Corporate governance impact on dividend

policy of NIFTY-500 indexed Indian

pharmaceutical companies (2014–2019)
Geetanjali Pinto and Shailesh Rastogi

Abstract Geetanjali Pinto is based at

Purpose – This study aims to evaluate the influence of corporate governance index (CGI), ownership the Department of Finance,
concentration (OC) and other features on the dividends of listed Indian pharmaceutical companies. The Institute for Technology and
other features included are leverage, excess return over cost of equity and stock-market return. This Management, Navi
study thus helps to provide more insights on the dividend distribution issues for a shareholder in the Mumbai, India. Shailesh
challenging and demanding pharma industry, especially when stakes are high.
Rastogi is based at the
Design/methodology/approach – The data for all 26 pharmaceutical companies which form part of the Symbiosis Institute of
NSE NIFTY-500 index for six years (2014–2019) is procured using Centre for Monitoring Indian
Business Management,
Economy’s (CMIEs) Prowess database. An eight-pointer scale (unweighted scale) is used to develop the
Symbiosis International
CGI. For OC, this paper considers the proportion of promoters’ shareholding, domestic institutional
investors’ shareholding and foreign owners’ shareholding. Both static and dynamic panel data models University, Pune, India.
are used to evaluate the effect of CGI and OC on dividends.
Findings – The panel data analysis depicts that CGI significantly positively influences the dividends of
pharmaceutical companies in India. Thus, the authors find support for La Porta et al.’s outcome agency
model. The results also reveal that only promoters’ holdings are significantly inversely related to
dividends out of the three OC variables used for this study. This discussion implies that family-run
pharmaceutical companies in India tend to retain profits instead of distributing dividends.
Research limitations/implications – This study provides two direct insights for policymakers and
stakeholders. First, because this study shows that CGI significantly positively influences dividends,
corporate governance (CG) is an essential factor for determining dividends. Second, because the results
also reveal that OC in the hands of promoters hurts dividends, it implies that the higher the promoter
holding, lesser is the dividend distributed by the company. Both these results can be used as a
quantitative tool by investors to assess Indian pharmaceutical companies better. However, a similar
study could be directed to assess the impact of CGI and OC on dividends of other industries. Moreover,
additional variables of CG and OC can also be evaluated in further detail. There is also a need to
empirically validate the impact of CG and OC on a company’s performance.
Originality/value – The results are robust and reveal that variation in CGI does impact dividend policy.
This aids in confirming that CG is a crucial aspect influencing dividends. The findings also add to the
increasing studies across the globe evaluating the influence of CG and OC on dividends.
Keywords Corporate governance, Ownership concentration, Dividends, Panel data model
Paper type Research paper

1. Introduction
As per OECD Publication (2001), corporate governance (CG) represents the nature of the
association between the company’s board, its shareholders and other stakeholders. This
discussion implies that CG is a mechanism of allocating rights and responsibilities amongst Received 24 August 2021
the stakeholders of a company. According to a much narrower view suggested by La Porta Revised 17 December 2021
3 March 2022
et al. (2000b), CG refers to “how suppliers of finance to the corporation assure themselves 12 March 2022
return on their investment.” A dividend is a form of return on investment to the suppliers of Accepted 9 May 2022

DOI 10.1108/CG-08-2021-0309 VOL. 22 NO. 7 2022, pp. 1547-1566, © Emerald Publishing Limited, ISSN 1472-0701 j CORPORATE GOVERNANCE j PAGE 1547
 finance (shareholders of the company). Payment of dividends to shareholders ensures that
managers do not misuse the company’s funds and thus helps decrease agency costs
(Easterbrook, 1984; Jensen, 1986; Myers, 2000; Rozeff, 1982). Thus, dividend acts as a CG
device to address the agency cost issue amongst management and shareholders because
of varied views on the optimum apportionment of the company’s resources.
La Porta et al. (2000a) have evaluated two models of agency problems on dividend policy
across the globe: “the outcome agency model” and “the substitute agency model.” “The
outcome agency model” envisages that good CG (through a robust shareholder protection
system) positively impacts dividends. This theory is confirmed by Bae et al. (2012), La Porta
et al. (2000a), Mitton (2004) and Sawicki (2009) for cross country; Yarram (2015) and
Yarram and Dollery (2015) for Australia; Garay and Gonza lez (2008) for Venezuela; Baker
et al. (2020) for Sri Lanka; and Rajput and Jhunjhunwala (2019) for India, whereas “the
substitute agency model” envisages the reverse of the “outcome agency model” and
argues that companies with weak CG mechanisms will distribute higher dividends. This
theory is confirmed by Jiraporn and Ning (2006) for the USA, Hamdouni (2015) for Saudi
Arabia and Renneboog and Szilagyi (2008) for The Netherlands. The discussion above
reveals a variation in the impact of CG on dividend policy across various countries. Also,
many studies have focused on a cross-country examination of CG mechanism on dividend
policy or for a specific country. Further, because of competitive reasons, the level of CG
disclosure is more likely to differ across industries (Mohd Ghazali, 2007). Hence, this paper
evaluates the impact of CG, specifically in the context of pharmaceutical companies in
India. The pharma sector is more pertinent than any other sector owing to the prevailing
COVID-19 pandemic across the globe. Also, Pinto and Rastogi (2019) report a need to
examine the effect of additional company-specific features, such as CG and shareholder
demographics, on dividends for pharma sector companies in India.
Further, as Bueno et al. (2018) indicated, a company’s CG mechanism blends its numerous
internal and external systems. The internal systems include the board and ownership
structure, while the external systems comprise the market and legal system (Denis and
McConnell, 2003). Also, Pant and Pattanayak (2010), studying the collective impact of
product market competition and CG variables on a company’s performance in the Indian
context, have construed CG as an amalgam of a company’s ownership concentration and
capital structure. Additionally, La Porta et al. (1998, 2000b) have found that except for the
USA and the UK, promoter/family-run companies are a prevalent form of ownership
structure across the globe. Even in India, family-run companies (FRCs) have a prominent
existence. According to the Credit Suisse Research Institute (CSRI), globally, India ranks
third regarding the number of FRCs. Despite the prominent role that FRCs have in the Indian
economy, very few studies have evaluated the effect of ownership concentration on
dividends in India.
Also, the literature review conducted herein depicts those past studies evaluating the
impact of ownership structure (in terms of promoter holding, state ownership, institutional
holding and foreign holding) on dividends are inconsistent. Also, as seen from Section 2,
very few papers have evaluated the effect of CG (through both internal and external
systems) on dividends. Hence, this paper evaluates the effect of CG, OC and other features
on dividends for all pharma sector companies included in NIFTY-500 from 2014 to 2019.
The included features are:
䊏 corporate governance index (CGI);
䊏 ownership concentration (OC);
䊏 leverage (DR) used to measure long-term solvency;
䊏 excess return (ER) used to measure value to the shareholder; and
䊏 stock-market return (MR) used to determine market value.

