Internal Control Quality and Dividend Policy in French setting:

does ownership concentration matter

Abstract:
Research paper

Purpose: The paper examines the association between internal control quality (ICQ) and
dividend Policy in the French setting. It also investigates how ownership concentration
moderates this relationship.

Design/methodology/approach: We measure ICQ by using the framework developed by

Michelon, et al. (2015).

Findings: Based on a sample of 760 firm-year observations over the period of 2011-2014, we
find that ICQ is positively and significantly associated with dividend policy indicating that
better controls increase dividend payout ratio. In addition, ownership concentration moderates
the association between ICQ and dividend policy since this association becomes non-
significant under high percentage of ownership concentration.

Originality/value: Our study adds to the internal control literature by focusing on a

developed civil law market. With respect to investors, our results also provide substantive
evidence that ICQ plays an important role in increasing dividend payout ratio.

Key words: ICQ, dividend policy, ownership concentration, France.

1
 1. Introduction
Chalmers, Hay, and Khlif (2018) noted in their review concerning internal control in

accounting research that future research should explore on the economic consequences of ICQ

quality on the cost of equity, dividend policy, cost of debt, earnings quality, accounting

choices and auditors in developed and emerging economies.

Dividend payout and internal control are two of the most researched areas in financial

economics literature but, as the researcher‘s knowledge, it is not known about the internal

control quality as the determinant of dividend payout in the French setting. However, limited

evidence has been reported with respect to the effect of internal control quality on dividend

payout. Besides, the study provides evidence from France, which has not been researched yet.

Internal control quality leads generally to higher operational performance (Etengu and

Amony, 2016; Gift, 2018; Kinyua, 2016; Njeri. 2014; Nyakundi, Nyamita and Tinega, 2014),

and to higher earnings quality (Marinovic, 2013; Noori and Shorvarzy, 2015; Salehi and

Bahrami, 2017). Therefore, a good internal control system will contribute to the improvement

of high quality earnings, liquidity, solvency and profitability, and consequently, reflects the

firm transparency. This will encourage leaders to post a good dividend policy, as dividends

are paid out of earnings. Therefore, dividend policy is used as a mechanism to signal to the

outside world information about a company’s prospect of stability and growth, and it is

through the internal control system.

The main objective of this study is to investigate the impact of the quality of internal control

on the dividend payout in France and to analyze the impact of ownership concentration on the

relationship between internal control quality and dividend payout for a sample of 190 French

firms over the period of 2011-2014 in French setting.

2
Our analysis incorporates several key measures to capture underlying constructs. First, to

measure dividend policy, dividend payout ratio is use to examine it by take dividend per share

and divide it by earnings per share (Fraser and Ormiston, 2016). We try to measure ICQ by

using the framework developed by Michelon, et al. (2015). The framework allows the formal

disclosure on the elements of the internal control system and the substantial disclosure on its

functioning to be defined separately so a sound judgment to be made.

Based on a sample of 190 French non-financial firms over the period spanning from 2011 to

2014, we document a significant positive association between dividend policy and ICQ. When

testing for the moderating effect of ownership concentration on this association, we provide

evidence that the positive association becomes non significant. This finding implies that ICQ

is an important element of dividend policy since it gives rise to the value relevance of

information disclosed among investors and thus increases the dividend payout ratio.

This study contributes to accounting literature as follows. First, to the best of our knowledge,

our study represents the first attempt to examine the relationship between ICQ and dividend

policy. Second, our study adds to the internal control literature by focusing on a developed

market characterized by legal system dominated by civil law. Finally, our results provide

substantive evidence that ICQ plays an important role in increasing dividend payout ratio. In

addition, we provide empirical evidence that ownership concentration moderates the

association between ICQ and dividend policy in France.

The remainder of the paper is organized as follows. Section 2 reviews the previous literature

and elaborates the hypotheses. Section 3 presents the research methodology. Section 4

explains the sample selection. Section 5 discusses the research findings. The final section

summarizes the paper and provides some questions for further research.

3
 2. Hypothesis development
In this section, we develop theoretical basis for the association between ICQ and the dividend

policy. We then attempt to conjecture how managerial may influence this relationship.

