels of investor
protection.
Other papers in the international arena confirm an inverse relationship between the level of dividends and
ownership concentration. Truong and Heaney (2007) study the interaction between the largest shareholder
and dividend policy in a sample of 8279 listed firms in 37 countries and find that dividends are negatively
related to ownership concentration. At the country level, there is also empirical evidence of a negative
relationship between dividend policy and ownership concentration. Khan (2006) finds a negative relation-
ship between dividends and ownership concentration for large public firms in the United Kingdom. Harada
and Nguyen (2011) and Mancinelli and Ozkan (2006) also provide empirical evidence of a negative relation-
ship between ownership concentration and the level of dividends paid by public firms in Japan and Italy,
respectively.
Khan (2006) identifies that ownership composition is also relevant indicating that ownership by financial
institutions has a positive effect on dividends. In the same vein, Truong and Heaney (2007) find that the
magnitude of the dividend payout tends to be smaller when the largest shareholder is either an insider or a
financial institution. They argue that a large shareholder could pressure the firm to expend cash that may
otherwise be misused by management. Gugler (2003) affirms that family controlled firms tend not to smooth
dividends, but state controlled firms do, while in empirical results for banks and foreign controlled firms,
dividends are dependent upon the identity of the controlling owner of the firm. Pindado et al. (2012) present
evidence based on a sample of nine Eurozone countries, where while family controlled firms distribute higher
and more stable dividends, they occur only when there is no separation between cash flow rights and
ownership rights. In addition, Barclay et al. (2009), Grinstein and Michaely (2005), and Short et al. (2002)
report evidence on the differentiated effect that ownership composition has on dividend payout policy. All
of this evidence indicates that not only ownership and dividend policy are highly related, but also that the
structure of ownership is crucial to better understand this relationship.
The abundance of empirical literature examining the dividend/ownership relationship around the world
contrasts with the scarcity of academic research for Latin America. Chong and López-de-Silanes (2007) find
that in Latin America, where countries offer less investor protection than the average protection in French
civil law countries, investors' expropriation risk is more severe, the cost of capital is higher, firms pay less in
dividends, and, in general, the level of financial development is relatively very low. Given the low level of
dividends, some countries in Latin America have adopted a “minimum” dividend (Martins and Novaes,
2012). In terms of corporate governance indexes and their relationship with dividend payouts, Bebczuk
(2007) finds positive, but very weak statistical support between good corporate governance and the level
of dividend payout for a set of 65 listed Argentinian firms. Similar to this evidence in Latin America,
Brockman and Unlu (2009) confirm, in an analysis of 52 countries, that the probability of paying dividends
and their levels are significantly lower in countries with poor creditors' rights. In addition, the typical CEO
is, or is related to, one of the firm's largest controlling shareholders. According to Johnston (2004), only two
shareholders typically hold more than 50% of a firm's equity in a region. However, although there are several
papers regarding how corporate governance affects value, performance, capital structure, and dividends
(Bebczuk, 2007; da Silveira et al., 2007) with focus on the region, to our knowledge, there is no published
research in Latin America that explicitly directly studies the relationship between dividend policy, ownership
concentration and, more importantly, ownership composition.
The level of dividends and the predicted relationship between dividend policy and ownership concentra-
tion in Latin America is far from obvious. The latent agency tensions between controlling and minority share-
holders could suggest a negative relation where controlling shareholders extract firm value to their own
4 M. Gonzalez et al. / Emerging Markets Review 30 (2017) 1–18

benefits (e.g., high firm's perquisites, related parties' transactions). Urzua (2009) finds that in group-affiliated
companies in Chile, firms prefer to increase directors' compensation rather than dividends as their cash flow
rights decrease. In addition, based on the analysis of Chilean firms, Lefort and Walker (2007) confirm that
dividend payout follows an inverted-U shaped relationship with ownership concentration. Contradicting
these results, Carvalhal-da-Silva and Leal (2012) fail to find any statistical relationship between the
Brazilian firms' ownership structure and their payout policies.
Moreover, Aivazian et al. (2003), studying a sample of emerging market companies not based in the Latin
America region, determine that these companies' dividend policies behave similarly to those adopted by the
U.S. firms. Additionally, they find that emerging market firms pay larger dividends than their U.S. counter-
parts, even after controlling for firm-specific variables.1 They categorize this larger level of dividends paid
in emerging markets as puzzling. Furthermore, in the context of closely held family firms in Colombia with
some level of ownership dispersion, minority shareholders press for dividends to prevent misuse of firm
resources by insiders (González et al., 2014).
Analyzing the level of dividends in a different set of emerging market firms based in Latin American may
offer some ideas to explain this contrasting evidence. Consistent with Easterbrook (1984), Gomes (2000), La
Porta et al. (2000), and Athari et al. (2016), one possibility may be that a firm with high ownership concen-
tration could pay dividends to establish a good reputation, which is an important asset, especially in countries
with weak legal protection of minority shareholders, such as that in Latin America. However, this substitute
model of dividends is strongly based on the assumption that firms actively go to the capital markets to
issue stocks or bonds, but that has not been the case in Latin America (Chong and López-de-Silanes, 2007).
We posit that this puzzling evidence could be related not only to ownership concentration, but also to
ownership composition. Based on this, we expect a negative relationship between ownership concentration
and dividends when the controlling shareholder is an individual investor, which could be an insider or
family-related investor, extracting rents from minority shareholders. Therefore, we state the following
hypothesis:

Hypothesis 1. There is a negative relationship between ownership concentration exerted by individual inves-
tors and firm's dividend payout.

There is evidence that the legal system where companies base their operations affects the relationship
between ownership concentration and dividend policy. Bris and Cabolis (2008) find that Tobin's Q of an
industry increases when firms within that industry are acquired by foreign firms from better investor
protection environments. Farinha and López-de-Foronda (2009) confirm that the relation between owner-
ship concentration and dividends is different when comparing companies based in countries with different
legal systems. They study a sample of European firms based in common law or civil law countries and find,
for both categories of legal systems, a nonlinear, but different relationship between insider ownership and
the level of dividends paid by the firms. Finally, Esqueda (2016) demonstrates that the likelihood of dividends
increases with cross-listing when the firm cross-listing is controlled by insiders. Following these insights, we
propose the following hypothesis:

Hypothesis 2. When the largest shareholder is based in a common law country, the company adopts
dividend practices that are consistent with those that exist in these countries with better investor protection.
Thus, firms tend to pay higher levels of dividends.