PAGE 1548 j CORPORATE GOVERNANCE j VOL. 22 NO. 7 2022

This study thus contributes to the existing work by providing further understanding for an
investor on the dividend distribution issues for an emerging market, specifically in the
challenging and demanding pharma industry. This result can help investors in portfolio
selection (current and future) while exercising their voting rights for the proper selection of
the board of a company.
The remaining article is organized in the following manner: Section 2 evaluates the existing
studies based on the hypotheses developed. Section 3 describes the data variables used
and explains the empirical model, research methods and procedures used for data
analysis. Section 4 describes the results obtained on data analysis supported by discussion
under Section 5. The article ends with concluding remarks in Section 6.

2. Literature review and formulation of hypotheses

First, the literature review lays the institutional background of CG in the Indian context. After
that, it evaluates the influence of CG, OC and other dividend policy determinants across the
developed and emerging economies of the world.

2.1 Institutional background

According to Nerantzidis (2016), for constructing an index, it is necessary to examine the
country’s legal framework, which for CGI would be the country’s CG mechanism. The form
of CG in India is significantly distinct from that in advanced economies. Moreover, the
concept of CG has undergone significant alternations since the establishment of the “New
Act” (The Companies Act, 2013) and an amendment to Clause 49 of the Securities
Exchange Board of India (SEBI)’s Listing agreement.
The “New Act” provides more significant emphasis on CG by enhancing disclosures,
reporting and transparency through various compliance provisions. These include mandate
on board of directors’ composition, selection of independent and women directors on the
board, code on remuneration, duties of directors and mandatory constitution of board
committees. The significant changes brought in by the “New Act” can be divided into six
significant parameters: financial reporting framework, higher auditor accountability, merger
and acquisitions, increased emphasis on investor protection, corporate social responsibility
and higher responsibility on directors and management.
Further, clause 49 entails that listed companies must include separate sections in their
annual report on CG compliances, submission of the quarterly compliance report and
disclosure of non-mandatory requirement compliances. Hence, this clause is also
contemplated to act as a bold step for improving CG norms and safeguarding the interest
of shareholders amongst listed companies in India. Accordingly, the period post-2014 is
considered to evaluate the impact of implementation of The Companies Act, 2013 and
revised Clause 49 of SEBI’s Listing Agreement on CG practices. Accordingly, all the factors
mentioned above have been considered to develop the CGI for this study.

2.2 Corporate governance and dividends

La Porta et al. (2000a) primarily support the “outcome agency model” and report that good
CG (through a robust shareholder protection system) positively impacts dividends. Further,
they also report that countries with superior legal systems distribute lesser dividends with
better investment opportunities.
Likewise, Bae et al. (2012), Mitton (2004) and Sawicki (2009) also support the “outcome
agency model” and reveal that countries with better CG ratings tend to distribute more
dividends. Furthermore, Mitton (2004) reports that profitability has a positive impact and
investment prospects have a negative impact on dividends. It uses the CG ratings
established by Credit Lyonnais Securities Asia, CLSA (2001). CLSA experts have evaluated

VOL. 22 NO. 7 2022 j CORPORATE GOVERNANCE j PAGE 1549

 the developing economy companies on 57 aspects in seven parts of CG. Few other studies
also used these CG ratings (Chen et al., 2003; Durnev and Kim, 2005; Friedman et al.,
2003; Khanna et al., 2006; Klapper and Love, 2004).
Garay and Gonza lez (2008) have reported that an improvement in CGI results in a rise in
dividend payout ratio (DPR) for Venezuelan companies. They have formulated the CGI
based on 17 questions out of the 24 questions (Da Silva and Leal, 2005). These 17
questions are clustered into four groups: disclosure, board of directors’ structure and
performance, moral beliefs and conflict of interest and shareholders’ rights.
Yarram (2015) finds that CG rating significantly positively impacts dividend decisions and
the level of mean DPR for Australian companies. Further, out of the three CG factors
considered by Yarram and Dollery (2015), the total number of the board of directors, the
total number of independent directors on the board and CEO dualism, they report that the
total number of independent directors on the board significantly positively impacts DPR for
Australian companies. As compared to several nations, Australian companies are inclined
towards greater investor security rights, and hence the results of Yarram and Dollery (2015)
exist along the lines of La Porta et al. (2000a)’s “outcome agency model.”
Roy (2015) has found that apart from liquidity and growth opportunities, the CG variables,
including total number of the board of directors, the total number of independent directors
on the board and the total number of non-executive directors’ board composition,
significantly influence the dividend policy for listed Indian companies.
On the basis of aforementioned points, we develop the ensuing hypothesis:
H1. There is a positive association between CGI and dividend policy.