2.1. ICQ and dividend policy

The necessity to establish effective internal control system has received serious attention as an

integral component of efficient management system. According to Souissi and Khlif (2012),

higher ICQ may play an essential role in improving the disclosure environment, and investors

will be very sensitive to any supplementary information provided in excess of mandatory

requirements to decrease the level of uncertainty and information asymmetry. Internal control

quality leads generally to higher operational performance (Etengu and Amony, 2016; Gift,

2018; Kinyua, 2016; Njeri. 2014; Nyakundi, Nyamita and Tinega, 2014), and to higher

earnings quality (Marinovic, 2013; Noori and Shorvarzy, 2015; Salehi and Bahrami, 2017).

On the one hand, among the various studies those examine internal control and operational

performance, Njeri (2014) investigate the effect of internal control on the financial

performance of manufacturing firms in Kenya. The study conclude that firms that had

provided on effective internal control systems had improved financial performance as

compared to those firms that had a weak internal control system.

In another study, Nyakundi, Nyamita and Tinega, (2014) propose that internal control

significantly influence the financial performance and suggested that proprietors of Small and

Medium scale Enterprises should be trained on the significance of internal control.

In Uganda, Etengu and Amony (2016) examine the role of internal control system on the

financial performance of non-governmental organisations. The study recommends that

performance standards should be establishes and communicate to employees of International

4
Union for Conservation of Nature in a bid to develop financial performance. Kinyua (2016)

suggest that internal control systems in particular risk management, corporate governance,

control activity, internal control environment and internal audit function are significant should

give interest to in order to improve their financial performance.

Gift (2018) investigate the effect of internal control on financial performance in Rivers State.

The study determined the extent to which the measures of internal control (control

environment, risk assessment and information and communication) persuade financial

performance (total revenue, profitability and return on assets) in Rivers State. The results

show that the surveyed have internal controls that support their operations and enhance their

financial performance.

On the other hand, researchers find the positive association between internal control quality

and accruals or discretionary accruals (Doyle, Ge, and McVay, 2007). Noori and Shorvarzy

(2015) examine the impact of internal control on earnings quality for firms listed in Tehran

Stock Exchange. The results show direct evidence of the association between the quality of

internal control and earning quality which can be considered in decisions being made by

investors or performed analysis.

Another stream of literature investigates the effect of internal control weaknesses on earnings

quality. Ashbaugh-Skaife et al. (2008) find that internal control weaknesses lowers accrual

quality. In addition, Doyle et al. (2007), find that firms with internal control weaknesses are

smaller, younger, riskier, and financially weaker have lower accrual and earnings quality.

Poor internal controls can lead to earnings management or unintentional errors which results

in lower quality of financial reporting.

Lashgari, Gawradar and bakhshayesh (2015) investigate the relation between internal control

weakness and accruals quality using data obtained from companies listed on Tehran stock

5
exchange. The results indicate that accruals quality is very strongly associated with the

internal control weakness and indeed, quality of accounting information is highly dependent

on both providing information environment and information resources. According to prior

research in companies with high internal control weakness, will present reduced financial

information quality.

The quality of earnings is a function of a firm’s fundamental performance. High quality

earnings are one that accurately reflects the company’s current operating performance. Hence,

reported earnings number of companies with high earnings quality is considered trustworthy

since it can reflect the true performance of companies.

Earnings management and earnings quality are kind of two sides of the same coin. When

earnings management is high, earnings quality is low and vice versa. In accordance with

Srikanth and Prasad (2015), earnings management has a lot in common with earnings quality

and highly managed earnings have low quality. Earning management affects both earning

quality and dividend policy of companies (Ali Shah et al., 2010; Kasemi, Rostami and

Ghorbani 2014).

The relationship between earnings management and dividend policy has been empirically

examined by different researchers. They suggest that dividends convey information regarding

the quality of firms reported earnings with dividend paying firms reporting higher quality

earnings than non dividend paying firms (e.g. Skinner and Soltes 2011; Caskey and Hanlon

2013).