A large shareholder is not necessarily a controlling shareholder. Eckbo and Verma (1994) and Jensen et al.
(1992) find a negative relation between inside ownership and dividend payout, yielding cash dividends to
almost zero when the owner-manager has full control of the firm. However, other studies indicate that insti-
tutional investors tend to have a positive influence on dividends (Short et al., 2002) although among dividend
paying firms, they prefer those with fewer dividends (Grinstein and Michaely, 2005). Pindado et al. (2012)
report that the distribution of higher levels of dividends, and its stability, is explained by those firms with a
non-family large second blockholder within their ownership structure. Jeong (2013) shows that a large

1
The sample of firms analyzed by Aivazian et al. (2003) comes from India, Jordan, Malaysia, Pakistan, South Korea, Thailand, Turkey,
and Zimbabwe.
 M. Gonzalez et al. / Emerging Markets Review 30 (2017) 1–18 5

shareholder ownership is an important determinant of dividend smoothing in Korea. These results indicate
that large, not necessarily controlling shareholders, influence dividend decisions. A vigilant, powerful share-
holder may monitor the behavior of the largest shareholder decreasing the level of potential expropriation.
Due to the lower level of loss faced by minority shareholders, the optimal level of dividends decreases. It
could be also possible that lower dividends could be due to expropriation driven by collusion among large
shareholders (Carvalhal, 2012). This type of cooperative agreement among large shareholders is very difficult
or impossible to empirically test, but it is still a valid an alternative explanation. Following this argument, we
put forward the following hypothesis:

Hypothesis 3. The second largest shareholder, if not an individual investor, exerts a monitoring role over the
largest controlling shareholder. Thus, firms tend to pay lower levels of dividends.

3. Data description and methodology

From 2007 to 2014, we identify, in DataStream, an initial sample of primary equity securities associated
with non-financial firms that are traded in Latin America. The countries under analysis include Argentina,
Brazil, Chile, Colombia, Mexico, and Peru. We gather accounting information to construct dividend-related
variables and firm-specific variables that may affect the level of dividends paid in Latin America. We collect
12,794 firm-year observations from DataStream for the period under analysis. Using generic company identi-
fiers from DataStream, we obtain ownership data for the same period from the Thomson One Corporate
Development database. Only a small percentage of the Latin American firms report ownership information
to Thompson One Corporate Development. Our final sample under analysis with complete ownership data
includes 1464 firm-year observations.
We use ownership data from the first quarter of the year and annual accounting data associated with the
end of the year since it is standard to set dividend policy about one year in advance in most of these countries.
For each of the ten largest shareholders, we obtain the following ownership information: 1) country of
shareholder residence, 2) investor type, 3) owner name, and 4) percentage of ownership.
Thomson One Corporate Development classifies the type of investor into the following 11 categories:
Individual Investor, Corporation, Holding Company, Government Agency, Bank and Trust, Pension Fund,
Sovereign Wealth Fund, Investment Advisor/Hedge Fund, Investment Advisor, Insurance Company, and
Hedge Fund. In order to identify the individual investor, we recognize that the database's ownership type,
“individual investor,” could underestimate the presence of an individual investor given that pyramidal
structures are common in the region. In other words, some individual investors could be hidden under the
investor type “Corporation.” In a country study that deals with ownership structures, such as González et al.
(2014) for Colombia or Lefort and Walker (2000) for Chile, researchers can trace the ultimate owner of
each firm in the sample using the country's national firm register. Given the size and the multinational nature
of our sample, this task is not feasible. However, we believe that this identification problem works in our favor
given the fact that this underestimation will bias the results against the formulated hypotheses.
Table 1 presents the frequency distribution of the sample of primary non-financial equity securities with
ownership data classified according to the country where the firm bases its operations and the year under
analysis. The last column provides the total number of observations per country, while the last row reports
the total number of observations per year analyzed in our sample. We find that most of the observations
occur in 2009, 2013, and 2014. The country with the most observations is Chile followed by Mexico, Brazil,
and Peru. Chile is the country with more primary equity securities. A higher proportion of securities in the
financial sector in Mexico and Brazil explains, at least partially, why Mexico and Brazil have fewer observa-
tions than Chile in the final sample. However, in Thompson One Corporate Development, companies from
Chile outnumber companies from larger markets, like Brazil and Mexico. We recognize that the sample
under analysis may be biased toward companies willing to voluntarily report detailed ownership data.
Chilean firms may be more willing to provide ownership details than their Mexican and Brazilian counter-
parts. In our final sample comprised of 1464 observations, the largest shareholder is an individual investor
in about 20% of the cases. Previous evidence indicates that in Latin America, more than 50% of companies
are controlled by a founding family.
We define three variables to proxy for dividend levels, similar to the ones used in the literature. Specifically,
we divide annual cash dividend paid by total assets, annual cash dividend paid by total sales, and annual cash
6 M. Gonzalez et al. / Emerging Markets Review 30 (2017) 1–18

Table 1
Frequency of observations by country. Table 1 provides the frequency distribution of the sample of primary equity securities under
analysis classified according to the country where the company bases its operations and year. This sample includes complete dividend,
ownership, and control variable information. The last column reports the total number of securities per country, while the last row
presents the total number of securities per year.

Country Year

2006 2007 2008 2009 2010 2011 2012 2013 2014 Total

Argentina 0 0 1 44 10 6 11 44 47 163
Brazil 0 1 7 50 10 7 8 48 131 262
Chile 2 4 9 100 25 14 25 109 127 415
Colombia 0 0 0 16 4 12 4 16 38 90
Mexico 3 3 6 72 20 5 21 69 86 285
Peru 0 0 4 62 12 8 12 62 89 249
Total 5 8 27 344 81 52 81 348 518 1464

dividends paid by the total book value of equity.2 We create a dummy to control for those firms whose
dividends are zero. This dummy takes a value of one if the firm's dividend is zero and zero otherwise.
Brazil has a singular feature called “interest on equity,” which is a form of dividend. Interest on equity
became an important and attractive way to pay dividends in Brazil for corporate tax reasons. However,
Brazilian companies usually combine them with cash dividends when they pay out more than the interest
on equity ceiling, with the excess in the form of cash dividends. Unfortunately, DataStream does not report
interest on equity. Thus, for Brazilian firms', dividend levels may be underestimated.3
To examine the effect of ownership concentration on dividends, we construct three different ownership-
related variables. First, we use the percentage of ownership for each of the ten largest stockholders to calculate
a Herfindahl Ownership Concentration Index. We also estimate ownership concentration using the percentage
of ownership of the largest stockholder. Finally, our third ownership concentration proxy is the cumulative
percentage of ownership of the five largest shareholders.
In Hypothesis 3, we posit that if the second largest shareholder is not an individual investor, the larger its
ownership stake, the lower the level of dividends paid for a given ownership concentration. Shleifer and
Vishny (1986) consider the possibility that other large stockholders will monitor the behavior of the largest
stockholder. These investors are usually sophisticated and unlike ordinary retail investors, they represent
other wealthy families, equity and pension funds, international investors, and other large private or public
firms. To test Hypothesis 3, we need to include the second largest stockholder's percentage of ownership in
our analysis.
To further analyze the ownership composition in Latin America, we create three new variables to estimate
the effect of the type of investor and the legal system presiding over the relationship between the ownership
concentration and dividend policy. First, to determine how ownership concentration interacts with the type
of investor involved in ownership, we create a variable that is formed as the product of any of the three own-
ership concentration indexes defined earlier and a dummy variable that takes a value of one if the largest
shareholder in the ownership structure of the firm is an individual investor, and zero otherwise. This variable
measures the interaction effect between ownership concentration and the largest shareholder that is an
individual investor. It will separate the effect over the ownership concentration when the largest shareholder
is an individual investor. According to La Porta et al. (2000), one possibility is that high ownership levels by
individuals, if they are family-related investors, will positively affect dividend levels to establish a good
reputation in markets with weak legal protection. This result would also be consistent with the evidence
found by Faccio et al. (2001). When the expropriation risk is high, firms will pay more dividends to be able
to access cheaper capital from minority investors. However, according to Eckbo and Verma (1994), and

