the differences in the payout policy of family firms …

THE DIFFERENCES IN THE PAYOUT POLICY OF FAMILY FIRMS AND NON-

FAMILY FIRMS

MANON FRISSEN

636219

MSc Finance

Supervisor : Prof. Dr. L.D.R. Renneboog

-2017-

THE DIFFERENCES IN THE PAYOUT POLICY OF FAMILY FIRMS AND NON-

FAMILY FIRMS

Master thesis Department Finance

MANON FRISSEN

636219

MSc Finance

Supervisor : Prof. Dr. L.D.R. Renneboog

Second reader: Prof. Dr. P.C. de Goeij

Date of completion: 04-08-2017

- 2017 –

This is the thesis “The differences in the payout policy of family firms and non-family firms”. It

has been written to fulfill the graduation requirements of the MSc Finance program at Tilburg

University. This thesis has been written under supervision of professor Renneboog.

Abstract

This study will investigate whether the payout policy of family firms differ from the payout

policy of non-family firms and if there are differences in the payout policy within family

firms. Two different theories can be used to explain differences in setting the payout policy:

tax clientele theory and agency problem theory. Different tax rates on dividends and capital

gains can lead to different preferences to distribute cash to other shareholders. Agency

problems consist of conflicts of interests between small and large shareholders and

expropriation of minority shareholders which can be different in family firms and non-family

firms. It is found that families, individuals and corporations prefer share repurchases over

dividends because of a higher dividend tax rate compared to the capital gains tax rate while it

is likely that pension funds prefer dividends over share repurchases. Furthermore, family

firms pay less dividends in countries with stronger shareholder protection because the

institutional environment acts as an alternative corporate governance mechanism. Besides, it

is found that family firms paid lower dividends than non-family firms during the 2008

financial crisis.

5

I. INTRODUCTION

A major part of the publicly traded firms in the world are controlled by a family (La Porta et

al. 1999, Claessens et al. 2000, European Corporate Governance Network 2001, Faccio and

Lang 2002). This group of firms consists of family firms in which family members play an

active role in the management of the firm, but also of family firms in which family members

are not part of the management of the firm.

The payout policy of family firms can be affected by two theories. On the one hand, agency

problems can be essential in family firms which cause conflicts of interests between small and

large shareholders (Maury, 2006; Villalonga and Amit, 2006). This problem can be reduced

by paying dividends because it will reduce the free cash flows and force management to enter

the external capital market which leads to external monitoring by the market (Rozeff, 1982;

Easterbrook, 1984; Jensen, 1986). On the other hand, the tax clientele theory can also play a

role in setting the payout policy. While the tax rates on dividends are higher for families and

individuals compared to the tax rates on capital gains, the reverse is often the case for

corporations and pension funds.

This study will investigate whether the payout policy of family firms differs from the payout

policy of non-family firms. It will also be researched if there are differences in the payout

policy within family firms. A distinction will be made between family firms actively managed

by family members and family firms not actively managed by family members. Besides, it

will be established if the institutional environment affects the payout policy of family firms.

This study will focus on listed firms located in the United Kingdom, Germany, and France.

Different tax rates have to be paid on dividends and capital gains. Mostly, the dividend tax

rates for families and individuals are higher than the tax rates on capital gains. Therefore, it is

expected that families and individuals prefer share repurchases over dividends. This

prediction is tested using a regression model based on families and individuals (1.037

observations). A significant negative relationship between the taxation of families and

individuals and their payout ratio is found. This confirmed the prediction that families and

individuals prefer share repurchases over dividends. On the contrary, dividend tax rates for

corporations and pension funds are often lower than the tax rates on capital gains.

Consequently, it is expected that corporations and pension funds prefer dividends over share

repurchases. Both predictions are tested using a regression model and the taxation of

6

corporations is significantly negatively related to their payout ratio while the taxation of

pension funds is insignificantly positively related to their payout ratio.

As already mentioned earlier, there are family firms actively managed by family members and

family firms not actively managed by family members. This can affect the payout policy of

the firm in a different way. In prior research it is found that family control can act as an

alternative corporate governance mechanism since owner families often hold large stakes in

their companies. This will lead to an efficient monitoring mechanism which can reduce the

free cash flow agency problem (Hu, Wang, and Zhang, 2007). Therefore, dividend payments

are less needed to reduce the agency problems within family firms actively managed by

family members and consequently, it is expected that family firms actively managed by

family members pay lower dividends than non-family firms. This prediction is tested by a

regression model based on a sample with all family firms actively managed by family

members and non-family firms (5.069 observations). The results of this regression show an

insignificant relation between the firm type and its dividend payout ratio.

However, in family firms not actively managed by family members agency problems become

an issue. It is possible that firm resources are extracted from the firm due to a lack of good

monitoring (Anderson, Dure and Reeb, 2009). A solution to this problem could be to pay

dividends as this will reduce free cash flows available to invest in poor investments or for

gaining private benefits. Therefore, it is expected that family firms actively managed by

family members pay lower dividends than family firms not actively managed by family

members. This prediction is tested using a regression model based on a sample containing all

family firms (1.037 observations). An insignificant positive relation is found between the

management of family firms and the dividend payout ratio.

It is also expected that family firms not actively managed by family members prefer dividends

over share repurchases as an instrument to distribute cash because dividends are sticky and

are rarely changed by firms (Lintner, 1956). This relation is tested using a regression model

based on a sample containing all family firms (1.037 observations) and tend to be

insignificantly negatively.

Another important governance mechanism is the institutional environment (Xia and Fang,

2005). The organization of corporate rights are regulated by the institutional environment

which also regulates corporate behavior including payout policy. A good institutional

environment can reduce agency problems because this will imply a good monitoring

7

mechanism and also tunneling behavior will be reduced (Wei et al., 2011). Therefore, the

institutional environment will act as an alternative corporate governance mechanism and it is

expected that dividend payments by family firms are lower in countries with strong

shareholder protection. This prediction is tested by conducting a regression based on a sample

with all family firms (1.074 observations). It is found that shareholder protection is

significantly negatively related to the dividend payout ratio. Consequently, it can be

concluded that the dividend payout ratio of family firms is lower in countries with stronger

shareholder protection.

Last, it is researched if the dividend payout differed between family firms and non-family

firms during the 2008 financial crisis. Generally, a controlling family is undiversified and has

invested al its wealth in its own firm. During a crisis it is possible that the firm loses a lot of

money which can be dangerous for the family’s empire. Therefore, in family firms it is more

likely that expropriation of minority shareholders takes place to preserve family’s benefits

(Lins et al., 2013). This will lead to less resources available to pay out as dividends to other

shareholders. Consequently, it is expected that family firms paid lower dividends than non-

family firms during the 2008 financial crisis. This prediction is tested using a regression

model based on a sample containing all observations of the 2008 financial crisis (597

observations). The results of this regression show a significant positive relationship between

the firm type and the dividend payout ratio. This implies that family firms paid lower

dividends than non-family firms during the 2008 financial crisis.