Internal control system designs to provide the reliability of financial reporting, assurance

regarding the achievement of a firm’s objectives in the effectiveness and efficiency of

operations and the achievement of the compliance with applicable laws and regulation. A

good internal control system will contribute to the improvement of high quality earnings,

6
liquidity, solvency and profitability, and consequently, reflects the firm transparency. This

will encourage leaders to post a good dividend policy, as dividends are paid out of earnings.

Therefore, dividend policy is used as a mechanism to signal to the outside world information

about a company’s prospect of stability and growth, and it is through the internal control

system.

Therefore, the present study seeks to determine the impact of internal control quality on

dividend policy of 190 listed non-financial companies in the French setting. To the best of our

knowledge, this is the first study to investigate this association. In order to achieve this

objective, the following hypothesis has been formulated:

H 1 There is a positive and significant association between internal control quality and
dividend policy.

2.2.The moderating effect of ownership concentration

How can concentrated ownership structure influence the relationship between internal control

quality and dividend policy? Ownership concentration is a significant internal governance

mechanism in which owners can control and manipulate the management of the firm to

protect their interests (Pankaj M. Madhani, 2016).

In line with Ooghe and Langhe, 2002 developed European countries apply a continental

model of corporate governance which are characterized by the presence of a small number of

major shareholders in their companies. The degree of ownership concentration affects on the

quality of internal control disclosure because of the restraints of the decentralization of shares

on shareholders, which makes them require high quality of disclosure. The higher degree of

ownership concentration, the weaker the restraint effect, which makes majority shareholders

harm the interests of minority shareholders. Majority shareholders may conceal or even

falsely disclose some important but unfavorable information, using their advantageous

7
controlling position or conspiring with the management, in order to protect their own

interests.

Many empirical studies have been conducted in order to define the determinants that may

influence a firm's dividend payout. We develop two opposite arguments regarding the effect

of ownership concentration on dividend payout ratio. The influence can be either positive or

negative. This effect is positive if large shareholders use dividends to constrain managerial

opportunism, but negative if they choose to pursue their own interests at the expense of small

shareholders.

On the one hand, ownership concentration provides the incentives for large shareholders to

monitor the firm’s management, thus overcoming the free-rider problem associated with

dispersed ownership whereby small shareholders have not enough incentives to incur

monitoring costs for the benefit of other shareholders. Owing to the active monitoring of large

shareholders, managers are better aligned with shareholders are better aligned towards the

objective of delivering shareholder value; which should result in higher firm values.

On the other hand, the large shareholders prefer to extract private benefits of control that are

not shared by minority shareholders (Shleifer and Vishny, 1997). In the absence of agency

conflicts, shareholders should be confident that the firm’s cash flows are properly used. In

fact, several studies suggest that closer alignment of interest between managers and

shareholders results in lower dividend payments.

Ownership concentration appears to play an essential role in corporate decisions of dividend

payout policy, essentially due to the way it intensifies the agency conflicts between widely

held and marginal shareholders. The ownership concentration who have a high level of

compensation other than dividends, will try to contrite increase in the dividend payout ratio

under internal control quality. According to this, we propose the following hypothesis:

8
H_2 Under high percentage of ownership concentration on the board, the association between

internal control quality and dividend policy becomes less significant.

3. Data collection

Our sample consists of the traded companies listed on the French stock exchange over the

period spanning from 2011 to 2014. Companies included in our sample operate in two main

industries: commercial and industrial sectors. We exclude financial and insurance firms since

they are classified as highly regulated industries. Our sampling process yields 760 firm-year

observations over the period 2011-2014. Table 1 presents more details about our sample.