2.3 Ownership concentration and dividends

A sole proprietary concern is owned, managed and controlled by the same
individual. However, ownership, management and control are split in the company’s
case, creating agency conflict. Jensen and Meckling (1976), in their seminal article,
have found that insider ownership and the firm’s value are significantly positively
related.
Cho (1998) shows that ownership structure influences investment, consequently influencing
corporate value. The simultaneous regression outcome of the study confirms that investment
influences corporate value, which consequently influences ownership structure. This
discussion suggests that corporate value affects ownership structure; however, the same is
not true vice versa. The outcomes of the study thus lead to a dilemma whether the ownership
structure can be established exogenously?
Shleifer and Vishny (1997) have conducted a survey focusing on the significance of
investor protection and ownership concentration in CG systems across the globe.
They find that legitimate investor protection and a specific structure of ownership
concentration are critical components of an effective CG mechanism. Moreover, they
find that effective CG systems of the USA, Germany and Japan depend on a blend of
both the components mentioned above. However, they also report that investor
protection is substantially lower in the remaining parts of the globe. Consequently,
companies tend to continue as family-controlled, finding it hard to raise funds
externally and thus majorly dependent on internal financing of their investments
(Mayer, 1990).
Further, a study conducted by Khanna and Palepu (1996) reveals that larger firms in India
are generally FRCs and mainly depend upon internal funding unless they receive
government funding. A company is considered an FRC if the promoters hold more than
25% of its shareholding (Bhattacharyya, 2009). La Porta et al. (2000a) have similarly

PAGE 1550 j CORPORATE GOVERNANCE j VOL. 22 NO. 7 2022

reported that OC almost exists as a rule in all countries across the globe. Moreover, all the
26 pharmaceutical companies selected for this study are found to be FRCs.
Large shareholders help monitor the performance of a company (Shleifer and Vishny,
1986). Roy (2015) has pointed out that this monitoring role is especially significant for
an emerging market country such as India, which has many FRCs. Again, in the Indian
context, it has been emphasized that foreign institutional investors (FIIs) play a crucial
part in monitoring a company’s performance (Majumdar and Chhibber, 1999). Further,
Khanna and Palepu (2000) report that FIIs are better than domestic institutional
investors (DIIs) in this monitoring process.
Further, it is found that East Asian companies having OC tend to pay lesser dividends
than similar west European companies (Faccio et al., 2001). Hence, they report that OC
and dividends are negatively related. Similar results are also reported for FRCs across
the globe: [De Cesari, 2012 (in Italy); Gugler, 2003 (in Austria); Gugler and Yurtoglu,
2003 (in Germany); Harada and Nguyen, 2011 (in Japan); Manos et al., 2012 (in India);
Maury and Pajuste, 2002 (in Finland); and Wei et al., 2011 (in China)].
Setiawan et al. (2016) have evaluated the impact of OC on dividends for Indonesia. They
have categorized firm ownership into family-owned, government-owned and foreign-owned.
They find that government-owned and foreign-owned companies are positively related to
dividends, whereas family-owned companies are negatively related. However, it is found
that all ownership features (family shareholding, foreign shareholding, DII and state
shareholding) have a significant inverse impact on DPR and dividend yield for Turkish
companies (Al-Najjar and Kilincarslan, 2016).
Manos (2003) has considered a cross section of Indian private sector companies and reported
that government shareholding, insider shareholding, risk, debt ratio and investment opportunities
are negatively related to DPR. In addition, institutional shareholding, foreign shareholding and
dispersed shareholding are positively associated with DPR, whereas, for a set of Indian
manufacturing companies, it is reported that promoter shareholding does not significantly
influence DPR (Narasimhan and Vijayalakshmi, 2002). In line with this finding, Roy (2015) also
reports that all OC features used in their paper: promoter shareholding, family control, DII and FII
have no significant impact on dividends.
However, again in the Indian context, it is found that earnings, past investment prospects,
corporate ownership and managerial (director) ownership have a positive association with
dividends (Kumar, 2006). However, they additionally report that debt–equity ratio, corporate
ownership and institutional shareholding are negatively related to dividends. However, the
study finds no significant impact of foreign ownership on dividends.
Accordingly, for this study, the OC is divided into:
䊏 percentage of promoters’ shareholding (promo) (Balasubramanian et al., 2010; Boys,
2009; Da Silva and Leal, 2005; Kumar, 2006; Rajput and Jhunjhunwala, 2019; Roy,
2015; Setiawan et al., 2016; Thi et al., 2019);
䊏 percentage of domestic institutional investors’ shareholding (DII) (Balasubramanian
et al., 2010; Jacob and PJ, 2018; Kumar, 2006; Roy, 2015; Thi et al., 2019); and
䊏 the proportion of foreign ownership (FII) (Balasubramanian et al., 2010; Jacob and PJ,
2018; Kumar, 2006; Roy, 2015; Thi et al., 2019).
On the basis of aforementioned points, we develop the ensuing hypotheses:
H2. There is a negative association between OC (promo) and dividend policy.
H3. There is a positive association between OC (DII) and dividend policy.
H4. There is a positive association between OC (FII) and dividend policy.