This study contributes to the literature by broaden it with more research based on family

firms. There is relatively little literature for family firms compared to literature about non-

family firms. Also, it should be possible to use the results of this study to improve or change

the corporate governance mechanism of a firm. It could help to reduce agency problems.

This paper proceeds as follows. Section II reviews the relevant literature which leads to the

development of the hypotheses. Section III describes the research method, sample

construction and data collection. Section IV provides the empirical results of the study and the

conclusion can be found in section V.

8

II. LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT

Generally, firms are controlled by their founders, or by the family and heirs of the founder.

Not only a big part of privately held firms is owned by a family, also publicly traded firms are

often controlled by a family. The majority of publicly traded firms in Western Europe, South

and East Asia, Middle East, Latin America, and Africa are controlled by a family (La Porta et

al. 1999, Claessens et al. 2000, European Corporate Governance Network 2001, Faccio and

Lang 2002). But also some of the largest publicly traded firms of the United States and the

U.K, for example Wal-Mart Stores and Ford Motor, are family controlled.

In literature, family firms are defined in several ways. For this research the definition

proposed by Rosenblatt et al. (1985) will be used. They define family firms as “any business

where the majority is controlled by the family, decisions about management are influenced by

the family, and two or more family members are employed and actively participate in the

management of the firm”. There are also family firms in which the family is the owner of the

firm but the family does not hold positions in (top) management (Hu, Wang, and Zhang,

2007). Two different theories will affect the payout policy of the family firm. First, agency

problems can arise which will influence the firm’s payout policy. In family firms conflicts of

interests between small and large shareholders can be an essential agency problem (Maury,

2006; Villalonga and Amit, 2006). To reduce the minority shareholders’ concern of

expropriation of their wealth, owner families can use their payout policy as a governance

mechanism. Second, the tax clientele theory implies different payout policies due to different

tax rates on dividends and capital gains.

Agency problems and payout policy

When researching the relationship between corporate governance and payout policies, mostly

it is focused on two types of agency problems. The first type of agency problems implies that

there is no difference between the interests of management and shareholders. This is also one

of the assumptions made by Miller and Modigliani (1961) in their proposition of dividend

irrelevance. However, because of information asymmetry and the impossibility of complete

contracting inevitably conflicts of interest between shareholders (principal) and management

(the agent) will occur (Jensen and Meckling, 1976). By paying cash dividends, free cash flows

will be reduced and therefore, management has to enter the external capital market which

exposes them to external monitoring by the market. Consequently, cash dividends reduce the

first type of agency problems (Rozeff, 1982; Easterbrook, 1984; Jensen, 1986).

9

The second type of agency problems consists of the expropriation by large shareholders of

minority shareholders (La Porta et al., 1999; Claessens et al., 2000; Faccio and Lang, 2002;

Holderness, 2009). According to Claessens et al. (1999), control of a firm by large

shareholders can lead to expropriation of minority shareholders due to conflicts of interest

between large and minority shareholders. These conflicts of interest can consist of outright

expropriation, which implies that large/controlling shareholders do not pay out dividends, or

they transfer profits to companies they also control to enrich themselves. It can also include

de facto expropriation which means that controlling shareholders strive for nonprofit-

maximizing objectives or taking nonprofit-maximizing projects. When minority shareholders

are protected by strong protection laws, companies will be encouraged to pay cash dividends

to reduce expropriation by large shareholders. By doing this, the interests of the investors will

be protected (La Porta et al., 2000; Faccio et al., 2001; Kalcheva and Lins, 2007; Brockman

and Unlu, 2009).

Tax Clientele Theory and payout policy

According to Miller and Modigliani (1961), a firm’s dividend policy should not matter in a

perfect world. However, due to a difference between tax rates on dividends and tax rates on

capital gains, the dividend policy does matter to investors. On top of that, in some countries

institutions have to pay lower dividend tax rates than individuals (Hu, Wang, and Zhang,

2007). This is due to the fact that dividend payments of institutions and corporations are

dividend tax exempt at different degrees. Consequently, individuals tend to prefer capital

gains over dividends while institutions should prefer dividends over capital gains. The tax

clientele theory is often tested by observing portfolio holdings of investors or their reactions

to a changing dividend policy. It is found that stockholders who have to pay high tax rates

(because they are in higher tax brackets) prefer capital gains over dividends relative to

stockholders who have to pay lower taxes (Elton and Gruber, 1970). Besides, low-income and

older investors prefer dividends over capital gains since they need the money and they are

also in lower tax brackets (Graham and Kumar, 2006).

It is also studied whether important decision makers and prominent large shareholders can

affect payout policy. In general, the personal income taxes of large shareholders can affect the

payout policy. According to Brav et al. (2007), dividend tax rates are taken into account when

setting the payout policy of a firm.

10

Family firms and the payout policy - Taxation

As mentioned earlier, family firms are mainly controlled by a family and there are also family

members who actively participate in the management of the firm. Consequently, the family

members can affect the firm’s payout policy by using their effective control, direct

management and voting power (Hu, Wang, and Zhang, 2007). Therefore, the payout policy is

influenced by the preferences of the founding family.

Over the last decades, the taxation regulation for dividends and share repurchases has changed

substantially. Take for example the UK. Individual investors need to pay income tax on their

dividend income. These dividends are also already taxed at the corporate level as they are part

of the profit. Consequently, this will lead to double taxation (Geiler and Renneboog, 2014).

Therefore, an imputation system was introduced in 1973, which takes into account a so-called

imputation tax credit (Bell and Jenkinson, 2002). This imputation tax credit permits

shareholders to deduct taxes which are already paid at the company level.

Capital gains tax has to be paid on the sale of shares, and applies to both individuals and

corporations. For capital gains, the imputation tax credit is the amount of the distribution

element, which can be calculated by deducting the book value of paid-in capital from the

market value of the repurchases shares. So, the imputation tax system will be used to avoid

double taxation. Geiler and Renneboog (2014) also found that changing tax regulations can

change the choice to pay dividends or repurchase shares and this can be different for different

types of shareholders, such as pension funds or corporations. They concluded that individuals

always preferred share repurchases over dividends, while corporations preferred dividends

over share repurchases. Pension funds changed from a dividend preference to a neutral choice

between dividends and share repurchases.

Mostly, the founder or founder’s descendants are individuals, who are subject to higher

dividend tax rates than large institutional shareholders. Therefore, it is expected that families

and individuals prefer share repurchases over dividends with respect to the tax regulation. The

non-family firms will be split into pension funds and corporations. It is expected that pension

funds and corporations prefer dividends over share repurchases. Consequently, it is expected

that families and individuals prefer share repurchases over dividends and contrarily,

corporations and pension funds prefer dividends over share repurchases.