[Insert table 1 about here]

4. Methodology
4.1. Model

To test the empirical validity of the hypotheses formulated above, we estimate a panel data

model with balanced data. Panel data analysis is a sequence of pictures of the same

observations but at different points in time. The regression model for this research is

performed as follows:

DPR ¿=β 0+ β 1 ( ICQ ¿ ) + β 2 ( OWC ¿ ) + β 3 ( PROF ¿ ) + β 4 ( RISK ¿ )+ AUD me section s ' β 5 ( LnCash )+ β 6 ( TAX ¿ ) + β 7 ( RVA
¿

(1)

Where:

Dependent variable
DPR = Dividend payout ratio: dividend per share/earnings per share for firm i in period t.
Test variables:
ICQ= Internal control quality;
OWC= ownership concentration: the share of the voting rights of the largest shareholder.
Control variables
PROF= Profitability: earnings before interest and taxes/total assets for firm i in period t;
9
RISK= variability in profit for firm i in period t;
LnCash= log of net cash flow for firm i in period t;
TAX= corporate tax divided by net profit before tax for firm i in period t;
RVAR= revenue variability: growth in sales for firm i in period t;
ATYPE= external auditor’s size (dummy variable; 1 for Big four firms and 0 otherwise).

The first model investigates the direct effect of ICQ on the dividend payout ratio (H1). In

order to test how ownership concentration may affect the relationship between ICQ and

dividend policy (H2), we adopt to introducing an interaction between ICQ and ownership

concentration that equals 1 if ownership concentration has a score superior to the median 1 and

0 otherwise. Such an interaction variable will be equal to ICQ score if the firm enjoys a high

ownership concentration and 0 otherwise.

4.2.Dividend policy

Dividend payout ratio is used to examine it by take dividend per share and divide it by

earnings per share (Fraser and Ormiston, 2016). This indicator is widely used by previous

studies to measure dividend policy (e.g. Jóźwiak, 2015; Penman, 2009; Amidu and Abor,

2006; Mancinelli and Ozkan, 2006).

4.3.ICQ

Following the new Internal Control Over Financial Reporting (ICOFR) imposed by the SOX

Act (section 404) in the USA in 2002, studies examining ICQ generally depend on the

information communicated in annual reports (e.g., Barua, Rama, and Sharma, 2010; Krishnan,

2005 and Lin et al. 2014).

According to Deumes and Knechel (2008), specific information on the characteristics of the

ICQ is indeed difficult and expensive to gather by investors as it is a complex set of activities

1
The median for ownership concentration in our sample accounts for 0.513

10
and processes carried out internally to the firm. Data on ICQ can’t be directly observed and it

is not generally available (Krishnan, 2005).

To highlight the ICQ, several empirical studies are discovered (e.g. Hu et al. 2014; Khlif and

Samaha, 2014; Khlif and samaha, 2016; Lin et al. 2014, Michelon et al, 2015; and Wan-

Hussin and Bamahros, 2013).

In Egypt, Khlif and Samaha (2014) have measured the quality of internal control by surveying

Egyptian auditors using an internal control checklist developed by Hwang, Shin, and Han

(2004). In the U.S, Lin et al. (2014) focus on internal control weaknesses disclosure (a

dummy variable that takes a value of 1 if a firm reports that a “material weakness exists” and

0 if a firm reports “no material weakness found by the auditor”).

In China, Hu et al. (2014) measure ICQ by the voluntary disclosure of auditors’ reports on

internal control and financial restatements. They adopt two measures to proxy ICQ. One is

Auditor’s report (0/1), which is a dummy variable of whether a firm has disclosed auditors’

reports on internal control. It is a reasonable proxy for ICQ in China.

Second, during the 2006–2010 sample periods, all auditors’ reports on internal control were

disclosed with positive opinions from the auditors, indicating good ICQ. Similarly, Wan-

Hussin and Bamahros (2013) exploit on the publicly available data concerning the investment

in and the sourcing arrangement of internal audit function in Malaysia.

Generally, disclosure indices in the literature are built mainly on checklists of items.

Michelon, Bozzolan and Beretta (2015) argue that these indices cannot capture the variety of

content that management can disclose on the internal control system in the European settings.

To overcome this limitation, they propose a framework that captures the variety and

complexity of the content disclosed through the narratives on internal control system.

11
The framework allows the formal disclosure on the elements of the internal control system

and the substantial disclosure on its functioning to be defined separately so a sound judgment

to be made. We try to measure ICQ by using the framework developed by Michelon, et al.

(2015)2.

