Academic journal article Journal of Economic and Social Development

Impact of Corporate Governance and Firm-Level Control Variables on Dividend Policy of Service Trade Sector of Malaysia

Academic journal article Journal of Economic and Social Development

Impact of Corporate Governance and Firm-Level Control Variables on Dividend Policy of Service Trade Sector of Malaysia

Article excerpt

1.INTRODUCTION

Financial crisis of 1990s proved that the good and efficient corporate governance matters. Then the attention of various agencies operating in Asian countries, including Malaysia, has attracted towards this issue (Mohamad, 2007). This is for the reason that poor standard of corporate governance has been held responsible for leading to the Asian financial crisis took place in 1997 and 1998 (Liew, 2006).

As explained by Broni and Velentzas (2012), corporate governance is actually the process, system, custom, law, and policy that will have an impact on how a corporate or company is regulated and controlled. The principles of Organization of Economic Co-operation and Development (OECD) further explicates that corporate governance involves a number of relationships between the management level of a company along with all of the shareholders, board of directors, and stakeholders as well that have the company's interest. It presents a general rule for deciding the objectives of a firm.

Generally, corporate governance is deemed as the board's governance. Board of directors of a corporation are the vital facet of a corporation's internal governance which is in charge of offering strategic direction (Lefort & Urzua, 2008). Furthermore, another function of board of director is to separate the control and ownership which is in charge of managing the agency problem between management team and disperse shareholders in a firm (Fama & Jensen, 1983). They are actually the control mechanism in support of monitoring the top management's behaviour. It is stated by Corporate Governance Blue Print (2011) that the formation of a corporate culture is the major task of a board. Therefore, the role of a board in governance is crucial. The constituents of corporate governance generally compute as in the size of control board and also board independence.

This article enriches the literature available on the corporate governance factors (i.e. board size, board independence, CEO ownership, CEO duality and CEO tenure) and firm-level control variables (firm size, firm growth and firm profitability) on dividend policy among the service trade sector of Malaysia. Service sector is large and fast growing sector of Malaysia, which contributed 50.4% to the GDP of the country in 2014 (Source: World Bank Online Database; http://data.worldbank.org/indicator/NV.SRV.TETC.ZS). However, there are quite a few studies available which have comprehensively investigated this sector in terms of corporate governance.

2.LITERATURE REVIEW

This section discusses the literature and findings of previous studies between corporate governance, firm variables and dividend policy of Malaysia service sector companies. Some theories have also been proposed here which have assisted us in hypothesis development and empirical investigation.

2.1 Agency Cost Theory

An important theory explained by the literature is agency cost theory, which was developed by Jensen and Meckling (1976). According to this theory, debt should be considered the important factor that creates conflict between managers and equity holders. Jensen and Meckling (1976) argue that the firm provides the probability distribution of cash flows that cannot be separated from its ownership structure, and that is the piece of information which may explain the optimal capital structure.

Furthermore, some theoretical summary on agency cost theory has been provided by Ryen et al. (1997). According to them, firms faced two sets of agency problems; conflict between stockholders and bondholders, and conflict between managers and stockholders. Regarding managers-stockholders conflict, over-expenditures are made by managers or they use less leverage, which do not benefit stockholders. Managers choose less leverage to avoid risk; risk of losing job, wealth and reputation. Many studies have been carried out to investigate the solutions to tackle agency problems between stockholders and managers. …

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