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H1: Families and individuals prefer share repurchases over dividends, while corporations

and pension funds prefer dividends over share repurchases, because the dividend tax relative

to the capital gains tax is higher for families and individuals than for corporations and

pension funds.

Family firms and the payout policy - Agency problems

According to the literature, when the firm is controlled by a family, agency problems can

occur between the controlling family and minority shareholders under specific circumstances

(Anderson & Reeb, 2003; Mishra, 2011; Villalonga and Amit, 2006, 2010; Wong, Chang and

Chen, 2010). Based on the agency theory, prior research accepts the view that a firm’s

ownership structure can affect companies’ payout policy (Barclay, Holderness, and Sheehan,

2009; Farinha, 2003; Short, Zhang, and Keasey, 2002). One of the agency problems that could

occur is the expropriation of minority investors’ wealth by controlling and powerful

shareholders (Cronqvist and Nilsson, 2003; Shleifer and Vishny, 1997). These conflicts of

interests between small and large shareholders are especially important within family firms

(Maury, 2006; Villalonga and Amit, 2006). To alleviate the anxiety about the expropriation of

other shareholders’ wealth, owner families can use dividends. This implies that family firms

can use their payout policy as a governance mechanism. However, in prior research both

positive as well as negative relationships between family control and dividends are found due

to both potential benefits and costs of family control (Anderson and Reeb, 2003; Miller et al.,

2008).

According to Chen et al. (2010), family ownership can lead to reputation cost concerns of

controlling families, which consequently discourage them from the expropriation of minority

shareholders’ wealth. In this case, family ownership is used as an alternative corporate

governance mechanism to the payout policy. Also, the free cash flow agency problem

(Jensen, 1986) should be lower in family firms and therefore, they do not need to pay out

dividends. This because owner families hold large stakes in their companies, which already

serve as an efficient monitoring mechanism. Consequently, this prevents managers to use

internal funds for unprofitable projects. So, when the founder or founder’s descendants also

actively participate in the firm’s management (holding top positions), there should be no

conflict between the family and top management (Hu, Wang, and Zhang, 2007).

Consequently, it is expected that family firms actively managed by the founding family pay

12

lower dividends than non-family firms because family control is used as an alternative

corporate governance mechanism.

However, there are also family firms in which family members do not actively participate in

the management. In those firms the effective management is transferred to managers who are

not part of the family. When this is the case, controlling agency conflicts become an issue

(Hu, Wang, and Zhang, 2007).

Family control can imply an entrenchment effect (Anderson, Dure and Reeb, 2009). This

entrenchment effect implies that family owners have strong incentives to exploit firm opacity,

which makes it easier for them to extract firm resources at the expense of the minority

shareholders. Also, due to a lack of good monitoring, family shareholders can use the firm’s

resources more easily which increases agency costs. Entrenchment can occur because of

transaction costs in shareholder activism and the corporate control market. Besides, managers

can make manager-specific investments to entrench themselves (Shleifer and Vishny, 1989)

and they can strategically improve their voting rights (Stulz, 1988). In the United States, a

positive relationship between the dividend payout level and factors that increase executive

entrenchment is found (Hu and Kamar, 2004). This because dividends reduce cash flows

available for poor investments or for retrieving private benefits. Consequently, managers will

be forced to enter the external financing market which leads to additional monitoring of the

managers (John and Knyazeva, 2006).

Also, dividends can be used as a reward for minority shareholders and to reduce insider

expropriation (Faccio, Land and Young, 2001; Setia-Atmaja, Tanewski and Skully, 2009). In

addition, a positive relationship between family ownership and dividends based on corporate

governance literature suggests that internal control mechanisms should complement each

other, particularly in less protective institutional environments (Miguel et al., 2005).

Consequently, when there is a lack of strong legal protection, family firms can use dividend

payments to create a reputation for good treatment of minority shareholders (Yoshikawa and

Rasheed, 2009). On top of that, it can be suggested that family CEOs can also improve their

wealth by capital gains. However, then they have to sell their shareholdings which will reduce

their control over the firm. Therefore, family owners prefer dividends over capital gains.

Taken altogether, family members can force management to pay out excess cash as dividends

to minimize agency costs. It is expected that family firms which are not actively managed by

13

family members pay higher dividends than family firms which are actively managed by

family members.

H2: Family firms actively managed by family members pay lower dividends than non-family

firms and family firms not actively managed by family members, because non-family firms use

dividends as an alternative corporate governance mechanism while family control is used as

an alternative corporate governance mechanism within family firms actively managed by

family members.

Firms can use both dividends and share repurchases to distribute cash. When the family firm

is not actively managed by family members, dividends tend to be a better instrument to

distribute cash than share repurchases. This because dividends are sticky and firms seldomly

change dividend payments (Lintner, 1956). This can be explained by the signaling theory of

dividends. Dividends can be signals to the market about a firm’s cash flow prospects for the

future. For example, when the firm increases its dividends they commit themselves to pay

these dividends for a long period. Investors perceive this as a positive signal of the firm’s

capacity to generate large, positive cash flows in the long run since the firm is willing to make

the commitment to pay dividends in the long run. In contrast, dividend cuts are perceived as a

negative signal of the firm’s future cash flows. Therefore, managers do not want to cut

dividends once they are set. In contrast, share repurchases are a one-time event and therefore,

provide managers with more flexibility (Jagannathan, Stephens, and Weisbach, 2000). Thus,

dividends tend to be an instrument which works for a longer period to distribute cash

compared to share repurchases. Therefore, it is expected that family firms which are not

actively managed by family members prefer dividends over share repurchases.

H3: Family firms not actively managed by family members prefer dividends over share

repurchases (contrarily to family firms actively managed by family members), because

dividends are a sticky instrument to distribute cash.

Legal protection and payout policy

According to Xia and Fang (2005), the institutional environment is an important corporate

governance mechanism. The institutional environment regulates the organization of corporate

control rights and therefore, also regulates corporate behavior including payout policy. La

Porta et al. (2000) conclude that cash dividends are higher when the legal protection of

investors is high, since they found that dividend in common law regions are higher than in

14

civil law regions. This is confirmed by Faccio et al. (2001), which found that European

companies pay higher dividends than Asian companies which is caused by the stronger

European investor protection. When there is better legal protection, investors can use legal

rights to obtain dividends in order to reduce agency costs (Bartram et al., 2008).

The institutional environment can reduce both types of agency problems. The first type of

agency problems, between the management and shareholders, will be reduced because a good

institutional environment monitors the management which will encourage them to maximize

the firm value (Wei et al., 2011). The second type of agency problems, the expropriation from

minority shareholders, will be reduced because a good institutional environment will reduce

tunneling behavior. In addition, the entrenchment effect will be reduced due to the prevention

of self-dealing behavior (Shleifer and Vishny, 1997).