Appendix 1 shows the two dimensions; the first includes the seven internal control system

elements defined by the COSO framework (2004): (i) Internal environment; (ii) Objective

setting and definition of risk appetite/tolerance; (iii) Risk identification; (iv) Risk assessment;

(v) Action planning; (vi) Implementation of action plans and (vii) Communication and

monitoring.

The second dimension reflects on internal control system functioning, where management can

decide to provide investors with standard information referring mainly to the various

objectives of control and the information on both the actors involved in the process and the

mechanisms through which the internal control system is implemented.

The type of firm’s objectives classification (O_score) is taken from the CoSO Framework: (i)

efficiency of operations; (ii) reliability of financial reporting; (iii) compliance with the law;

(iv) safeguarding of assets. Thus the second dimension of the ICS disclosure framework

considers also the types of actor (A_score) involved in the internal control process and the

types of control procedures and mechanism implemented inside the firm in order to act the

control activities. The classification of type of actors is; (i) Board of Directors; (ii) Audit

Committee; (iii) Internal Control Supervisor; (iv) Internal Auditor; (v) Senior Management

(CEO, CFO, Controller, etc); (iv) Risk Committee - Risk Manager. The development of type

of control procedures and mechanisms is: (i) audit committee's working mechanisms; (ii)

2
The framework developed by Michelon et al (2015) in the article 'Board monitoring and internal control system
disclosure in different regulatory environments' encompasses two dimensions; the first refers to the seven
internal control system elements defined by the CoSO framework and The second regards internal control
system functioning.

12
internal control guidelines and procedures; (iii) accountability definition; (iv) ethical codes -

codes of conduct; (v) planning and budgeting; and (vi) risk reporting.

Following by Michelon, et al. (2015), we classify data collection in the following phases.

First, we define the recording unit. We choose single sentences as recording units because

they are generally considered more reliable than pages or paragraphs. Second, we set a coding

procedure to capture the disclosure of internal control system information. Each sentence is

assigned with a score of 0 for providing no information on any internal control system

component and a score of 1 if it contains some information on internal control system. Any

time a piece of information is identified, it is located into the internal control system

disclosure framework at the intersection of rows and columns.

Thus, we organize each sentence disclosed concerning internal control system at the same

time both by type of component and by content of disclosure. We calculate different

disclosure scores and indices. Each specific category of disclosure has its own disclosure

score: the disclosure score of information on objectives (O_score), the disclosure score of

information on actors (A_score), the disclosure score of information on implementation

mechanisms and procedures (M_score). The Total internal control system Disclosure Score

(TICSD) is obtained by summing the disclosure scores for each specific category of

disclosure and it is the total amount of information disclosed on ICS. We also calculate the

internal control system Disclosure Index (ICSD) for each firm by dividing its disclosure score

by the maximum TICSD obtained in each year, across all firms and countries.

[Insert Appendix 1 about here]

4.4.Ownership concentration

Ownership concentration can reflect the continuity and conservatism of an enterprise. It is the

index to measure the distribution of all shares in the hands of each shareholder. This paper

13
uses the share of the voting rights of the largest shareholder as a criterion to measure the

concentration degree of ownership.

4.5.Control variables

In our analysis, we include control variables that have been found in the literature to be

correlated with the dividend payout ratio. With regard to profitability, it has been found as one

of the most important determinants of dividend policy. The results on relationship of

profitability and dividend payout have been mixed. Amidu and Abor (2006) have maintained

that the profitability is highly negative and significantly associated with the dividend payout.

Contrary to it, there are many. Conforming to Ayman (2015), profitability has long been

considered as a determinant of a firm’s ability to pay dividend. In addition, Muhammad et al.

(2011) regarded profit as the primary indicator of the firm’s capacity to pay dividend. Kun Li

and Chung-Hua (2012) have maintained that firms are more likely to increase their dividends

if they are large and profitable. Risk is measured as the year-to-year variability of earnings. In

empirical studies searching for the determinants of corporate dividend policy, variability of

earnings, equity beta coefficient and leverage ratio have been used as indicators of risk. Pruitt

and Gitman (1991) reveal that risk determines firms’ dividend policy. Firms with stable

earnings tend to pay out a higher amount of dividend than firms with unstable earnings,

because their future earnings are more predictable.