VOL. 22 NO. 7 2022 j CORPORATE GOVERNANCE j PAGE 1551

 2.4 Other features influencing dividends
Pant and Pattanayak (2010) have explained the significant effects of a company’s capital
structure on its CG mechanism. They state that the neo-capital structure model claims that
capital structure plays a substantial part in the management’s incentive system. An
alteration in the capital structure alters the organization’s incentive mechanism, resulting in
a change in returns. Second, the signaling approach claims that if the company and its
management are well notified regarding returns, then the capital structure can also serve as
a signaling device and thus help in altering market views about potential returns.
Nevertheless, leverage or the determination of optimal debt and equity ratio is primarily
considered a company’s financial decision, thus forming part of its internal governance
system. The debt ratio is thus used as a tool to measure the long-term solvency of a
company.
Further, it is reported that retained earnings are positively associated with after-tax profits,
amount of investment avenues, debt cost and percentage of growth and are inversely
associated with debt levels, tax rate and cost of equity (COE) for Indian companies (Bhole and
Mahakud, 2005). This discussion is in line with Auerbach (1982) and Bhole (2000). Aivazian
et al. (2003, 2006), Al-Najjar (2009), Al-Najjar and Kilincarslan (2017), Jensen et al. (1992),
Kumar and Sujit (2018), Kumar (2006), Li and Lie (2006) and Yusof and Ismail (2016) also
report an inverse relation amongst debt ratio and dividends.
This discussion leads to the following hypothesis:
H5. Leverage (DR) and dividends are inversely associated.
Walter (1963) contends that dividends influence the firm’’s value. He evaluated the
association between the internal rate of return (r) and the cost of capital (k). Walter’s model
considers three scenarios: growth firms (r > k), normal firms (r = k) and declining firms (r <
k). Walter’s model suggests that the optimal payout policy should be 0% for growth firms.
Gordon’s model contends that dividends are likely to increase when profits are plowed
back into the business (Gordon, 1962, 1963).
Many studies have also found that larger companies (size) having higher profitability and
lower growth prospects distribute higher dividends (Al-Najjar, 2009; Benito and Young,
2003; Easterbrook, 1984; von Eije and Megginson, 2008; Fama and French, 1999, 2001;
Ferris et al., 2006; Kumar and Sujit, 2018; Renneboog and Trojanowski, 2007; Yusof and
Ismail, 2016). Thus, for this study, we consider profitability [measured using return on equity
(ROE) less COE], referred to as an ER, to influence dividends positively. ROE is considered
as net income divided by total equity (Pinto and Rastogi, 2019; Rositha et al., 2019; Santos
et al., 2019; Ahsan et al., 2020; Khalil and Ben Slimene, 2021; Khalil and Taktak, 2020; and
Rashid, 2020). ER is thus used as a tool to measure shareholder value.
This discussion enables us to postulate that:
H6. Excess return (ER) and dividends are related positively.
Miller and Modigliani (MM) contend on the irrelevance of dividends because they argue that
it does not influence firm value. MM argues that the firms’ value is established exclusively
because of the earning capacity of the company’s assets or because of the company’s
investment decision and not because of the approach through which the company’s profits
are divided between retained earnings and dividends (Miller and Modigliani, 1961). MM
model recognized the settings when dividends influence firm value. It occurs merely after
violation of the underlying assumptions and not because dividends are believed to be
better in comparison to capital appreciation, as envisaged conventionally.
Black and Scholes’ (1974) outcomes are consistent with the irrelevance theory. They report
that the level of dividends does not affect stock prices. Bierman (2008) also finds support
for the Black and Scholes model and concludes that a firm’s profitability influences its stock

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price but has no impact on dividends. However, Chou et al. (2009) have not found any
significant impact of extraordinary or special cash dividends on stock returns.
Feldstein and Green (1983) explain how firms maximize their share value by distributing
higher dividends. Benartzi et al. (1997) have similarly found that dividend increase leads to
a moderately significant positive ER in the next three years. Also, the results of various
studies such as Boehme and Sorescu (2002) and Byun and Rozeff (2003) study on stock-
splits; and Liu et al. (2008) study on dividend reductions and omissions – all do not provide
a strong signal of over- or under-reaction of stock market return to this varied dividend
news.
Klapper and Love (2004) concluded that good CG significantly influences the company’s
operating profits and market value. Gottesman and Jacoby (2006) have reported that a
company’s DPR significantly impacts the association amongst returns and spread. Further,
Bolbol and Omran (2005) have evaluated the stock market returns influence on investments.
Maitah et al. (2014) evaluated the association between economic value-added, stock price
and dividends. Liu and Chi (2014) have reported that dividend declaration positively
influences the market price of the company’s shares. Choi et al. (2014) also report that
stock prices react positively towards differentiated dividends when total dividends paid are
enhanced. Khan et al. (2011) find that dividend yield, profits, ROE and profit after tax
positively influence the company’s market price.
Accordingly, the results of investors’ reactions to all types of dividend news are unsettled.
Hence, it can be stated that stock market return can be used either way to distribute
dividends or in the decision of not distributing dividends. Thus, the stock market return has
been used to determine the company’s market value. Accordingly, it is postulated that:
H7. Stock-market return (MR) and dividends have a positive association.
Despite the substantial literature evaluating the impact of CG, OC and other factors on
dividends, some missing links still exist. Moreover, not much research has been done to
evaluate the CG and OC impact on dividend policy for emerging market economies,
particularly India. Besides, the impact of CG issues and OC on dividends for different
industries has hardly been studied. Because of the prevailing COVID-19 pandemic across
the globe, we evaluate the influence of CG, OC and other features on the dividends of listed
Indian pharmaceutical companies.

3. Research design
3.1 Data
The data is procured from CMIE’s Prowess database, a widely available database of Indian
companies. The financial statements contained in this database are standardized and do
not suffer from any deliberate survivorship bias. Our final sample is selected based on the
following criteria. First, we consider all the pharmaceutical companies that form part of the
NSE NIFTY-500 index [1] for six years (2014–2019). This initial sample consists of 28
pharma companies. Second, we exclude only two pharma companies with missing data for
some relevant CG variables included in the study. Hence, the final sample comprising 26
pharma companies shortlisted by market capitalization is considered for six years
(2014–2019) [2].