Hence, a good institutional environment will reduce agency problems and reduce the

probability of expropriation from minority shareholders. Therefore, it can also be thought that

dividends are less needed as a corporate governance mechanism, since the institutional

environment will work as an alternative corporate governance mechanism. According to Wei

et al. (2011), family firm’s decisions are more affected by the institutional environment than

non-family firm’s decisions. Therefore, it is expected that family firms pay a lower dividend

in countries where minority shareholders are strongly protected.

H4: Family firms pay lower dividends in countries where minority shareholders are more

strongly protected because the institutional environment will act as an alternative corporate

governance mechanism.

Family firm’s payout policy during the 2008 financial crisis

It also have been studied whether unexpected liquidity shocks, such as the 2008 financial

crisis, affects a firm’s payout policy. A liquidity shock can imply a shortage of liquidity.

According to Lins et al. (2013), being a family-controlled firm can both be beneficial and

costly during a liquidity shock. On the one hand, family-controlled firms could be able to

have more access of finance via firms it controls, which could add value when there is

liquidity scarcity. On the other hand, the crisis can also affect the family’s private benefits of

control. In general, the controlling family of the firm is likely to be undiversified with all of

its wealth invested in their firm. Consequently, a liquidity shock can be dangerous for the

family’s empire and therefore, family-controlled firms tend to take more survival-oriented

15

actions to preserve the family’s benefits of control at the expense of outside shareholders,

relative to non-family firms controlled by more diversified shareholders. This will lead to

expropriation from minority shareholders’ wealth by using the firm’s resources for private

benefits. Therefore, less resources will be available to distribute as dividends to other

shareholders.

In addition, the family-controlled firm’s equity financing costs increased during the 1997

Asian crisis which supports the view that agency costs are higher during a financial crisis

(Boubakri et al., 2010). This can be due to the entrenchment effect, which implies that a

firm’s resources are extracted from the firm at the expense of minority shareholders. During a

financial crisis, investors may think that the likelihood of entrenchment of controlling families

is higher and therefore, they require a higher equity premium from family firms which results

in higher equity costs. Besides, it is found that the value of poorly governed Asian firms

decreased during the 1997 Asian crisis (Bae et al., 2012). Lastly, Mitton (2002) argues that

corporate governance may be especially important during periods of economic distress. Taken

all these arguments together, it is expected that family firms paid lower dividends during the

2008 crisis because there is more expropriation of minority shareholders by large shareholders

within family firms during a financial crisis.

H5: Family firms paid lower dividends than non-family firms during the 2008 financial crisis

because there is more expropriation of minority shareholders by large shareholders within

family firms during a financial crisis.

III. RESEARCH METHOD

Regression analysis

To test the hypotheses, several regression analyses will be used. A list with the definitions of

all variables used in the regression models can be found in Table A1.

Tax effect

To determine the impact of the tax regulation on the preference of dividends or share

repurchases, the relationship between the payout ratio and the taxation on dividends relative

to capital gains for family firms, pension funds, and corporations will be tested. To test the

16

determinants of the variation in the payout ratio as predicted in Hypothesis 1, the following

regression is specified:

𝑃𝑎𝑦𝑜𝑢𝑡 𝑟𝑎𝑡𝑖𝑜 = 𝛼 + 𝛽1𝑇𝐴𝑋𝐴𝑇𝐼𝑂𝑁𝐹𝑖𝑟𝑚𝑡𝑦𝑝𝑒 + 𝛽2𝑀𝐵𝑅 + 𝛽3𝐹𝐼𝑅𝑀𝑆𝐼𝑍𝐸 + 𝛽4𝐹𝐼𝑅𝑀𝐴𝐺𝐸

+ 𝛽5𝑅𝑂𝐴 + 𝛽6𝐶𝐴𝑆𝐻 + 𝛽7𝑆𝐴𝐿𝐸𝑆𝐺𝑅𝑂𝑊𝑇𝐻 + 𝛽8𝑁𝑂𝑁𝑂𝑃 + 𝜀 (1)

The payout ratio will be used as the dependent variable. The same approach as the study of

Hu, Wang, and Zhang (2007) will be followed. The payout ratio will be calculated by

dividing the dividend payments by the sum of dividends and share repurchases. This variable

can take values between zero and one. Firms which only pay dividends have a value of one,

and firms that only do share repurchases have a value of zero. The higher the value, the more

dividends are paid relative to the amount of share repurchases. TAXATIONFirmtype stand for

the taxation on dividends relative to capital gains whereby Firmtype can be replaced by

families and individuals, corporations and pension funds.

According to Poterba (2004), the dividend tax preference ratio can be calculated by using the

following formula:

𝜃𝑡 = (1 − 𝜏𝑑𝑖𝑣,𝑡)/(1 − 𝜏𝑐𝑔,𝑡)

where τdiv,t denotes the tax rate on dividends at time t and τcg,t denotes the tax rate on capital

gains at time t.

The first control variable is the market-to-book ratio (MBR), which will be used as a proxy

variable for investment opportunities. FIRMSIZE, which is calculated by the log of total

sales, will be used to control for the effects of firm size. Thirdly, FIRMAGE is the age of the

firms, which will be controlled for because the age of a firm might affect its propensity to pay

dividends. For example, older firms may pay higher dividend due to less growth

opportunities. Fourth, Return on Assets (ROA) will be calculated by dividing net income by

total assets, to control for profitability. Fifth, CASH will be included and measured by cash

plus cash equivalents scaled by total assets (Stephens and Weisbach (1998), Dittmar (2000),

Moser (2007), and Skinner (2008)). Sixth, SALESGROWTH will be included to control for

investment opportunities. Lastly, the percentage of non-operating income of the total earnings

(NONOP) will be added. According to Jagannathan, Stephens and Weisbach (2000), the non-

17

operating income is an essential element for share repurchases. The error term will include

industry-fixed effects and year-fixed effects to exclude variations in the payout due to the

industry and the year the firm is operating in.

Predicted direction of the beta coefficients

First, β1 with Firmtype families and individuals is expected to be negative, since it is expected

that families and individuals pay lower dividends relative to share repurchases due to higher

dividend taxes. Secondly, β1 with Firmtype corporations and pension funds are expected to be

positive because corporations and pension funds tend to prefer dividends over share

repurchases. Third, firms with high (low) MBRs will pay low (high) dividends. Grullon and

Michaely (2002) argues that firms with high MBR do repurchase shares but do not pay

dividends. Therefore, β2 is expected to be negative. Fourth, according to Jagannathan et al.

