Essays on minority protection and dividend policy

This thesis studies minority protection and dividend policy. The minority shareholder problem contains that both the controlling shareholders and managers have the power to extract private benefits at the costs of minority shareholders. However, legal regimes, if such exist, may give minority shareholders enough power to extract cash dividends. Corporate scandals in USA and Europe have served to underline the need to develop formal principles for corporate governance. This study aims to fill this gap by presenting results whether legal based minority protection affects corporate cash dividends and information content of dividends. The purpose of the first article is to describe the discussion on dividends and dividend theories. This article shows that there are a number of theories of dividend behaviour, and empirical studies provide little evidence for one over the other. This article also shows that latest discussion on dividends is turned to legal regimes and controlling shareholders. The following two papers explore the role of minority protection in Finnish traded corporations. In the second article, I explore whether legal based minority protection affects corporate cash dividends. I focus on (1) whether minority protection affects managerial control and controlling shareholders similarly and (2) as minority protection depends on sign of the earnings, are controlling shareholder(s) able to change their strategy for expropriation of outside shareholders. I find, that minority protection is a better influence over managerial control than controlling shareholders having absolute voting power. When there is no controlling shareholder and coalition costs are lowest, minority protection in Finland is better than minority protection in mandatory dividend countries. Combining strong shareholder rights (as in the USA) and minority dividend (as in Finland) could decrease agency costs both vertically and horizontally. In the third paper, I analyze whether legal based minority protection affects on information content of dividends in Finland. According to the basic hypothesis of information content of dividends managers use changes in cash dividends to convey information about future earnings changes (e.g. Miller and Modigliani, 1961). The paper focuses on the relation between dividend changes and future earning changes. It is not very clear in the finance literature why some firms use dividends to signal whilst some do not. On the other hand minority protection differs across countries and especially in Europe. The goal of regulation is to attain efficient markets so as to improve the allocation in the economy and at the same time, give minority shareholders certain powers to protect their investments. Regulators need to balance between (1) how to assure efficient information content of dividends and, at the same time (2) give minority shareholders powers against expropriation by insiders. Differences in legal regimes concerning minority protection could explain conflicting results concerning empirical dividend-earnings tests