3.2 Description of variables

The dependent variable, dividends, is measured as total equity dividend divided by total
assets (Div/TA). The dependent and explanatory variables are defined in Table 1. The CG
ratings for the sample studied were not directly available for all companies. Hence, this
study uses variables used previously by researchers as indicators of good CG.

VOL. 22 NO. 7 2022 j CORPORATE GOVERNANCE j PAGE 1553

 Table 1 List of variables
Name of the variable Symbol Definition

Dividends (dependent variable) Div/TA Dividends is defined as total equity dividend

divided by total assets
CG Index lcgi Corporate Governance Index is estimated
using unweighted scale of eight points and
have 2014 as base year and 100 is the base
year value
OC: Promoters prom Percentage of the promoters group
shareholding
OC: Domestic institutional investors’ shareholding dii Percentage of domestic institutional investors
shareholding
OC: Foreign investors’ shareholding fii Percentage of foreign ownership
Debt ratio dr Debt ratio is defined as proportion of debt in
the total capital structure
Excess return er Excess return is defined excess return of ROE
(return on equity) over COE (cost of equity)
Market return mr Annual return on stocks is defined as market
return

Hamdouni (2015) used eight criteria to construct the CGI, out of which one criterion pertains
to Shariah law compliance, and the remaining criteria evaluate the company’s CG structure,
rules and procedures. Additionally, the value of CG can be appraised based on tenets of
disclosure and transparency, the association among shareholders and stakeholders, board
of directors’ attributes, compliance procedures combined with ownership and control
structure (Shahwan, 2015). Further, the board of directors are appointed by the shareholders
and hence form an integral part of the internal structure associated with the proper direction
and management of an organization (Abdeljawad et al., 2020; Jimenez et al., 2020; Rashid
et al., 2020; Rehman and Hashim, 2020). Also, there is no standard concerning the number
of variables used to construct the CGI. The number of variables used ranges from 8
(Hamdouni, 2015; Mohamad Ariff et al., 2007) to 300 (Bauwhede and Willekens, 2008).
Accordingly, to develop the CGI, this paper considers the following eight variables:

1. the total number of board of directors (Balasubramanian et al., 2010; Boys, 2009; Khalil
and Ben Slimene, 2021; Oswald and Young, 2008; Rajput and Jhunjhunwala, 2019;
Roy, 2015; Da Silva and Leal, 2005; Yarram and Dollery, 2015);

2. independent board directors on board (Balasubramanian et al., 2010; Boys, 2009;

Farinha, 2003; Hu and Kumar, 2004; Khalil and Ben Slimene, 2021; Nerantzidis and
Tsamis, 2017; Rajput and Jhunjhunwala, 2019; Roy, 2015; Yarram and Dollery, 2015);

3. non-executive board directors (Balasubramanian et al., 2010; Khalil and Ben Slimene,
2021; Roy, 2015);
4. the total number of board committees (Balasubramanian et al., 2010; Boys, 2009; Roy, 2015);

5. the total number of audit committee meetings (Balasubramanian et al., 2010; Roy,
2015);

6. attendance of independent directors in the company’s annual general meeting (Roy,

2015);
7. related party expenditure as a percentage of the total expense (Baker et al., 2020;
Balasubramanian et al., 2010; Su et al., 2014); and
8. related party income as a percentage of total income (Baker et al., 2020;
Balasubramanian et al., 2010; Su et al., 2014).

PAGE 1554 j CORPORATE GOVERNANCE j VOL. 22 NO. 7 2022

The data for all CGI features are obtained from the company’s annual report publicly
available on their website. For developing the CGI, an eight-pointer scale (unweighted
scale) is used to assess the index (Anginer et al., 2018; Balasubramanian et al., 2010). 2014
is considered the base year, and 100 is the base year value of the CGI. For normalization of
data, we use the log of CGI (lcgi) in our panel data model.

3.3 Model specifications

The research uses panel data models to explore the impact of CGI, OC and other factors on
dividends. Hsiao (2003) has emphasized the benefits of using the panel data technique
rather than the common time-series or cross-sectional data (Hsiao, 1985, 1995; Hsiao and
Sun, 2000). The following empirical models are estimated to test the hypothesis:

Div =TA ¼ f ðdr; er; mr; lCGI; promo; dii; fii Þ (1)

Div =TAit ¼ a þ b 1 drit þ b 2 erit þ b 3 mrit þ b 4 lcgiit þ b 5 promoit þ b 6 diiit þ b 7 fiiit þ uit
(2)

where Div/TA = dividend divided by total assets, dependent variable; dr = debt ratio; er =
excess return; mr = market return; lcgi = natural log of the CGI; promo = proportion of
promoters’ stake; dii = domestic institutional investor stake; fii = foreign ownership in the
company; and uit= m iþvit m i is the random error component of the individual effect; and y it is
the regular error term.

Div =TAit ¼ a þ b 1 Div =TAit1 þ b 2 drit þ b 3 erit þ b 4 mrit þ b 5 lcgiit þ b 6 promoit þ b 7 diiit
þ b 8 fiiit þ uit
(3)

where uit= m iþvit m i is the random error component of the individual effect, and y it is the
regular error term. Here the only new term over equation (2) is the lagged value of the
dependent variable.
Static [equation (2)] and dynamic [equation (3)] panel data methods are used to estimate
equation (1). Del-Rı́o et al. (2019) and Lee et al. (2012) have justified using both methods in
the same paper. It ensures the robustness of the results and covers all other possibilities of
an association between the endogenous and exogenous variables. Because the N/T ratio is
large enough (N is 26 and T is 6), stationarity is assumed in the panel dataset (Baltagi,
2008). This paper uses Arellano and Bond’s (1991) proposed method for panel data model
estimation. This method is justified because of the short panel and limitation of instruments
in the other possible methods to estimate dynamic panel data (Anderson and Hsiao, 1981;
Nickell, 1981).