2
As a robustness check, we also calculate the dividend yield, defined as dividends per share divided by price per share, and the payout
ratio, defined as dividends per share divided by earnings per share, for each of the companies and year under analysis. As identified by
Aivazian et al. (2003), the payout ratio is very unstable and non-normal when earnings tend to zero. In the case of dividend yield, Aivazian
et al. (2003) also recognize that market values introduce some pricing effects that are outside of the control of managers. Overall, the re-
sults are consistent, but statistically weaker when compared to the ones reported.
3
We alternatively exclude Brazilian firms from the sample without significantly affecting our main results (not reported).
 M. Gonzalez et al. / Emerging Markets Review 30 (2017) 1–18 7

Jensen et al. (1992), if individual investors are insiders/family managers, these investors will have an incentive
to extract private benefits, expropriating wealth from minority shareholders. In this case, we should expect
that the presence of individual investors will have a negative effect on the level of dividends paid by the
firm, which is the expected result formulated in the first hypothesis.
In addition, we want to identify if the largest shareholder in the ownership structure is based in a common
law or civil law country. Bris and Cabolis (2008) find that good governance is transferred from the acquirer to
the target company in a sample of cross-border mergers and acquisitions. In a similar fashion, we expect that if
the largest shareholder is incorporated in a common law country, the dividend payment level will converge to
the average levels paid in a common law country. Chong and López-de-Silanes (2007) report lower levels of
dividend payments in Latin American countries whose legal system is that of civil law. In addition, according
to La Porta et al. (2000), strong shareholder's rights are associated with higher dividend payments. Therefore,
we expect a positive relationship between dividend levels and a higher ownership concentration of the largest
shareholder if based in a common law country. This is our second hypothesis.
Moreover, we posit, in Hypothesis 3, that the second largest shareholder will monitor the behavior of
the largest shareholder when ownership concentration is high, particularly when the largest shareholder is
also an individual investor. However, we need to control for the type of investor that the second largest share-
holder is. If the largest and the second largest shareholders are both individual investors, they may collude to
extract private benefits from minority investors, paying fewer dividends. This creates a similar expected
inverse relationship between the level of dividends paid and the percentage of ownership of the second
largest shareholder, but for a different reason from the one explained in Hypothesis 3. To control for this
possibility in our analysis, we construct an interaction variable defined as the product of the percentage of
ownership of the second largest shareholder and a dummy that takes a value of one if the second largest
shareholder is an individual investor. This variable allows us to disentangle Hypothesis 3 from the possibility
of lower dividend payments due to the largest and second largest shareholders colluding to extract inside
benefits to the detriment of minority investors.
We also want to examine the potential effect that the legal system has on the monitoring role of the second
largest shareholder. We argue that if the largest shareholder is not based in a common law country, but the
second largest shareholder is, investors will recognize the monitoring role of the second largest shareholder
over the behavior of the largest shareholder. Better monitoring and the transfer via ownership of better
governance practices imply a higher level of dividends. Alternatively, Faccio et al. (2001) demonstrate that
dividend payouts tend to be substantially higher when firms are affiliated with tightly controlled business
groups. Consistent with the outcome model of La Porta et al. (2000), these firms pay higher dividends to
establish a good reputation. If the largest shareholder's behavior is controlled by another large shareholder
that is based in a common law country, minority investors will recognize the monitoring role at the ownership
level, adjusting the optimal amount of dividends to control for the extraction of private benefits to a lower
level. Thus, we should expect a negative relationship between the presence of a common law monitoring
shareholder in the ownership structure and the level of dividends paid. We construct an interaction variable
that is defined as the product of the percentage of ownership of the second largest shareholder and a dummy
that takes a value of one if the second largest shareholder is based in a common law country, while the largest
shareholder is not based in a common law country. This dummy will maximize the potential monitoring effect
of the second largest shareholder when the legal system is different. We leave it to the empirical evidence to
determine whether the relation between dividend and ownership levels associated the second largest share-
holder based in a common law country is positive or negative.
Finally, our analysis controls for different company-specific variables that have been shown to affect the
level of dividends paid. We use the natural logarithm of total assets to consider the effect of firm size, the
return on assets defined as net income over total assets to control for profitability, total debt over total assets
to control for financial leverage, and equity beta to control for systematic risk.

4. Results

Table 2 provides the mean, median, and standard deviation values for variables classified in three categories:
1) level of dividends, 2) ownership concentration, and 3) control variables. For the period under analysis, the
average and median values associated with dividend payment levels are lower in Latin America than those
reported by Aivazian et al. (2003) for a sample of emerging market companies based in Asia and Africa.
8 M. Gonzalez et al. / Emerging Markets Review 30 (2017) 1–18

Table 2
Descriptive Statistics. Table 2 reports the descriptive statistics associated with the sample of Latin American companies under analysis.
Mean, median, standard deviation, and 25% and 75% percentiles are presented for variables that are organized into three categories:
1) dividend levels, 2) proxies of ownership concentration and structure, and 3) firm-specific control variables.

Variables Mean SD P25 P50 (Median) P75

Dividend
Dividend over assets 0.0296 0.0602 0.0000 0.0088 0.0345
Dividend over sales 0.0487 0.0951 0.0000 0.0131 0.0548
Dividend over equity 0.0583 0.1084 0.0000 0.0199 0.0683

Ownership concentration
Herfindahl Concentration Index 0.2663 0.2679 0.0398 0.1953 0.4080
Percentage ownership largest shareholder 0.4351 0.2777 0.1996 0.4419 0.6388
Cumulative percentage ownership five largest shareholders 0.6629 0.2776 0.5115 0.7061 0.8449
Percentage ownership second largest shareholder 0.1205 0.1073 0.0359 0.1000 0.1727

Firm-specific
Log of assets 12.46 2.37 11.00 12.65 14.00
Log of sales 12.49 2.33 11.20 12.69 14.00
ROA 0.0435 0.1248 0.0081 0.0418 0.0857
Total debt over total assets 0.2207 0.1798 0.0585 0.2104 0.3370
Beta (beta) 0.5665 0.4263 0.2260 0.5030 0.8200