5. Results
5.1.Descriptive statistics

Table 2 summarizes the descriptive statistics of variables included in the analysis. Dividend

payout ratio variable has a mean of 22.2 percent and ranges from 0 to 88.9 percent. On

average, firms disclose 0.447 items of information on quality of internal control. This variable

has a standard deviation of 0.212 and ranges from 0.039 to 1. The majority shareholder owns,

14
on average, 0.458 of the voting rights, with a minimum of 0.096 and a maximum of 0.746.

Profitability ratio has a mean of 52 percent and ranges from -1 to 0.700. The average of

companies is risk -1.130 percent. The log of cash flow has a mean of 5.310 and varies from 0

to 17. Corporate tax rate, measured as the corporate tax divided by net profit before tax, has a

mean of 27.3 percent and ranges from 0 to 96 percent. Finally, 81.7 percent of firms in our

sample are audited by Big 4 audit firms. This means that 153 sample companies were audited

by big four audit firms and just 37 companies were audited by non-big four audit firms hence

the mean is close to 1.

[Insert table 2 about here]

5.2.Univariate analysis

Table 3 reports bivariate statistical correlations between all variables. The analysis shows that

dividend payout ratio is positivity associated with ICQ with a Pearson coefficient accounting

for (0.249; p < 0.01). This result provides a preliminary support for H1 predicting that ICQ is

positively and significantly associated with dividend policy in the French setting. With respect

to control variables, profitability is positively associated with dividend payout ratio with a

Pearson coefficient accounting for (0.240; p < 0.01) implying that highly profitable firms tend

to declare and pay high dividend.

[Insert table 3 about here]

5.3.Multivariate analysis

Results of multivariate analysis are reported in table 4. In model 1, our finding provides

evidence that ICQ is negatively associated with dividend payout ratio (t = 6.53; p = 0.000)

which provides support to hypothesis H1. This result suggests that firms with strong ICQ will

tend to use high dividend payout ratio. The coefficient of ICQ (0.247) indicates that if the

15
score of internal control increased by 1 unit, the dividend payout ratio increased by 0.247

units. ICQ plays a significant role on dividend payout ratio.

With respect to control variables, neither Risk, nor log cash has a significant effect on

dividend policy. Similarly, revenue variability and audit type does not exert a negative and

significant effect on DPR. With regard to the remaining control variables, only corporate tax

and profitability are positively and significantly associated with dividend policy.

The results indicate a statistically significant and positive relationship between profitability

and the dividend payout ratio (t = 5.97; p = 0.000). This result suggests that, highly profitable

firms tend to declare and pay high dividend. Thus, they would have exhibited high payout

ratios. A firm’s profitability is considered an essential factor in influencing dividend payment.

The results also appear to be consistent with the findings of other empirical studies (e.g.

Alzomaia and Al Khadiri, 2013; Amidu and Abor, 2006; Fitri et al., 2016; Nuhu, 2014 and

Shubiri, 2011).

The results of this study show a positive relationship between corporate tax and dividend

payout ratios (t = 1.96; p = 0.051), indicating that, increasing tax is associated with increase in

dividend payout. This position seems to also be consistent with existing literature (e.g. Ali

Khan and Ahmed, 2017; Amidu and Abor, 2006 and Rehman and Takumo, 2012).

In an attempt to capture the weight of dividend payout ratio in explaining ICQ, we exclude

this variable from the model 2 since it represents the most important predictor of dividend

policy and we regress the remaining variables on our dependent variable. The Fisher value

accounts for 5.67 (p-value = 0.000). The adjusted R-Square witnesses a significant decrease,

moving from 12.06 per cent to 5.8 per cent (about 50 percent) implying that the quality of

internal control plays an important role in explaining dividend policy. This corroborates the

16
strong univariate correlation between ICQ and dividend payout ratio. ICQ is one of the

important factors to determine dividend policy in French’s setting.