(2000), larger firms prefer dividends over share repurchases and therefore, β3 is expected to be

positive. Fifth, it is expected that older firms have less growth opportunities and therefore,

older firms are expected to pay higher dividends (Yoshikawa and Rasheed, 2009). Also, in

prior research it is found that firms that repurchase shares are younger than dividend paying

firms (Grullon and Michaely, 2002). Therefore, β4 is predicted to be positive. Sixth, firms

with a higher ROA are more profitable and therefore, these firms are more likely to pay

dividends. Thus, β5 is also expected to be positive. Seventh, β6 is expected to be positive

because higher cash holdings lead to more internal resources to distribute to shareholders.

Eighth, firms with more investment opportunities pay less dividends (Jacob and Jacob, 2013)

and therefore, β7 is expected to be negative. Last, β8 is expected to be negative since a higher

non-operating income increases the probability to repurchase shares (Jagannathan et al.,

2000).

Family firms actively managed by family members versus non-family firms and family

firms not actively managed by family members

For hypothesis 2, the relationship between family firms actively managed by family members

on the one side and the non-family firms and family firms not actively managed by family

members on the other side and their dividend payout will be tested using the following

specifications:

𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑎𝑦𝑜𝑢𝑡 𝑟𝑎𝑡𝑖𝑜

= 𝛼 + 𝛽1𝐴𝐶𝑇𝐼𝑉𝐸𝐹𝐴𝑀𝐼𝐿𝑌𝐹𝐼𝑅𝑀 + 𝛽2𝑀𝐵𝑅 + 𝛽3𝐹𝐼𝑅𝑀𝑆𝐼𝑍𝐸 + 𝛽4𝐹𝐼𝑅𝑀𝐴𝐺𝐸

+ 𝛽5𝑅𝑂𝐴 + 𝛽6𝐶𝐴𝑆𝐻 + 𝛽7𝑆𝐴𝐿𝐸𝑆𝐺𝑅𝑂𝑊𝑇𝐻 + 𝛽8𝑁𝑂𝑁𝑂𝑃 + 𝜀 (2𝑎)

18


= 𝛼 + 𝛽1𝑀𝐴𝑁𝐴𝐺𝐸𝑀𝐸𝑁𝑇 + 𝛽2𝑀𝐵𝑅 + 𝛽3𝐹𝐼𝑅𝑀𝑆𝐼𝑍𝐸 + 𝛽4𝐹𝐼𝑅𝑀𝐴𝐺𝐸

+ 𝛽5𝑅𝑂𝐴 + 𝛽6𝐶𝐴𝑆𝐻 + 𝛽7𝑆𝐴𝐿𝐸𝑆𝐺𝑅𝑂𝑊𝑇𝐻 + 𝛽8𝑁𝑂𝑁𝑂𝑃 + 𝜀 (2𝑏)

The dividend payout ratio will be used as the dependent variable. This ratio will be calculated

by dividing the total dividend payments by net income. This ratio is the most frequently used

measure of dividend payouts (La Porta et al., 2000). In equation 2a ACTIVEFAMILYFIRM

will be used to distinguish between family firms actively managed by family members and

non-family firms. This dummy variable will be 1 for family firms actively managed by family

members and 0 for non-family firms. In equation 2b MANAGEMENT will be included to

differentiate between family firms actively managed by family members (1) and family firms

not actively managed by family members (0). The error term will include industry-fixed

effects, year-fixed effects, and country-fixed effect to exclude effects on the dividend payout

according to the industry, year, and country the firm is operating in.

Predicted direction of the beta coefficients

Firstly, the relationship between ACTIVEFAMILYFIRM and dividend payout is expected to

be negative, since it is expected that family firms actively managed by family members pay

lower dividends than non-family firms. Therefore, β1 in equation 2a is expected to be

negative. Secondly, β1 in equation 2b is expected to be negative because it is expected that

family firms not actively managed by family members pay higher dividends than family firms

actively managed by family members. Thirdly, β2 is expected to be negative because firms

with high (low) MBRs will pay low (high) dividends. This is due to the large cash

requirements when the firm has many investment opportunities. Consequently, investment

opportunities negatively affect dividend payout (Chay and Suh, 2009). Fourth, large firms are

more likely to payout dividends (Redding, 1997). Therefore, β3 is predicted to be positive.

Fifth, it is expected that older firms have less growth opportunities and therefore, older firms

are expected to pay higher dividends (Yoshikawa and Rasheed, 2009). Consequently, β4 is

expected to be positive. Sixth, β5 is expected to be positive since firms with a higher ROA are

more likely to pay dividends. Seventh, firms with higher cash holdings are more likely to pay

dividends and therefore, β6 is expected to be positive. Eighth, β7 is expected to be negative as

firms with more investment opportunities will pay less dividends. Last, β8 is expected to be

negative since firms with high non-operating income have a higher probability of

repurchasing shares and therefore, less resources are available to distribute as dividends.

19

Dividends versus share repurchases

To test the determinants of the variation in the payout ratio as predicted in Hypothesis 3, the

following regression is specified and will be tested on family firms only:

𝑃𝑎𝑦𝑜𝑢𝑡 𝑟𝑎𝑡𝑖𝑜 = 𝛼 + 𝛽1𝑀𝐴𝑁𝐴𝐺𝐸𝑀𝐸𝑁𝑇 + 𝛽2𝑀𝐵𝑅 + 𝛽3𝐹𝐼𝑅𝑀𝑆𝐼𝑍𝐸 + 𝛽4𝐹𝐼𝑅𝑀𝐴𝐺𝐸

+ 𝛽5𝑅𝑂𝐴 + 𝛽6𝐶𝐴𝑆𝐻 + 𝛽7𝑆𝐴𝐿𝐸𝑆𝐺𝑅𝑂𝑊𝑇𝐻 + 𝛽8𝑁𝑂𝑁𝑂𝑃 + 𝜀 (3)

To determine the effect of active management of family firms on their choice between

dividends and share repurchases, the payout ratio will be used as dependent variable. The

higher the value, the more dividends are paid relative to the amount of share repurchases. The

error term will include industry-fixed effects, year-fixed effects and country-fixed effects to

exclude effects on the dividend payout according to the industry, year, and country the firm is

operating in.

Since it is expected that family firms not actively managed by family members pay more

dividends than they do share repurchases than family firms actively managed by family

members (Hu, Wang, and Zhang, 2007), β1 is expected to be negative.