Table 2 also confirms that, in Latin America, there is a high level of ownership concentration (Chong and
López-de-Silanes, 2007). On average, the largest shareholder in Latin America owns 43% of the shares of a
publicly-traded corporation. The median percentage ownership is 44%. These values are similar to those
reported in La Porta et al. (1998) for emerging market countries, Johnston (2004), and Cespedes et al.
(2010) for the region. On average, the largest shareholder owns 3.6 times more shares than the second largest
shareholder. If we use median values, this ratio increases to 4.4. The mean (median) level of ownership asso-
ciated with the five largest shareholders increases to 66.29% (70.61%). Finally, the mean (median) Herfindahl
Ownership Concentration Index is 0.2663 (0.1953). The results presented in Table 2 validate previous
evidence associated with high ownership concentration in Latin America.
To study the relationship between ownership concentration and dividend payments in Latin America, we
divide the sample with ownership data into two sets according to the Herfindahl Ownership Concentration
Index. The low Herfindahl set is comprised of those companies whose Herfindahl Ownership Concentration
Indexes are below the median Herfindahl value for the complete sample of observations. Similarly, in the
high Herfindahl set, companies have Herfindahl Ownership Concentration Indexes larger than the median
Herfindahl value for the whole sample. The last column in Table 3 reports t-statistics to determine whether
the sample of firms with a high ownership concentration differs from that with a low ownership concentra-
tion. We are interested to determine whether dividend levels between the two samples are different.
In general, companies with concentrated levels of ownership have higher levels of dividends. The results
are statistically significant for all of our dividend proxy variables according to the t-, Wilcoxon, and median
two-sample test values. All of the results are statistically significant at least at a 5% level.
Table 3 also demonstrates that in the sample with a low ownership concentration, the median Herfindahl
Index is 0.0398, the largest median shareholder only owns 19.95% of the firm, and the five largest
shareholders own 54.01%. As expected, in the sample with a high ownership concentration (median
Herfindahl concentration index equal to 0.4080), the median largest shareholder possesses majority control
(63.88%) and the five largest shareholders own 82.79% of the firm. When comparing these two samples,
the only variable that is not significantly different is the percentage of ownership of the second largest
shareholder.
At the univariate level and before any analysis of the composition of the ownership structure, Table 3
indicates that in our sample of companies from Latin America, there is a positive and significant relationship
between ownership concentration and dividend levels. This preliminary evidence is consistent with the out-
come model of La Porta et al. (2000) where family-related investors with high ownership levels try to create a
good reputation in markets with very weak protection for minority investors. Faccio et al. (2001) find similar
evidence when analyzing European and Asian firms and ownership concentration through business groups.
 M. Gonzalez et al. / Emerging Markets Review 30 (2017) 1–18 9

Table 3
Univariate analysis: the effect of ownership concentration on dividends. Table 3 provides the mean and median values (in parenthesis)
for different dividend, ownership concentration, and company-specific variables. Column one, labeled “low ownership concentration,”
reports means and medians for those observations where the Herfindahl Ownership Concentration Index is below the median Herfindahl
Concentration Index for the whole sample. The second column, labeled “high ownership concentration,” presents the means and medians
for the subsample of observations where the Herfindahl Concentration Index is above the median. The last column provides values
associated with the t test, the Wilcoxon two-sample test, and the median two-sample test. *, **, and *** indicate statistical significance
at the 10%, 5%, and 1% levels, respectively.

Variables Low ownership High ownership t-statistics

concentration concentration

Dividend indicators
Dividend over assets 0.0214 0.0369 17.4980***
(0.0075) (0.0120) −3.3818**
−2.1285**
Dividend over sales 0.0357 0.0597 18.6806***
(0.0104) (0.0215) −4.4899***
−3.5052***
Dividend over equity 1 0.0449 0.0657 10.3826***
(0.0166) (0.0231) −2.8542***
−2.1260***

Ownership concentration variables

Herfindahl Concentration Index 0.0568 0.4758 Statistically significant by design
(0.0398) (0.4080)
Percentage ownership largest shareholder 0.1992 0.6709 Statistically significant by design
(0.1995) (0.6388)
Cumulative percentage ownership five largest 0.5047 0.8427 Statistically significant by design
shareholders (0.5401) (0.8279)
Percentage ownership second largest shareholder 0.1183 0.1203 0.1160
(0.1066) (0.0934) −2.0729**
−2.5663**

Firm-specific variables
Log of assets 12.8586 12.9739 0.9940
(12.9235) (12.9439) 1.0057
−0.1352
Log of sales 12.7006 12.7750 0.3016
(12.9702) (12.9524) −0.5469
0.1547
ROA 0.0272 0.0467 7.4261**
(0.0331) (0.0414) −2.8013***
−2.0448**
Total debt over total assets 0.2406 0.2194 3.9818**
(0.2361) (0.2093) 2.1780**
1.7455*
Beta 0.6903 0.5870 16.3451***
(0.6380) (0.5230) −3.9808***
−3.4874***

However, this preliminary result contradicts most of the previous evidence found in other emerging markets
where the relationship between ownership concentration and dividends is negative.4
In order to reconcile the evidence, we need to study the composition of the ownership structure in our
sample of Latin American firms. Khan (2006), among others, finds that ownership composition matters in
the relationship between ownership concentration and dividend policy for listed firms.
To identify the effect of the largest shareholder as an individual investor, Panel A of Table 4 provides a more
complete bivariate analysis taking into consideration not only the ownership concentration according to the
Herfindahl Concentration Index, but also whether the largest shareholder is an individual investor or not. For
each dividend proxy, there are four quadrants of results. Quadrant (High, Yes) reports mean and median

4
See, among others, Guizanai and Kouki (2012) for Tunisia and Lefort and Walker (2007) for Chile.
10 M. Gonzalez et al. / Emerging Markets Review 30 (2017) 1–18

Table 4
Bivariate analysis: the effect of ownership concentration and composition on dividends. Table 4, Panel A presents the mean and median
values (in parenthesis) for different dividend proxy variables classified in four different subsamples according to the Herfindahl
Ownership Concentration Index (High or Low) and the presence of an individual investor (Yes or No). For each dividend proxy, there
are four quadrants of results: (High, Yes), (Low, Yes), (Low, No), and (High, No). The last column and five rows report t-tests, the
Wilcoxon two-sample test, and the median two-sample test values. *, **, and *** indicate statistical significance at the 10%, 5%, and 1%
levels, respectively. Table 4, Panel B presents the mean and median values (in parenthesis) for different dividend proxy variables classi-
fied in four different subsamples according to the Herfindahl Ownership Concentration Index (High or Low) and the largest shareholder
basing its operations in a common law country (Yes or No). For each dividend proxy, there are four quadrants of results: (High, Yes),
(Low, Yes), (Low, No), and (High, No). The last column and five rows present the t-tests, Wilcoxon two-sample test, and the median
two-sample test values. *, **, and *** indicate statistical significance at the 10%, 5%, and 1% levels, respectively.

Dividend levels Is the largest shareholder Concentration low Concentration high T-ratio (high/low)
an individual investor?

Panel A
Dividend Over Assets Yes 0.0212 0.0206 0.0055
(0.0097) (0.0066) −0.8960
−1.2910
No 0.0215 0.0396 18.7148***
(0.0064) (0.0138) −3.8567***
−3.0189***
T-ratio (yes/no) 0.0062 4.1523**
0.5168 −2.6788***
1.2859 −3.4051***
Dividend Over Sales Yes 0.0355 0.0228 1.6184
(0.0137) (0.0097) −1.0565
−1.3232
No 0.0358 0.0656 21.7970***
(0.0081) (0.0262) −5.0136***
−4.4093***
T-ratio (yes/no) 0.0016 11.2385***
0.7435 −3.3501***
1.7687* −3.7392***
Dividend Over Equity Yes 0.0399 0.0391 0.0031
(0.0190) (0.0130) −0.9907
−1.2990
No 0.0463 0.0702 10.9380***
(0.0157) (0.0262) −3.2941***
−2.3898**
T-ratio 0.5258 4.3802**
(Yes/No) 0.1233 −2.7571***
0.6536 −3.1422***

Panel B
Dividend Over Assets Yes 0.0142 0.1220 47.2302***
(0.0018) (0.0876) 4.5855***
3.4874***
No 0.0222 0.0337 9.2887***
(0.0078) (0.0111) −2.3604**
−1.3624
T-ratio (yes/no) 2.0433 27.4856***
−1.7417* 4.1729***
−1.0519 3.0355***
Dividend Over Sales Yes 0.0334 0.1423 18.8678***
(0.0016) (0.1473) 4.6123***
3.9036***
No 0.0360 0.0566 13.1457***
(0.0111) (0.0189) −3.4810***
−2.7443***
T-ratio (yes/no) 0.0581 13.2731***
−1.7257* 4.0400***
−1.0384 3.3663***
Dividend Over Equity Yes 0.0285 0.2194 26.8793***
(0.0039) (0.0790) 3.5748***
3.2982***
 M. Gonzalez et al. / Emerging Markets Review 30 (2017) 1–18 11

Table 4 (continued)

Dividend levels Is the largest shareholder Concentration low Concentration high T-ratio (high/low)
an individual investor?