5.4.The moderating role of ownership concentration

To test for the moderating effect of ownership concentration on the relationship between ICQ

and dividend policy in the French setting (hypothesis H2), we adapt to introducing an

interaction between ICQ and ownership concentration that equals 1 if ownership

concentration has a score superior to the median and 0 otherwise. Such an interaction variable

(ICQ*OWC) will be equal to ICQ score if the firm enjoys a high ownership concentration and

0 otherwise.

As shown in the full model of Table 5, the relationship between dividend payout and

ICQ*ownership concentration is positive and significant at 5 percent level statistically (t =

2.23; p = 0.026). In comparison with the results of the first regression, under high percentage

of ownership concentration, the association between ICQ and dividend policy becomes less

significant (the t witnesses a significant decrease, moving from 6.53 to 2.23). This result

suggests that, in existence of higher percentage of ownership concentration on the board, the

relationship between ICQ and dividend payout ratio becomes less significant. Consequently,

this result supports the hypothesis H2.

[Insert table 5 about here]

6. Summary and conclusions

In this paper, we investigate the association between ICQ and dividend policy in the French

setting. We also explore whether ownership concentration moderates the documented positive

association between ICQ and dividend policy. Based on a sample of 760 company-year

17
observations over the period of 2011-2014, we document a significant positive empirical

association between ICQ and dividend payout ratio.

ICQ contributes significantly to the increasing of dividend payout ratio. It represents a key

determinant of dividend policy. This relationship becomes less significant during the

existence of higher percentage of ownership concentration.

Overall, our study contributes to the growing literature concerning the impact of ICQ on the

economic consequence linked to investors through dividend policy in several ways. First, our

findings help corporate managers and fellow researchers, who try to find guidance from the

relevant literature, to increase a broad understanding of the effects of internal control and

factors on corporate dividend policy.

Second, the findings of this study have also implications to investors who prefer steady

growth of dividends every year and are reluctant to investment to companies that apply

dividend policy. For investors, dividends serve as an important indicator of the strength and

future prosperity of the business.

Since this study focuses on the determinants of ICQ in a develop country, future research may

examine the economic consequences of ICQ including its effect on the cost of debt, the audit

report lag and the cost of equity capital in such context.

18
References

19
 Table 1. Sample description

Sectors  / Years Number of enterprises in the sample

Year 2011-2014
Industrial 72
commercial 118
Total 190
Totals 760

20
 Table 2. Descriptive statistics of the studied variables

Variables Mean Std. deviation Minimum Maximum

DPR 0.222 0.217 0.000 0.889
ICQ 0.447 0.212 0.039 1
CONC 0.3581 0.223 0.0997 0.7541
PROF 0.520 0.139 -1.062 0.730
Risk -0.013 0.295 -0.047 2.419
Ln cash 5.310 5.065 0 17.148
Tax 0.273 0.167 0 0.960
RVAR 0.222 1.955 -1 46.633
ATYPE 0.817 0.387 0 1
Notes: This table shows the minimum, maximum, mean and standard deviation of every variable including
control variables. DPR is the dividend payout ratio; ICQ is the internal control quality; CONC is percent of
the proportions of shares held by the majority shareholder of the company; PROF is earnings before interest
and taxes/total assets; Risk is variability in profit; Ln cash is log of net cash flow; Tax is corporate tax divided
by net profit before tax and ATYPE is dummy equaling 1 if the auditor is PricewaterhouseCoopers, Ernst and
Young, KPMG or Deloitte.

21
 Table 3. Univariate analysis for continuous variables: Correlation matrix
Variables DRP ICQ CONC PROF Risk Ln cash Tax RVAR ATYPE