Shareholder protection

To test the determinants of the variation in the dividend payout ratio as predicted in

Hypothesis 4, the following regression is specified:


= 𝛼 + 𝛽1𝑆𝐻𝐴𝑅𝐸𝐻𝑂𝐿𝐷𝐸𝑅𝑃𝑅𝑂𝑇𝐸𝐶𝑇𝐼𝑂𝑁 + 𝛽2𝑀𝐵𝑅 + 𝛽3𝐹𝐼𝑅𝑀𝑆𝐼𝑍𝐸

+ 𝛽4𝐹𝐼𝑅𝑀𝐴𝐺𝐸 + 𝛽5𝑅𝑂𝐴 + 𝛽6𝐶𝐴𝑆𝐻 + 𝛽7𝑆𝐴𝐿𝐸𝑆𝐺𝑅𝑂𝑊𝑇𝐻 + 𝛽8𝑁𝑂𝑁𝑂𝑃

+ 𝜀 (4)

For this regression, a subsample will be used which contains family firms only. The variable

SHAREHOLDERPROTECTION will measure the strength of minority investor protection in

different countries. An index will be used which can contain values between zero and ten. A

higher value for this index indicates stronger minority investor protection. The composition

and methodology used to construct this index are presented in Table A2 in the Appendix. This

will be a dummy variable which is 1 for strong minority investor protection (index > sample

mean) and 0 otherwise. It is expected that stronger shareholder protection implies lower

20

dividends and therefore, β1 is expected to be negative. The error term will include industry-

fixed effects and year-fixed effects to exclude effects on the dividend payout according to the

industry and year the firm is operating in.

Family firms versus non-family firms during the 2008 financial crisis

To test the determinants of the variation in the dividend payout ratio as predicted in

Hypothesis 5, the following regression is specified and will be tested on the observations of

the 2008 financial crisis:


= 𝛼 + 𝛽1𝐹𝐴𝑀𝐼𝐿𝑌𝐹𝐼𝑅𝑀 + 𝛽4𝑀𝐵𝑅 + 𝛽5𝐹𝐼𝑅𝑀𝑆𝐼𝑍𝐸 + 𝛽6𝐹𝐼𝑅𝑀𝐴𝐺𝐸

+ 𝛽7𝑅𝑂𝐴 + 𝛽8𝐶𝐴𝑆𝐻 + 𝛽9𝑆𝐴𝐿𝐸𝑆𝐺𝑅𝑂𝑊𝑇𝐻 + 𝛽10𝑁𝑂𝑁𝑂𝑃

+ 𝜀 (5)

The variable FAMILYFIRM will be included to differentiate between family firms and non-

family firms. This dummy variable will be 1 for family firms and 0 otherwise. The error term

will include industry-fixed effects and country-fixed effect to exclude variations in the

dividend payout due to the industry and country the firm is operating in.

β1 is expected to be negative since it is expected that the dividend payout ratio of family firms

during the 2008 financial crisis is lower than the payout ratio of non-family firms during the

2008 financial crisis.

Sample construction and data collection to test Hypotheses 1, 2, 3 and 5

This research will compare the dividend payout and share repurchases of family firms with

the dividend payout and share repurchases of non-family firms. The focus will be on listed

firms located in the United Kingdom, Germany and France. Financial firms will be excluded

from the sample because government regulations affect their dividend policies (La Porta et al.,

2000). The Amadeus Database will be used to retrieve all non-financial family and non-

family firms located in the United Kingdom, Germany and France. The sample will contain

firm-specific yearly observations from 2008 to 2015.

When retrieving all listed family firms and non-family firms located in the United Kingdom,

Germany and France, firms of which no data is available about their dividend payout are

excluded from the sample. Consequently, a sample of 1.138 firms with 8 years of firm-

21

specific observations is retrieved from the Amadeus Database. Observations for which data

for the variables MANAGEMENT, MBR, FIRMSIZE, FIRMAGE, ROA, CASH,

SALESGROWTH, and NONOP is not available will be deleted from the sample. Eventually,

the final sample contains 5.672 observations. The sample selection procedure for testing

Hypothesis 1,2,3 and 5 is presented in Table 1.

Information about the tax rates on dividends and capital gains in the United Kingdom,

Germany and France will be retrieved from the World Wide Corporate Tax Guides of EY. A

distinction will be made of dividends paid to individuals, corporations and pension funds. All

tax rates and relative tax burdens per country and per year can be found in Table A3-9 in the

Appendix.

Table 1 Final sample for testing Hypothesis 1,2,3, and 5

Observations

Starting sample 1.138*8 = 9.104

(-) Unavailable data to compute

MANAGEMENT, MBR, FIRMZISE,

FIRMAGE, ROA, CASH,

SALESGROWTH, and NONOP

3.432

Total sample 5.672

Sample construction and data collection to test Hypotheses 4

To measure the impact of shareholder protection on the dividend payout of family firms, a

subsample, which will contain family firms only, will be retrieved from the total sample. The

sample consists of 176 family firms with 8 years of firm-specific observations for the

different variables used in the model. Observations for which data for the variables MBR,

FIRMSIZE, FIRMAGE, ROA, CASH, SALESGROWTH, and NONOP is not available will

be deleted from the sample. Consequently, the final sample contains 1.074 observations. The

sample selection procedure for testing Hypothesis 4 is presented in Table 2.

To measure shareholder protection, the minority investor protection index from Doing

Business from the World Bank will be used. The composition of this index can be found in

Table A2 in the Appendix. The composition of the minority investor protection index of the

22

United Kingdom, Germany and France for the years 2008 to 2015 can be found in Table A10-

12 in the Appendix.

Table 2 Final sample for testing Hypothesis 4

Observations

Starting sample 176*8 = 1.408

(-) Unavailable data to compute MBR,

FIRMSIZE, FIRMAGE, ROA, CASH,

SALESGROWTH, and NONOP

334

Total sample 1.074

IV. RESULTS

Descriptive statistics

The descriptive statistics to test Hypothesis 1,2,3, and 5 are presented in Table 3. A mean of

0.5434 for the payout ratio implies that on average the firms in the sample pay more dividends

than they repurchase shares. The average dividend payout ratio is 0.4063. The mean for the

taxation of family firms (0.8232) is in line with the prediction that dividend tax rates relative

to capital gains tax rates are higher. Comparably, the means for the taxations of corporations

and pension funds (1.1888, 1.2803) implies that their dividend tax rates relative to capital

gains tax rates are lower. 18% of the sample consists of family firms and 42% of those family

firms are actively managed by family members.

23

Table 3 Descriptive statistics to test Hypothesis 1,2,3, and 5

This table provides basic descriptive statistics including the minimum, maximum, mean,

median and standard deviation for the sample firms in the United Kingdom, Germany, and

France from 2008 up to and including 2015.

To test Hypothesis 4, a subsample with only the family firms will be used. The descriptive

statistics can be found in Table 4. The average dividend payout ratio of family firms is

0.3467. The sample consists of 32.03% of family firms located in countries with strong

shareholder protection.

Table 4 Descriptive statistics to test Hypothesis 4

This table provides basic descriptive statistics including the minimum, maximum, mean,

median and standard deviation for the family firms in the United Kingdom, Germany, and

France from 2008 up to and including 2015.

N Minimum Median Maximum Mean Std.