4. Data analysis and results

4.1 Descriptive and correlation statistics
Table 2 depicts the descriptive statistics of all variables. The mean values of all the
variables are as expected. CGI average, minimum and maximum values are 140.82, 12.77
and 342.92, respectively; it can be an area of concern and considered low (Table 2 reports
a natural log of CGI values). The mean proportion of promoters’ holdings is found to be
56.61%. This discussion shows that most Indian pharmaceutical companies are highly
promoter-driven. The average proportion of domestic and foreign investors is almost the
same and tilted more towards foreign investors’ ownership. On average, the debt ratio is
7.84%, which is also considered low. Multicollinearity in the data is not an issue as the

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 Table 2 Descriptive statistics
Descriptive and correlation matrix
dr er mr lcgi promo dii Fii Mean SD

dr 1.00 07.84 13.51

er 0.17 (0.03) 1.00 10.76 16.99
mr 0.06 (0.42) 0.19 (0.02) 1.00 11.93 48.38
lcgi 0.16 (0.04) 0.08 (0.32) 0.06 (0.49) 1.00 04.78 0.6464
promo 0.19 (0.02) 0.21 (0.01) 0.03 (0.75) 0.20 (0.01) 1.00 56.61 12.32
dii 0.05 (0.56) 0.14 (0.07) 0.11 (0.19) 0.06 (0.49) 0.09 (0.26) 1.00 10.62 7.21
fii 0.06 (0.47) 0.09 (0.25) 0.03 (0.73) 0.46 (0.00 0.43 (0.00) 0.09 (0.28) 1.00 15.69 16.75

NoteS: Values are correlation coefficients. Significant at 5%. dr, er, sr, lcgi, promo, dii and fii are in percentages. CGI is measured on
the base value of 100 in the base year of 2014, containing eight parameters using unweighted method. For analysis, natural log
transformation for CGI is used to ensure consistency of the data

correlation coefficient between none of the two exogenous variables is 0.80 or more
significant (Wooldridge, 2006).

4.2 Panel data regression results

The static panel data results of equation (1) are reported in Table 3. Homoscedasticity
assumption is violated (Wald test of heteroscedasticity is significant; Table 3); therefore,
results are reported using robust estimates of standard errors. Autocorrelation of time
individual effect is not significant. Out of all seven exogenous variables, the debt ratio is
significant at the 5% level, and excess-return and market-return are significant at the 10%
level. All the other four exogenous variables are insignificant.
In the dynamic panel data analysis, lagged terms of the dependent variable (Div/TA), CGI,
ER and market return are significant at the 5% level. The proportion of promoters’
shareholding is significant at the 10% level. The other three variables, including debt ratio
(significant in the static model), are not found to be significant (Table 4).

Table 3 Static model for dividend policy

Div/TA is the dependent variable (robust estimates)
Coefficient Standard error p-value

CG Index (lcgi) 0.0986 0.0797 0.2190

Promoters (promo) 0.0763 0.1242 0.5400
Domestic inst. investors (dii) 0.1570 0.1110 0.2640
Foreign inst. investors (fii) 0.1414 0.2005 0.4870
Debt ratio (dr) 0.0784 0.0303 0.0110
Excess return (er) 0.1229 0.0736 0.0970
Market return (mr) 0.0233 0.0132 0.0790
F-test (model) 1.91 (0.0066)
R-square 32.37%
SSE 0.084 2
DF 123
F-test fixed effect 3.07 (0.0000)
Breusch–Pagan (B-P) test 0.54 (0.2307)
Hausman testa 42.90  (0.0000)
Note: No. of observations 156
Wooldridge autocorrelation testb 1.5490 (0.2249)
Wald test for heteroscedasticityc 12816.62 (0.000)
Notes: aNull hypothesis for Hausman test is that the individual effect is not correlated with repressors; bWooldridge test of autocorrelation
in panel has the null of no autocorrelation (with 1 lag); cWald test of heteroscedasticity has the null of no heteroscedasticity. Values in
parenthesis ( ) are p-values for the test conducted.  p < 0.05,  p < 0.10

PAGE 1556 j CORPORATE GOVERNANCE j VOL. 22 NO. 7 2022

 Table 4 Dynamic model for dividend policy
Div/TA is the dependent variable
Coefficient Standard error p-value

Div/TA (1) 0.0235 0.0112 0.0350

CG Index (lcgi) 0.1236 0.0291 0.0000
OC promoters (promo) 0.1268 0.0742 0.0870
OC domestic inst. investors (dii) 0.0997 0.0956 0.2970
OC foreign inst. investors (fii) 0.0943 0.1039 0.3640
Debt ratio (dr) 0.0664 0.0684 0.3320
Excess return (er) 0.3170 0.0675 0.0000
Market return (mr) 0.0359 0.0073 0.0000
Sargan test 2.1202 (0.3464)
Arellano–Bond AR (1) 0.1122 (0.9106)
Arellano–Bond AR (2) 0.9845 (0.3249)
Notes: promo is for promoters holding; dii is for domestic institutional investors holdings; fii is for foreign institutional investors holding.
Sargan test is the test of over-identification issues under GMM framework. The null hypothesis of Sargan test is that there is no over-
identification problem in dynamic panel data model. Arellano–Bond test used in the analysis is for serial autocorrelation in the first
differenced error terms of the order 1. Values in parenthesis ( ) are p-values for the tests conducted;  p < 0.05,  p < 0.10