Panel B
No 0.0467 0.0611 4.9333**
(0.0179) (0.0227) −1.9712**
−1.3128
T-ratio (yes/no) 2.1707 27.5719***
−2.1029** 2.9531***
−1.5185 2.8883***

values where the ownership concentration is high and the largest shareholder is an individual investor (yes).
Similarly, the rest of the observations belong to any of the following three remaining possibilities: 1) high
ownership concentration and the largest shareholder is different from an individual investor (High, No),
2) low ownership concentration and the largest shareholder is an individual investor (Low, Yes), and
3) low ownership concentration and the largest shareholder is not an individual investor (Low, No).
Table 4, Panel A presents two distinct results when ownership levels interact with investor type for the
largest shareholder. First, in Latin American firms where the largest shareholder is different from an individual
investor, high ownership concentration is associated with higher dividend payments. This result, obtained
from comparing quadrants (High, No) and (Low, No), is statistically significant for all dividend proxies. In
these two subsamples that comprise more than 50% of the observations, the largest shareholder can be
classified into three categories: 1) non-financial corporation, 2) financial institution, and 3) government-
related entity. Consistent with Khan (2006), one potential explanation for the positive relationship between
higher ownership concentration and higher dividend levels in the region is that each of these three categories
of constituencies may be able to impose their preferred dividend policy over the firm. Khan (2006) finds a
positive relationship between dividends and ownership for insurance companies in the U.K. In Latin
America, financial institutions, such as pension funds, banks and trusts, and government entities, may force
companies to increase dividend distributions depending upon the investment style (financial institutions)
or cash needs (government entities). Short et al. (2002) also determine that institutional investors have a
positive effect on dividends.
In addition, Table 4, Panel A indicates that if the ownership concentration is above the median level
when we vertically compare quadrants (High, Yes) and (High, No), we find that the presence of an individual
investor is associated with statistically significantly less dividend payments when concentration levels are
high. This result is consistent with Hypothesis 1 and with most of the evidence in emerging market countries
where the negative relationship between dividends and insider ownership is explained by the potential
extraction of benefits by insiders at the expense of minority shareholders. Another explanation could
be due to indirect ownership by individuals (non-financial corporation), which would appear in the “no”
line. The largest individual direct shareholders are not associated with larger dividends, while the largest
individual indirect shareholders are associated with larger dividends as they need to signal “good behavior”
to outside investors.
Panel B of Table 4 is similar in design to Panel A, but we seek to analyze the relationship between dividend
policy and ownership concentration when controlling for the legal system of the country where the largest
shareholders resides. Similar to the results shown in Panel A, ownership concentration is positively related
to a higher level of dividends paid by firms. However, Panel B reveals that the country of residence of the
largest shareholder explains the level of dividend payment when ownership concentration is high. Table 4,
Panel B demonstrates that when ownership concentration is high, the level of dividend payments differs
statistically significantly at a 1% level of confidence when comparing the sample of observations where the
largest shareholder is based in a common law country vs. the sample where the largest shareholder is not
common law country based. Higher levels of dividends when ownership concentration is high and the largest
shareholder based in a common law country are consistent with Hypothesis 2. This result is robust to the dif-
ferent proxies for dividend levels. Note that when ownership concentration is low, the fact that the largest
shareholder is based in a common law country becomes almost irrelevant when explaining dividend levels.
The results are not robust to the different t-statistics and, at the most, the statistical significance is 10%.
12 M. Gonzalez et al. / Emerging Markets Review 30 (2017) 1–18

To estimate the concurrent effects of ownership-related variables on the level of dividends paid by Latin
American firms, Tables 5 and 6 report the results for OLS and panel data estimates of the impact of ownership
concentration and composition on the level of dividends. In the OLS regressions shown in Table 5, we use
dummy variables to control for the countries where the companies reside and the year under analysis. The
unbalanced panel data regressions in Table 6 also incorporate dummy variables to control for the country
of residence of the companies. Each table presents three different dividend-related dependent variables
and, for each dividend proxy, we present three models varying how the ownership concentration is mea-
sured. In Model 1 (first column), the proxy for ownership concentration is the Herfindahl Concentration
Index. In Models 2 and 3, the proxies are the percentage of ownership of the largest shareholder and the
accumulated percentage of ownership of the first five largest shareholders, respectively.
Consistent with the univariate analysis, Tables 5 and 6 indicate a positive and significant relationship
between ownership concentration and dividend policy exits. The results are statistically significant at least
at the 5% level when dividends are measured as a percentage of total assets, total sales, or the total book
value of equity.
We create an interaction variable to test the effect of having an individual investor as the largest share-
holder. The interaction variable results from the product of the ownership concentration proxy and a
dummy that takes a value of one if the largest shareholder is an individual investor and zero otherwise. The
proxy for ownership concentration changes in each of the models. The Herfindahl Concentration Index is
found in the first column of results. The percentage of ownership of the largest shareholder and the accumu-
lated percentage of ownership of the first five shareholders are located in the second and third columns,
respectively. OLS and panel data results in Tables 5 and 6 indicate that a high concentration, coupled with
the largest shareholder as an individual investor, have a negative and significant effect on the level of
dividends paid. This result is robust at least at the 5% level for all of the dividend and ownership concentration
specifications.
This result is also economically significant. If one increases the ownership concentration proxy by one
standard deviation, one obtains a decrease in the dividend proxy of up to 0.24 standard deviations, depending
upon the model. In other words, a 0.2679 increase in the Herfindahl Index when the largest shareholder is an
individual investor results in an average $44,620 decrease in the firm dividend. For reference, the average
Herfindahl Index in the sample is 0.2663, and the average cash dividend is $68,079.
Overall, these results in Tables 5 and 6 are consistent with Hypothesis 1 and with those results found at the
univariate and bivariate level. If the largest shareholder is an individual investor, dividend payments are
reduced. This could be interpreted as evidence of private rent extractions to the detriment of minority share-
holders through a lower dividend payment policy.
To test Hypothesis 2, Tables 5 and 6 examine how the presence of the largest shareholder in a common
law country interacts with the level of dividends paid. Consistent with Hypothesis 2, the coefficient of the
interaction variable is positive and statistically significant at the 5% level in all of the regressions. These
coefficients are also economically significant. For example, if one increases the ownership concentration
proxy by one standard deviation, one obtains an increase in the dividend proxy of up to 0.80 standard
deviations, depending upon the model. In other words, a 0.2679 increase in the Herfindahl Index when the
largest shareholder is based in a common-law country produces an average $302,787 increase in the firm
dividend. For reference, the average Herfindahl Index in the sample is 0.2663, and the average cash dividend
is $68,079.
These results corroborate the general idea offered by Bris and Cabolis (2008) that better governance prac-
tices are transferred through ownership structure from common law-based shareholders to, in this particular
case, firms based in civil law countries. Bris and Cabolis (2008) apply this idea of the effect of ownership
changes to the convergence of better property rights in the area of M&As, while our study is a related appli-
cation as to how ownership composition influences dividend policy.
Tables 5 and 6 also present evidence related to the monitoring benefit of the second largest shareholder.
Consistent with Hypothesis 3, the greater the percentage of ownership of the second largest shareholder,
the lower the dividend payment in Latin American firms. This result, statistically significant at least at the
5% level, is consistent with the monitoring role of the second largest shareholder, if the second largest share-
holder is not an individual investor. These coefficients are also economically significant. If one increases the
ownership of the second largest shareholder by one standard deviation, one obtains a decrease in the
dividend proxy of up to 0.49 standard deviations, depending upon the model. In other words, a 10.73%
Table 5
OLS estimates of the impact of ownership on dividends in Latin America. Table 5 reports OLS regressions to test the effect of ownership concentration and composition on dividend policy. The first row
identifies the dependent variable in each regression. For each dependent variable, the table presents three OLS regressions where the ownership concentration and the interaction variables change. In
Column 1, ownership concentration is measured using a Herfindahl Ownership Concentration Index. In Columns 2 and 3, ownership concentration is proxied by the percentage of ownership of the largest
shareholder and the accumulated ownership of the first five shareholders, respectively. Each cell in the table provides coefficient estimates and t-values in parenthesis. We control for the size of the firm
(log of assets), profitability (ROA), leverage (total debt over total assets), and risk (beta). Although not shown, we use dummy variables to control for years and countries where the company is based.
*, **, and *** indicate statistical significance at the 10%, 5%, and 1% levels, respectively.