Deviation

Dividend payout ratio 1074 -0.2941 0.2811 1.3244 0.3467 0.3716

SHAREHOLDERPROTECTION 1074 0 0 1 0.3203 0.4668

MBR 1074 0.3434 1.2163 47.2481 1.8758 2.3659

FIRMSIZE 1074 1.7067 6.2477 13.0110 6.3712 1.8837

FIRMAGE 1074 1 45 145 57.09 40.640

ROA 1074 -4.0983 3.9565 15.1750 4.4981 4.5165

CASH 1074 0.0002 0.1176 0.7450 0.1429 0.1095

SALESGROWTH 1074 -0.2143 0.0133 18.3231 0.0741 0.6861

NONOP 1074 -0.3443 0.0060 24.0157 0.1901 1.2039

N Minimum Median Maximum Mean Std.

Deviation

Payout ratio 5672 0 1 1 0.5434 0.4898

Dividend payout ratio 5672 -0.4366 0.3396 1.6145 0.4063 0.4592

TAXATIONFamilies,Individuals 1037 0.7708 0.8065 1.0357 0.8231 0.0581

TAXATIONCorporations 4505 0.9666 1.2658 1.4286 1.1895 0.1832

TAXATIONPensionfunds 129 1.0175 1.3158 1.4286 1.2783 0.1341

FAMILYFIRM 5672 0 0 1 0.18 0.387

ACTIVEFAMILYFIRM 5069 0 0 1 0.09 0.2801

MANAGEMENT 1037 0 0 1 0.42 0.494

MBR 5672 0.4062 1.4596 111.3329 2.3080 3.9405

FIRMSIZE 5672 0 6.4109 13.0110 6.6496 2.2201

FIRMAGE 5672 1 33 145 50.66 42.015

ROA 5672 -6.3798 4.4095 16.0521 4.8076 5.3429

CASH 5672 0 0.0928 0.9007 0.1290 0.1207

SALESGROWTH 5672 -0.2480 0.0165 81.4916 0.0666 1.1534

NONOP 5672 -0.3188 0.0037 126.6078 0.2171 2.3932

24

Correlations

The correlation matrix to test Hypothesis 1,2,3, and 5 is provided in Table 5. The relative tax

burden of families and individuals is significantly negatively related to the payout ratio. This

is in line with the prediction that families and individuals prefer share repurchases over

dividends. However, the relationship between the relative tax burden of corporations and

pension funds and the payout ratio is also negative which is the reverse of the prediction.

Also, the negative relation between MANAGEMENT and the payout ratio implies that family

firms actively managed by family members pay less dividends than family firm not actively

managed by family members. Besides, MBR, FIRMSIZE, and NONOP are significantly

negatively related to the payout ratio while FIRMAGE is significantly positively related to the

payout ratio. FAMILYFIRM is significantly negatively related to the dividend payout ratio

which could imply that family firms pay lower dividends than non-family firms. Besides,

ACTIVEFAMILYFIRM is negatively related to the dividend payout but this relationship is

not significant. The relationship between MANAGEMENT and the dividend payout ratio is

positive but not significant. This could imply that family firms actively managed by family

members pay lower dividends than family firms not actively managed by family members.

The correlations of the variables to test Hypothesis 4 are presented in Table 6.

SHAREHOLDERPROTECTION is insignificantly positively related to the dividend payout

ratio which is contrarily to the prediction that family firms located in countries with stronger

shareholder protection pay lower dividends.

25

Table 5 Correlation matrix to test Hypothesis 1,2,3, and 5

This table provides the correlations between the variables used in the regression models to test Hypothesis 1, 2, 3, and 5. First, the correlation matrix for the

regression models with the payout ratio as dependent variable is shown. Second, the correlation matrix for the regression models with the dividend payout

ratio as dependent variable is shown.

Payout ratio as dependent variable

Payout

ratio

FAMILY

FIRM

MANAG-

EMENT

MBR FIRM

SIZE

FIRM

AGE

ROA CASH SALE

S

GRO

WTH

NON

OP

Payout ratio 1

TAXATIONFamilies,Individuals -0.081**

TAXATIONCorporations -0.240**

TAXATIONPensionfunds -0.172

FAMILYFIRM 0.215**

1

MANAGEMENT -0.020 - 1

MBR -0.032*

-0.053**

-0.059

1

FIRMSIZE -0.095**

-0.045**

-0.301**

0.040**

1

FIRMAGE 0.121**

0.074**

-0.180**

-0.063**

0.258**

1

ROA 0.010 -0.020 -0.183**

0.267**

-0.097**

-0.070**

1

CASH 0.075**

0.058**

-0.088**

0.081**

-0.280**

-0.188**

0.254**

1

SALESGROWTH -0.007 0.003 0.039 0.002 -0.004 -0.027*

0.015

-0.002 1

NONOP -0.020*

-0.005 -0.001 -0.019 0.07 0.026 -0.067**

-0.020 0.006 1

Dividend payout ratio as dependent variable

Dividen

d payout

ratio

FAMILY

FIRM

ACTIVE

FAMILY

FIRM

MANAG-

EMENT

MBR FIRM

SIZE

FIRM

AGE

ROA CASH SALES

GROW

TH

NON

OP

Dividend payout ratio 1

FAMILYFIRM -0.040**

1

ACTIVEFAMILYFIRM -0.017 - 1

MANAGEMENT 0.036 - - 1

MBR 0.072**

-0.053**

-0.048**

-0.059

1

FIRMSIZE 0.048**

-0.045**

-0.116**

-0.301**

0.040**

1

FIRMAGE -0.030*

0.074**

-0.003 -0.180**

-0.063**

0.258**

1

ROA 0.161**

-0.020 -0.067**

-0.183**

0.267**

-0.097**

-0.070**

1

CASH 0.035**

0.058**

0.016 -0.088**

0.081**

-0.280**

-0.188**

0.254**

1

SALESGROWTH -0.029*

0.003 0.009 0.039 0.002 -0.004 -0.027*

0.015

-0.002 1

NONOP -0.030*

-0.005 0.003 -0.001 -0.019 0.007 0.026 -0.067**

-0.020 0.006 1 *,**

Correlation is significant at the 0.05, 0.01 level

26

Table 6 Correlation matrix to test Hypothesis 4

This table shows the correlations between the variables used in the regression model to test Hypothesis 4. The sample contains family firms in

the United Kingdom, Germany, and France from 2008 up to and including 2015.