4.3 Endogeneity and robustness

Endogeneity of the explanatory variable is a problem in regression analysis, including in the
panel data regression. Endogeneity is caused mainly because of omitted variable bias;
measurement error; and reverse causality. One of the main repercussions of the
endogeneity is biasedness in the estimate. This discussion means that if endogeneity is
present in the model, the coefficient may not be BLUE (Wooldridge, 2006). It is believed that
CG Index (lcgi) can be endogenous to the dependent variable of Div/TA and create
biasness issues with the projected coefficient of the explanatory variable. Therefore,
endogeneity is tested for CGI with Div/TA. The Wu–Hausman test is conducted (Janot et al.,
2016) to examine the null hypothesis of exogeneity of CGI for Div/TA. The test statistics
value is insignificant as F(1,147) = 0.7501 (0.3877), where p-value is 0.3877. Hence, it is
evident that the model does not have the problem of endogeneity because of CGI.
Moreover, results are also tested for robustness. The estimates of both the static and
dynamic panel data models (Tables 3 and 4) present almost the same significant
coefficients, and both the models report broadly similar results. Further, we used a
robustness check like Barslund et al. (2007). We conducted a series of probit regressions to
test the estimated coefficients’ sensitivity to the omission of variables. We found that all the
independent variables were robust and not sensitive (no sign change) to any omitted
variables. Therefore, it is appropriate to state that the panel data outputs are consistent, and
the results are robust (Tables 5 and 6).

5. Discussion
As expected, the static panel data results reveal that the debt ratio (used to measure long-
term solvency) has a negative impact on dividends. This conclusion is consistent with
earlier research done by Aivazian et al. (2003, 2006), Al-Najjar (2009), Al-Najjar and
Kilincarslan (2017), Kumar and Sujit (2018), De Cesari (2012), Farinha (2003), Jensen et al.
(1992), Kumar (2006), Li and Lie (2006), Setiawan et al. (2016), Su et al. (2014) and Yusof
and Ismail (2016).
Profitability (either measured using ROE or return on assets) has been found to be positively
associated with dividends (Abor and Bokpin, 2010; Aivazian et al., 2003; Al-Najjar and
Kilincarslan, 2017; Amidu and Abor, 2006; Baker et al., 2007; Baker et al., 2013; Benito and
Young, 2003; Bhat and Pandey, 1994; Bhattacharya, 1979; Goergen et al., 2005; DeAngelo et al.,
2004; Denis and Osobov, 2008; Easterbrook, 1984; Fama and French, 2001; Ferris et al., 2006;

VOL. 22 NO. 7 2022 j CORPORATE GOVERNANCE j PAGE 1557

 Table 5 Robustness check – static
Core Percentage
var Max Min Mean AvgSTD significant Percþ Perc AvgT Obs

lcgi 0.102823 0.102823 0.102823 0.114346 0 1 0 0.899235 1

promo 0.033005 0.033005 0.033005 0.125097 0 1 0 0.263837 1
dii 0.22491 0.22491 0.22491 0.233723 0 0 1 0.962304 1
fii 0.14138 0.14138 0.14138 0.219989 0 0 1 0.642674 1
dr 0.08993 0.08993 0.08993 0.042753 1 0 1 2.103454 1
er 0.121045 0.121045 0.121045 0.099532 1@ 1 0 1.21614 1
mr 0.02399 0.02399 0.02399 0.015325 1@ 0 1 1.565204 1
Notes: Cor var presents the core variables. Max, Min and mean are representatives of maximum, minimum and mean values of the
coefficient over all regression; AvgSTD is average standard deviation; the percentage of regressions where the coefficient is significant
is called PerSigni; Percþ and Perc denote the proportion of regressions with positive and negative coefficients, respectively; the
average T-value is AvgT; the number of times a variable is used in the regression is represented by Obs; @ at 10% level of significance

Table 6 Robustness check – dynamic

Core Percentage
var Max Min Mean AvgSTD significant Percþ Perc AvgT Obs

Ldivta 0.09423 0.09423 0.09423 0.053617 1@ 0 1 1.757421 1

lcgi 0.495127 0.495127 0.495127 0.27214 1@ 1 0 1.819386 1
promo 0.19294 0.19294 0.19294 0.160586 0 0 1 1.201447 1
dii 0.70138 0.70138 0.70138 0.469404 0 0 1 1.494196 1
fii 0.40699 0.40699 0.40699 0.440279 0 0 1 0.924394 1
dr 0.227168 0.227168 0.227168 0.258914 0 1 0 0.877385 1
er 0.100801 0.100801 0.100801 0.104972 0 1 0 0.960269 1
mr 0.06012 0.06012 0.06012 0.03363 1@ 0 1 1.787538 1
Notes: Cor var presents the core variables. Max, Min and mean are representatives of maximum, minimum and mean values of the
coefficient over all regression; AvgSTD is average standard deviation; the percentage of regressions where the coefficient is significant
is called PerSigni; Percþ and Perc denote the proportion of regressions with positive and negative coefficients, respectively; the
average T-value is AvgT; the number of times a variable is used in the regression is represented by Obs; @ at 10% level of significance

Ho, 2003; Jensen et al., 1992; Li and Lie, 2006; Mahapatra and Sahu, 1993; Mishra and
Narender, 1996; Mitton, 2004; Mohamed et al., 2012; Reddy and Rath, 2005; Renneboog and
Trojanowski, 2007; Subhash Kamat and Kamat, 2013; von Eije and Megginson, 2008; Yarram,
2015; Yusof and Ismail, 2016). The findings for both the static and dynamic panel data models
show that profitability (ROE) less the COE, referred to as ER (used to measure shareholder
value), is positively associated with dividends. This discussion implies that if the company’s
earnings are more than its COE, they tend to distribute higher dividends. It is possible
because these top pharmaceutical companies (based on high market capitalization) certainly
have capital market accessibility. This reduces their need to rely on retained earnings,
enabling higher dividends distribution (Al-Najjar and Kilincarslan, 2017; Mohamed et al., 2012;
Pinto and Rastogi, 2019).
Further, we find no support for Miller and Modigliani (1961) irrelevance theory and Black
and Scholes (1974) model because the static and dynamic panel data models show that
market return (MR) is significantly associated with dividends. This discussion implies that the
dividends are significantly related to stock market return (used to measure market value).
However, we report an inverse relation instead of a positive relation as found in previous studies
by Benartzi et al. (1997), Feldstein and Green (1983), Khan et al. (2011) and Liu and Chi (2014).
We also find support for Lintner (1956) model because our dynamic panel data model
results demonstrate that dividend distributed by the company in the previous year
significantly influences the current year’s dividends. Similar results were also reported by