Variables Dividend over assets Dividend over sales Dividend over equity

Herfindahl Concentration Index 0.0215*** 0.0506*** 0.0331**

(2.94) (3.97) (2.34)
Percentage ownership of the largest owner 0.0186*** 0.0434*** 0.0270**

M. Gonzalez et al. / Emerging Markets Review 30 (2017) 1–18

(2.87) (3.84) (2.14)
Accumulated percentage ownership of the first five largest 0.0223*** 0.0472*** 0.0282**
shareholders (3.02) (3.36) (1.98)
Interaction effect of the ownership concentration proxy when −0.0325** −0.0204** −0.02204*** −0.0839*** −0.0515*** −0.0339*** −0.0552** −0.0365** −0.0378***
the largest shareholder is an individual investor (−2.48) (−2.26) (−3.49) (−3.63) (−3.24) (−2.78) (−2.19) (−2.09) (−3.11)
Interaction effect of the ownership concentration proxy when 0.1197*** 0.0981*** 0.0580*** 0.0704** 0.0616** 0.0333 0.3255*** 0.2037*** 0.0849***
the larges -shareholder is based in the common law country (6.51) (6.60) (4.87) (2.23) (2.42) (1.48) (6.09) (5.55) (3.10)
dummy
Percentage ownership of the second largest shareholder −0.0371** −0.04324** −0.0776*** −0.0817*** −0.0942*** −0.1681*** −0.0690** −0.0754** −0.1096***
(−2.27) (−2.65) (−3.92) (−2.89) (−3.33) (−4.47) (−2.18) (−2.38) (−2.86)
Second largest shareholder is an individual investor dummy −0.0234 −0.0168 0.0119 −0.0720 −0.0603 −0.0551 −0.0392 −0.0301 −0.0092
(−0.86) (−0.61) (0.38) (−1.53) (−1.26) (−0.92) (−0.74) (−0.56) (−0.15)
Interaction concentration proxy x the second largest from −0.0294* −0.0178 −0.0086 −0.0644** −0.0402** −0.0222 −0.0572* −0.0381* −0.0216
common law and largest not from common law dummy (−1.77) (−1.61) (−1.08) (−2.26) (−2.12) (−1.48) (−1.79) (−1.78) (−1.40)
Non-dividend-paying company −0.0285*** −0.0283*** −0.0260*** −0.0472*** −0.0464*** −0.0417*** −0.0533*** −0.0532*** −0.0534***
(−7.06) (−7.00) (−6.11) (−6.72) (−6.61) (−5.10) (−6.81) (−6.77) (−6.51)
Size −0.0029** −0.0031*** −0.0025** −0.0009 −0.0009 0.0005 −0.0017 −0.0017 −0.0011
(−2.52) (−2.61) (−2.09) (−0.43) (−0.48) (0.21) (−0.77) (−0.74) (−0.47)
Profitability 0.2022*** 0.2019*** 0.1893*** 0.2306*** 0.2299*** 0.2414*** 0.4350*** 0.4359*** 0.3908***
(12.45) (12.39) (10.76) (7.95) (7.90) (7.06) (12.88) (12.83) (10.90)
Leverage −0.0191* −0.0185* −0.0263** −0.0391** −0.0389** −0.0468** 0.0585*** 0.0573*** 0.0445**
(−1.83) (−1.77) (−2.40) (−2.14) (−2.13) (−2.23) (2.77) (2.71) (2.06)
Beta 0.0008 −0.0003 −0.0011 −0.0092 −0.0096 −0.0157* −0.0063 −0.0073* −0.0061
(−0.67) (−0.07) (−0.24) (−1.21) (−1.27) (−1.89) (−0.75) (−0.86) (−0.72)
Constant 0.0726*** 0.0719*** 0.0638*** 0.0807*** 0.0776*** 0.0598* 0.0619* 0.0591* 0.0507
(4.43) (4.38) (3.73) (2.81) (2.70) (1.81) (1.96) (1.86) (1.54)
N 795 795 674 777 777 659 781 781 664
F Value 23.49*** 23.22*** 18.98*** 14.37*** 14.18*** 11.52*** 20.22*** 19.68*** 15.03***
Adj R2 0.3839 0.3810 0.3908 0.2748 0.2720 0.2602 0.3516 0.3451 0.3176

13
 14
Table 6
Panel Data fixed effects estimates of the impact of ownership on dividends in Latin America. Table 6 reports the panel data fixed-effect regressions to test the effect of ownership concentration and
composition on dividend policy. The results indicate coefficients and t-values in parentheses when performing time-series cross-sectional regressions for an unbalanced panel of firm observations from
2007 to 2014. The first row of the table identifies the dependent variable. For each dependent variable, the table presents three panel regressions where the ownership concentration and the interaction
variables change. In Column 1, ownership concentration is measured using a Herfindahl Ownership Concentration Index. In Columns 2 and 3, ownership concentration is proxied by the percentage
ownership of the largest shareholder and the accumulated ownership of the first five shareholders, respectively. We control for the size of the firm, profitability, leverage, and risk. We use dummy variables
to control for countries where companies reside. *, **. *** indicate statistical significance at the 10%, 5%, and 1% levels, respectively.

