Dividend Payouts: Majority Control and Rent Extraction

In Eurasia, Turkey has a “crony” capitalist system with majority control and business groups (BGs) in the hands of a few families. These business groups are often organised around a holding company. Turkey has adapted French civil law which offers a good setting to understand the dividend policies of majority controlled companies dealing with the principal-principal conflict in a weak investor protection setting. We analyse the dividend payouts of family controlled Borsa Istanbul companies, which are affiliated to holding and non-holding BGs. We use a panel data random-effects Tobit estimation methodology for a period of eight years (2010- 2017). We investigate and quantify the effects of several control-enhancing mechanisms (CEMs) on dividend payouts. We use precise quantitative proxies for CEMs to measure the divergence between control and ownership rights. Supporting the rent extraction hypothesis, holding business group companies have lower dividend payouts as the divergence between control and ownership rights widens and the pyramid wedge increases. However, controlling foreign-family coalitions in holding business group companies curb the rent extraction problem by having a positive effect on the dividend payouts. Overall, for family controlled holding BG companies, the effects of company-specific financial control variables on dividend payouts are stronger than the effects of CEMs. For family controlled non-holding BG companies, there is no empirical support for either the rent extraction or the reputation building hypotheses. The company-specific financial control variables are the main determinants of dividend payouts for family controlled non-holding BG companies. The empirical findings of this study have implications such as higher expropriation risk for minority shareholders, portfolio managers and investors of family controlled holding BG companies in a low investor protection setting. The results show that there is a need for further policy actions to strengthen the rights of minority shareholders to limit rent extraction by the controlling families.