Institutional investment horizon and dividend policy: An empirical study of UK firms
Özet
This paper investigates the effect of the institutional investment horizon on dividend policy.
Using a panel dataset of non-financial UK firms over the period 2000‒2010, we measure institutional investors’ investment horizons by the churn rate of their overall stock positions in a
firm. We find that there is a significantly negative relationship between the churn rate and dividend payments, and this negative relation is robust to the usage of different dividend policy
proxies, substitute methodologies and alternative churn rate measures. Thus, our findings suggest
that institutions with shorter term investment horizons (with higher churn rates) have a negative
impact on dividends, whereas longer term institutional investors (with lower churn rates) have a
positive one. Overall, our evidence is consistent with the notion that long-horizon institutions are
more concerned with monitoring, compared to short-horizon institutions, and prefer higher dividends to increase dividend-induced capital market monitoring in order to lower the agency
costs of managerial discretion. In addition, this positive influence may also reflect the preferences
of tax-neutral long-horizon institutions for dividend income due to their liquidity needs, as well
as the common institutional charter and prudent-man rule restrictions.