Variables Dividend over assets Dividend over sales Dividend over equity

Herfindahl Concentration Index 0.0205*** 0.0495*** 0.0312**

(2.79) (3.88) (2.20)
Percentage ownership of the largest owner 0.0180*** 0.0424*** 0.0256**

M. Gonzalez et al. / Emerging Markets Review 30 (2017) 1–18

(2.75) (3.76) (2.02)
Accumulated percentage ownership of the first five largest 0.0226*** 0.0474*** 0.0289**
shareholders (3.06) (3.38) (2.03)
Interaction effect of the ownership concentration proxy when −0.0336** −0.0211** −0.02271*** −0.0859*** −0.0530*** −0.0345*** −0.0578** −0.0382** −0.0391***
the largest shareholder is an individual investor (−2.54) (−2.33) (−3.60) (−3.72) (−3.34) (−2.84) (−2.28) (−2.18) (−3.23)
Interaction effect of the ownership concentration proxy when 0.1175*** 0.0964*** 0.0586*** 0.0722** 0.0634** 0.0349 0.3202*** 0.2006*** 0.0875***
the largest shareholder is based in the common law country (6.35) (6.45) (4.91) (2.29) (2.49) (1.55) (5.95) (5.43) (3.19)
dummy
Percentage ownership of the second largest shareholder −0.0361** −0.0419** −0.0756*** −0.0805*** −0.0925*** −0.1641*** −0.0654** −0.0713** −0.1060***
(−2.19) (−2.56) (−3.82) (−2.85) (−3.28) (−4.38) (−2.05) (−2.24) (−2.76)
Second largest shareholder is an individual investor dummy −0.0212 −0.0144 0.0136 −0.0665 −0.0543 −0.0539 −0.0380 −0.0285 −0.0028
(−0.78) (−0.52) (0.43) (−1.43) (−1.14) (−0.90) (−0.72) (−0.53) (−0.05)
Interaction concentration proxy x second largest from common −0.0258 −0.0158 −0.0079 −0.0597** −0.0373** −0.0214 −0.0499 −0.0339 −0.0199
law and largest not from common law dummy (−1.55) (−1.42) (−1.00) (−2.10) (−1.98) (−1.44) (−1.55) (−1.57) (−1.29)
Non-dividend paying company −0.0279*** −0.0278*** −0.0258*** −0.0471*** −0.0464*** −0.0421*** −0.0526*** −0.0524*** −0.0524***
(−6.90) (−6.84) (−6.08) (−6.74) (−6.63) (−5.18) (−6.69) (−6.64) (−6.41)
Size −0.0031** −0.0032*** −0.0026** −0.0009 −0.0010 0.0006 −0.0019 −0.0018 −0.0015
(−2.67) (−2.75) (−2.20) (−0.46) (−0.51) (0.25) (−0.82) (−0.80) (−0.64)
Profitability 0.2058*** 0.2058*** 0.1897*** 0.2329*** 0.2327*** 0.2455*** 0.4447*** 0.4458*** 0.3929***
(12.74) (12.71) (10.92) (8.14) (8.11) (7.25) (13.23) (13.18) (11.07)
Leverage −0.0181* −0.0175* −0.0267** −0.0408** −0.0407** −0.0501** 0.0590*** 0.0580*** 0.0443**
(−1.73) (−1.67) (−2.45) (−2.25) (−2.24) (−2.40) (2.79) (2.74) (2.06)
Beta 0.0002 −0.0002 −0.0011 −0.0094 −0.0098 −0.0154* −0.0072 −0.0081* −0.0063
(0.05) (−0.05) (−0.24) (−1.25) (−1.30) (−1.86) (−0.85) (−0.95) (−0.75)
Constant 0.0757*** 0.0749*** 0.0671*** 0.0869*** 0.0839*** 0.0652** 0.0659* 0.0631** 0.0593
(4.67) (4.61) (3.97) (3.08) (2.97) (2.00) (2.10) (2.00) (1.82)
N 795 795 674 777 777 659 781 781 664
 M. Gonzalez et al. / Emerging Markets Review 30 (2017) 1–18 15

increase in the ownership of the second shareholder is related to an average $104,521 decrease in the firm
dividend. For reference, the average ownership of the second shareholder in the sample is 12.05%, and the
average cash dividend is $68,079.
Note that in the OLS and panel data results in Tables 5 and 6, we control for those cases in which the second
largest shareholder is an individual investor. There is also some partial evidence supporting the idea that if the
second largest shareholder is based in a common law country, while the largest shareholder is not common
law based, there is an extra monitoring role associated with the second largest shareholder, lowering the
optimal dividend demanded by minority shareholders. However, this result is only statistically significant
at least at the 10% level in only five of the nine OLS regressions and in only two of the nine panel data regres-
sions in Table 6. These results are consistent with the idea of preventing expropriation through the monitoring
action of a powerful shareholder (Truong and Heaney, 2007; Khan, 2006; Short et al., 2002). We realize that
there could be alternative explanations, such as the potential collusion among a set of shareholders (Carvalhal,
2012). We recognize that we are unable to fully disentangle these two contrasting explanations with the same
empirical expected effect on the level of dividends.
We also report the relation between our control variables and dividend payments. Leverage and dividend
levels are negatively related. This is consistent with leverage being used as an alternative mechanism to
dividends in order to decrease the potential misuse of free cash flows by the firm (Jensen, 1986). The higher
the leverage, the lower the dividend paid by the firms. Leverage may substitute dividends as a mechanism to
reduce free cash flows. In addition, there is a strong positive statistical relationship between profitability and
the level of dividend payments.
Finally, we consider the potential endogeneity that may exist between the level of dividends and
ownership concentration at the firm level. Instead of ownership concentration affecting dividend policy,
large shareholders may be attracted to companies with some specific dividend distributions. To address
this concern, we run a 2SLS model, as well as a non-linear OLS regression assuming an endogenous relation-
ship between dividends and ownership concentration. We follow Harada and Nguyen (2011) and use age and
average country-year ownership concentration as instrumental variables for ownership concentration.5 Using
a simultaneous system of equations, Table 7 presents the results associated with the non-linear OLS regres-
sions. The 2SLS regression results are consistent with those presented in Table 7.
Table 7 presents results consistent with those from Tables 5 and 6 after controlling for a potential endog-
enous relationship between dividends and ownership concentration. Empirical evidence associated with
Hypotheses 1 and 2 is even statistically stronger than that presented previously. However, the evidence asso-
ciated with the positive monitoring role that the second largest shareholder exerts on the largest controlling
shareholder is weaker than that in Tables 5 and 6. In Table 7, the coefficient associated with the ownership of
the second largest shareholder is statistically significant in only two out of nine regressions at least at the 10%
confidence level. Since we are controlling for endogeneity, this result might be associated with the existence
of some level of collusion between the largest and the second largest shareholder that is canceling, on average,
the potential monitoring role the second largest shareholder monitoring the actions of the largest
shareholder.