PAGE 1558 j CORPORATE GOVERNANCE j VOL. 22 NO. 7 2022

Al-Ajmi (2010), Dewasiri et al. (2019), Hutagalung et al. (2013), Lestari (2018), Pandey and
Bhat (2007) and Yusof and Ismail (2016).
The dynamic panel data model results further depict that CGI is significantly positively
associated with dividends. It supports La Porta et al.’s (2000a) outcome agency model, and
consequently, we report that good CG positively influences dividends of pharmaceutical
companies in India. This is corresponding to Bae et al. (2012), Baker et al. (2020), Choi
et al. (2014), Garay and Gonza lez (2008), Mitton (2004), Rajput and Jhunjhunwala (2019),
Sawicki (2009), Yarram (2015) and Yarram and Dollery (2015).
Out of the three OC variables used for this study, the dynamic panel results find that only
promoters holdings are significantly inversely related to dividends. This discussion implies
that because all the top pharmaceutical companies in India are FRCs, it is difficult to raise
funds externally; hence, they tend to retain more for growth and expansion, thereby
reducing dividend payouts. Similar results are also reported for FRCs across the globe:
[Shleifer and Vishny, 1997 (for all countries around the world except the USA, Germany and
Japan); De Cesari, 2012 (in Italy); Gugler, 2003 (in Austria); Gugler and Yurtoglu, 2003 (in
Germany); Harada and Nguyen, 2011 (in Japan); Khanna and Palepu, 1996; Manos, 2003;
and Manos et al., 2012 (in India); Baker et al., 2020 (in Sri Lanka); Maury and Pajuste, 2002
(in Finland); Wei et al., 2011 (in China); Setiawan et al. (2016) (in Indonesia)].

6. Conclusion, limitations and future scope

The existing literature complements the outcomes of our paper. Consistent with prior
literature, for instance, Bae et al. (2012), Baker et al. (2020), La Porta et al. (2000a), Mitton
(2004), Sawicki (2009), Yarram (2015), Yarram and Dollery (2015), Garay and Gonza lez
(2008) and Rajput and Jhunjhunwala (2019), we find that variation in CGI does positively
influence dividends. This aids in confirming that CG is a crucial factor affecting dividends for
pharma companies in India. Moreover, the findings also add to the increasing studies
evaluating company-specific CG parameters to assess the CG impact for companies across
the globe, as deliberated under the literature review conducted in Section 2.
Consistent with past studies such as De Cesari (2012) (in Italy), Gugler (2003) (in Austria),
Gugler and Yurtoglu (2003) (in Germany), Harada and Nguyen (2011) (in Japan), Manos
et al. (2012) (in India), Maury and Pajuste (2002) (in Finland) and Wei et al. (2011) (in
China), our results too show that OC in the hands of promoters hurts dividends. This
discussion implies that the higher the promoter holding, lesser is the dividend distributed by
the company. This discussion shows that family-owned companies tend to retain more
profits and divert the same to their related concerns instead of distributing it to their
shareholders. Among the other features evaluated, lagged dividends, ER and market return
influence dividends significantly. In line with Al-Najjar (2010), we report no significant impact
amongst institutional investors and dividends.
This study provides two direct insights into the context of emerging market economies for
policymakers and stakeholders. First, it confirms that CG is an essential factor influencing
dividends. Thus, pharmaceutical companies in India, which are interested in safeguarding
investors’ rights by increasing CG, tend to distribute higher dividends. Second, because
OC in the hands of promoters is negatively associated with dividends, it implies that the
greater the promoter holding, lesser is the dividend distributed by pharmaceutical
companies in India. Thus, the extent of CG measures and ownership concentration
(especially promoter holding) can be used by investors as a quantitative tool to assess
Indian pharmaceutical companies better. In general, investors must consider the extent of
CG and OC (especially promoters holding) to make a better informed decision before
investing. Also, better access to the company’s information can enable investors in portfolio
selection and appropriately select the board representatives for the firms wherein they have
the right to vote (Bueno et al., 2018).

VOL. 22 NO. 7 2022 j CORPORATE GOVERNANCE j PAGE 1559

 Our study has some limitations too. First, we have concentrated on pharma sector companies
only. Hence, the results of this study may not be the same for other sectors. Comparative
research can also evaluate the CGI and OC influence on dividends for other sectors. Second,
we have considered a few parameters to develop the CGI and evaluate OC. Hence, further
studies using additional CG and ownership concentration parameters can provide further
insights. Further, there is also a need to empirically validate the impact of CG on a company’s
performance (Al Mutairi et al., 2012). It requires attention in future studies.

Notes
1. Most of the Indian stock market trading takes place on the Bombay Stock Exchange (BSE) and the
National Stock Exchange (NSE). NIFTY-500 index represents the top 500 companies listed on NSE
based on full market capitalization.
2. The period post-2014 is considered to evaluate the impact of (i) implementation of The Companies
Act, 2013 and (ii) Amendment to Clause 49 of SEBI’s Listing Agreement. Data is extracted only till
2019 to exclude the impact of COVID-19 if any.

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Corresponding author
Geetanjali Pinto can be contacted at: geetanjali.pinto1977@gmail.com

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