DPR 1.000

ICQ 0.249*** 1.000

CONC 0.031 0.190 1.000

PROF 0.240*** 0.064 0.051 1.000

RISK 0.045 0.026 0.013 0.293*** 1.000

Ln cash 0.079 0.049 -0.003 0.138** 0.079 1.000

Tax 0.083 -0.066 -0.012 0.139** 0.016 0.017 1.000

22
RVAR -0.015 -0.006 0.021 -0.039 0.046 0.036 0.046 1.000

ATYPR 0.045 0.278*** -0.034 -0.082 0.003 -0.064 -0.064 -0.007 1.000

Notes: DPR is the dividend payout ratio; ICQ is the internal control quality; CONC is percent of the proportions of shares held by the majority shareholder
of the company; PROF is earnings before interest and taxes/total assets; Risk is variability in profit; Ln cash is log of net cash flow; Tax is corporate tax
divided by net profit before tax and ATYPE is dummy equaling 1 if the auditor is PricewaterhouseCoopers, Ernst and Young, KPMG or Deloitte.
*Significant at 10 percent; **significant at 5 percent; ***significant at 1 percent.
23
 Table 4. Univariate analysis: t-test for dummy variable

Variables Category N. of observations Mean Standard Deviation T-statistic

(p-value)
ATYPE 0 139 0.201 0.211 -
1.2501***
1 621 0.227 0.218 (0.000)
Notes: Dependent variable: DPR: Dividend payout ratio; Atype: auditor type (dummy variable; 1 for big four
firms and 0 otherwise);
*Significant at 10 percent; **significant at 5 percent; ***significant at 1 percent.

24
 Table 5 Multiple regression analysis

Variables Model 1 Model 2 Model 3

Overall sample Excluding internal control quality Ownership concentration
Constant 0.078( -2.370)** 0.132 (4.020)*** 0.163(4.58)***
ICQ*OWC - - 0.092(2.230)**
ICQ 0.247 (6.530)*** - -
OWC -0.024 (-0.700) 0.021 (0620) -0.068(-1.920)
PROF 0.344(5.970)*** 0.376(6.360)*** 0.363(6.130)***
RISK -0.002(-0.760) 0.002(-0.750) -0.002(-0.750)
Ln cash 0.002(1.070) 0.002(1.420) 0.002(1.360)
Tax 0.087(1.960)* 0.070(1.520) 0.072(1.550)
RVAR -0.001(-0.200) -0.001(-0.220) -0.001(-0.240)
ATYPE 0.002(0.080) 0.041(2.070)** 0.032(1.560)
2011 -0.013(0.590) -0.018(-0.810) -0.017(-0.770)
2013 -0.012(-0.550) -0.064(-0.300) -0.008(-0.370)
2014 -0.002(-0.100) -0.006(0.290) 0.005(0.210)
N° of observation 760 760 760
ADJ_ R 2 0.1206 0.0580 0.0630

F (p-value) 9.32***(0.000) 5.67***(0.000) 5.64***(0.000)

Max VIF 1.52 1.52 2.42
Notes: DPR is the dividend payout ratio; ICQ is the internal control quality; OWC is percent of the proportions of shares held by the majority shareholder of the company;
PROF is earnings before interest and taxes/total assets; Risk is variability in profit; Ln cash is log of net cash flow; Tax is corporate tax divided by net profit before tax and
ATYPE is dummy equaling 1 if the auditor is PricewaterhouseCoopers, Ernst and Young, KPMG or Deloitte.
*Significant at 10 percent; **significant at 5 percent; ***significant at 1 percent

25
 plans

Monitoring
4. action Planning
Appetite-Tolerance

3. Risk Assessment

Total
2. Risk identification

6. Communication and
0. Internal environment

5. Implemention of action
1. Objective Setting and Risk
1. Efficiency of operations

2. Reliability of Financial
reporting

O_score
3. Compliance with the law
OBJECTIVES (O)

4. Safeguarding of assets

1. Board of Directors

2. Audit Committee

26
3. Internal Control Supervisor

4.Internal Auditor

A_score

Research P.145.
ACTORS (A)

5. Senior Management (CEO, CFO, Controller, etc.)

Controller, etc.)

6. Risk Committee – Risk Manager

1. Audit Committee’s Working

Mechanisms

2. Internal Control Guidelines and

Procedures
Appendix 1. Internal control system disclosure framework

3. Accountability definition
(M)

M-score
4. Ethical Codes – Codes of Conduct

Inspired by Michelon, Bozzolan and Beretta article (2014) Source: Journal of Applied Accounting
5. Planning and budgerting
IMPLEMENTION MECHANISMS

6. Risk Reporting

TICSD