5. Conclusions

We examine the effect of ownership concentration and composition on dividends using a unique sample
of Latin American publicly-traded corporations from 2007 to 2014. In highly concentrated ownership
structures, the presence of the largest shareholder as an individual investor is associated with a strong,
negative, and economically significant effect on the level of dividends paid. Univariate and bivariate analysis,
OLS, and panel data regressions indicate that this negative effect is robust to different specifications of the
dividend and ownership concentration proxy definitions. The results hold when we consider the potential en-
dogenous relationship between ownership concentration and dividend levels. Overall, our results add
empirical evidence to the discussion as to how the controlling shareholders in emerging markets could extract
private benefits from minority shareholders.

5
Finding appropriate instrumental variables for ownership concentration is not an easy task. In our case, average ownership concen-
tration seems to work better, but we present the results following Harada and Nguyen (2011) and include, in the reported model, the firm
age. They argue that older firms have a lower ownership concentration.
 16
Table 7
Non-linear OLS estimates of the impact of ownership on dividends assuming an endogenous relationship. Table 6 reports non-linear regressions to test the effect of ownership concentration and compo-
sition on dividend policy assuming endogeneity between dividends and ownership concentration. For each dependent variable, the table provides three regressions where the ownership concentration
and the interaction variables change. In Column 1, ownership concentration is measured using a Herfindahl Ownership Concentration Index. In Columns 2 and 3, ownership concentration is proxied by the
percentage of ownership of the largest shareholder and the accumulated ownership of the first five shareholders, respectively. Each cell in the table presents coefficient estimates and e t-values in paren-
theses. We control for the size of the firm, profitability, leverage, and risk. Although not shown, we use dummy variables to control for years and countries where the company is based. *, **, and *** indicate
statistical significance at the 10%, 5%, and 1% levels, respectively.

Variables Dividend over assets Dividend over sales Dividend over equity

Herfindahl Concentration Index 0.0110 0.0272* 0.0170

(1.29) (1.72) (1.12)
Percentage ownership of the largest owner 0.0135* 0.0310** 0.0190

M. Gonzalez et al. / Emerging Markets Review 30 (2017) 1–18

(1.74) (2.16) (1.37)
Accumulated percentage ownership of the first five largest 0.0151* 0.0342* 0.0137
shareholders (1.79) (1.90) (0.87)
Interaction effect of the ownership concentration proxy when the −0.0380** −0.0250** −0.0296*** −0.1085*** −0.0665*** −0.0462*** −0.0671** −0.0457** −0.0498***
largest shareholder is an individual investor (−2.22) (−2.27) (−4.06) (−3.29) (−3.14) (−2.88) (−2.20) (−2.32) (−3.68)
Interaction effect of the ownership concentration proxy when the 0.1414*** 0.1219*** 0.0929*** 0.0940*** 0.0826*** 0.0613** 0.4320*** 0.2962*** 0.1895***
largest shareholder is based in the common law country (7.64) (7.94) (7.20) (2.78) (2.94) (2.25) (8.35) (8.03) (6.09)
dummy
Percentage ownership of the second largest shareholder −0.0202 −0.0419** −0.0537** −0.0645* −0.0720** −0.1329*** −0.0369 −0.0411* −0.0624
(−1.05) (−2.56) (−2.46) (−1.85) (−2.08) (−2.88) (−1.09) (−1.21) (−1.52)
Second largest shareholder is an individual investor dummy −0.0500 −0.0247 0.0171 −0.1215** −0.1056* −0.0838 −0.0679 −0.0547 0.0268
(−1.60) (−1.32) (0.49) (−2.12) (−1.82) (−1.13) (−1.22) (−0.96) (0.41)
Interaction concentration proxy x second largest from common −0.0209 −0.0407 −0.0031 −0.0479 −0.0285 −0.0173 −0.0407 −0.0238 −0.0086
law and largest not from common law dummy (−1.05) (−1.29) (−0.38) (−1.32) (−1.25) (−0.99) (−1.14) (−1.05) (−0.55)
Non-dividend-paying company −0.0354*** −0.0353*** −0.0337*** −0.0583*** −0.0464*** −0.0565*** −0.0611*** −0.0524*** −0.0626***
(−7.27) (−7.27) (−6.82) (−6.47) (−6.63) (−5.30) (−7.00) (−6.64) (−6.81)
Size −0.0023* −0.0026* −0.0029** 0.0011 0.0006 −0.0006 −0.0001 −0.0003 −0.0008
(−1.68) (−1.91) (−2.25) (0.41) (0.25) (−0.22) (−0.02) (−0.11) (−0.32)
Profitability 0.1395*** 0.1371*** 0.1074*** 0.1519*** 0.1474*** 0.1456*** 0.2833*** 0.2813*** 0.2208***
(7.86) (7.73) (5.80) (4.46) (4.32) (3.58) (8.24) (8.13) (6.00)
Leverage −0.0336*** −0.0304** −0.0243* −0.0640*** −0.0611*** −0.0558** 0.0353 0.0378 0.0463*
(−2.65) (−2.42) (−1.92) (−2.72) (−2.59) (−2.05) (1.53) (1.63) (1.92)
Beta −0.0027 −0.0025 −0.0052 −0.0187** −0.0176** −0.0250** −0.0133 −0.0130 −0.0160*
(−0.56) (−0.52) (−1.12) (−2.09) (−1.99) (−2.55) (−1.54) (−1.52) (−1.87)
Constant 0.0745*** 0.0753*** 0.0815*** 0.0850** 0.0841** 0.1084** 0.0504* 0.0493 0.0636*
(3.87) (3.92) (4.21) (2.35) (2.32) (2.56) (1.47) (1.43) (1.77)
N 526 526 453 511 511 441 517 517 445
Adj R2 0.3960 0.3998 0.3771 0.2843 0.2517 0.2325 0.3958 0.3912 0.3218
 M. Gonzalez et al. / Emerging Markets Review 30 (2017) 1–18 17

We also find evidence supporting the idea that a large shareholder, different from the largest, may monitor
the activities of the latter affecting the level of dividends paid. We find that the higher the ownership percent-
age of the second largest shareholder, the lower the dividend payment. This evidence, however, becomes
weaker when we control for endogeneity. According to Jensen (1986), one possible explanation is that better
monitoring by a large shareholder of the manager's activities will require lower levels of dividend payments to
minimize the free cash flow available to managers. This result is also consistent with the evidence reported by
Truong and Heaney (2007) and Short et al. (2002).
Finally, we also consider the effect that the largest shareholder based in a common law country has on the
level of dividends distributed. All of the firms in our sample are based in civil law Latin American countries
where investor protection is weak relative to the protection afforded those in common law countries. We
provide evidence of the positive effect that the largest common law-based shareholder has on the dividend
policy of a company based in a civil law country. This evidence is consistent with the idea of Bris and
Cabolis (2008) that a company operating in a country characterized by weak investor protection may improve
its governance and reputation when the ownership of the firm participates in a corporation/financial institu-
tion based in a common law country.

Acknowledgements

The authors wish to thank Dušan Isakov, Benoit d'Udekem, and participants from the following
conferences: the 2013 IESA Research Seminar, the 2014 LARC Conference at the Freeman School of Business,
Tulane University, the Research Roundtable at the Paseka School of Business, Minnesota State University
Moorhead, and the 2015 Midwest Finance Association for helpful comments.

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