Dividend

payout ratio

SHAREHOLDER

PROTECTION

MBR FIRM

SIZE

FIRM

AGE

ROA CASH SALES

GROWTH

NONOP

Dividend payout ratio 1

SHAREHOLDERPROTECTION 0.009

1

MBR 0.125**

0.132**

1

FIRMSIZE 0.016 -0.046 0.072*

1

FIRMAGE -0.056 -0.072*

-0.038 0.313**

1

ROA 0.143**

0.042

0.407**

0.028 -0.087**

1

CASH 0.087**

0.048 0.153**

-0.229**

-0.232**

0.312**

1

SALESGROWTH -0.065*

-0.076*

-0.015 0.094**

-0.017 0.017 -0.001 1

NONOP 0.042

0.050 -0.035 -0.030 0.006 -0.120**

-0.032 0.002

1

*,** Correlation is significant at the 0.05, 0.01 level

27

Univariate analyses

Some independent samples t-tests are conducted to test whether the means of two groups are

(significantly) different. First, the differences between family firms and non-family firms will

be tested, and second, the differences between family firms actively managed by family

members and family firms not actively managed by family members. Last, a distinction is

made between family firms located in countries with strong shareholder protection and

countries with weak shareholder protection. The results are shown in Table 7, 8, and 9. In

terms of FAMILFIRM differences, there is a significant difference in the payout ratio (t =

16.537), the dividend payout ratio (t = -3.994), FIRMSIZE (t = -3.386), FIRMAGE (t =

5.623), and CASH (t = 4.360). These results imply that FAMILYFIRM has an effect on the

payout ratio, dividend payout ratio, FIRMSIZE, FIRMAGE, and CASH. In terms of

MANAGEMENT, there is a significant difference in MBR (t = -1.776), FIRMSIZE (t = -

10.186), FIRMAGE (t = -5.888), ROA (t = -5.866), and CASH (t = -2.843). However, there is

no significant difference in the payout ratio and dividend payout ratio. These results suggest

that MANAGEMENT has an effect on MBR, FIRMSIZE, FIRMAGE, ROA, and CASH.

Last, in terms of SHAREHOLDERPROTECTION, there is a significant difference in MBR (t

= 3.970), FIRMAGE (t = -2.458), ROA (t = 2.061), and SALESGROWTH (t = -3.168). This

means that SHAREHOLDERPROTECTION has an effect on MBR, FIRMAGE, ROA, and

SALESGROWTH. However, there is no significant difference in the dividend payout ratio.

Table 7 Independent samples t-test FAMILYFIRM

This table provides the results of an Independent samples t-test which compares the mean of

all variables used in the regression models between family firms and non-family firms.

FAMILYFIRM

1 = Family firm 0 = Non-family firm t-statistic

Payout ratio 0.7654 0.4937 16.537***

Dividend payout ratio 0.3677 0.4149 -3.994***

MBR 1.8671 2.4068 -1.494

FIRMSIZE 6.4389 6.6968 -3.386***

FIRMAGE 57.27 49.18 5.623***

ROA 4.5838 4.8577 -1.493

CASH 0.1438 0.1257 4.360***

SALESGROWTH 0.0727 0.0652 0.269

NONOP 0.2418 0.2116 -0.406

*,**,***Significant at 0.1, 0.05, 0.01 level

28

Table 8 Independent samples t-test MANAGEMENT


all variables used in the regression models between family firms actively managed by family

members and family firms not actively managed by family members.

MANAGEMENT

1 = Actively 0 = Not actively t-statistic

Payout ratio 0.7553 0.7726 1.175

Dividend payout ratio 0.3860 0.3545 0.869

MBR 1.7030 1.9854 -1.776*

FIRMSIZE 5.7673 6.9234 -10.168***

FIRMAGE 48.76 63.42 -5.888***

ROA 3.5621 5.3209 -5.866***

CASH 0.1324 0.1519 -2.843***

SALESGROWTH 0.1043 0.0500 1.245

NONOP 0.2383 0.2443 -0.045


Table 9 Independent samples t-test SHAREHOLDER PROTECTION


all variables used in the regression models between family firms located in countries with

strong shareholder protection and family firms located in countries with weak shareholder

protection.


SHAREHOLDER PROTECTION

1 = Strong 0 = Weak t-statistic

Dividend payout ratio 0.3521 0.3446 0.295

MBR 2.3315 1.6610 4.370***

FIRMSIZE 6.2461 6.4302 -1.477

FIRMAGE 52.84 59.09 -2.356**

ROA 4.7743 4.3679 1.377

CASH 0.1506 0.1392 1.584

SALESGROWTH -0.0018 0.1099 -2.496***

NONOP 0.2778 0.1487 1.641

29

To test for multicollinearity the VIF values for the different variables are used. All VIF values

can be found in Table A13-17 in the Appendix. In all models there is no danger of

multicollinearity as all VIF values are acceptable.

Multivariate analyses

Tax effect

To test the cross-sectional variation in the payout ratio as predicted in Hypothesis 1, three

OLS regressions are conducted using equation 1. To examine whether families and

individuals, corporations, and pension funds prefer share repurchases or dividends, the

variable TAXATIONFirmtype will become TAXATIONFamilies,Individuals, TAXATIONCorporations,

TAXATIONPensionfunds respectively. Each regression will be conducted using the appropriate

subsample which means that three subsamples are used (families and individuals,

corporations, and pension funds). By doing this, the direct relationship between the taxation

of a specific firm type and its payout ratio can be determined. The results of these regressions

are presented in Table 10.

First, it is tested whether families and individuals prefer share repurchases over dividends

because of a higher tax on dividends compared to tax on capital gains. This is done using

equation 1 with Firmtype in the TAXATION variable replaced by Families, Individuals in a

subsample with only the families and individuals. This resulted in a subsample with 1.037

observations. As can be seen in Table 10 in Panel A (families and individuals), there is a

significant negative relationship between the relative taxation of dividends and capital gains

of families and individuals and their payout ratio (p = 0.001). This means that a higher

relative tax burden leads to a lower payout ratio of families and individuals. A lower payout

ratio implies higher share repurchases compared to dividend payments. Consequently, it can

be concluded that families and individuals prefer share repurchases over dividends, because

the dividend tax relative to the capital gains tax is higher for families and individuals.

Second, it is examined whether corporations prefer dividends over share repurchases because

of a lower tax on dividends compared to tax on capital gains. This is done using equation 1

with Firmtype in the TAXATION variable replaced by Corporations in a subsample with

corporations only. This subsample contains 4.506 observations. As can be seen in Table 10 in

Panel B (corporations), TAXATIONCorporations is significantly negatively related to the payout

ratio of corporations (p = 0.000). This would also imply that the payout ratio of corporations

consists of more share repurchases than dividend payments. This in contrast to the prediction

30

that corporations prefer dividends over share repurchase because of a lower relative tax

burden. However, in France is the dividend tax also higher than the tax on capital gains

(comparable to the families and individuals). This could be a possible explanation for the

negative relation between TAXATIONCorporation and the payout ratio of corporations.

Consequently, it cannot be concluded that corporations prefer dividends over share

repurchases because the dividend tax relative to the capital gains tax is lower for corporations.

Third, the relationship between the relative tax burden of pension funds and their payout ratio

is tested. This is done using equation 1 with Firmtype in the TAXATION variable replaced by

Pensionfunds in a subsample with pension funds only. This subsample consists of 129

observations. As can be seen in Table 10 in Panel C (pension funds), there is a positive

relationship between TAXATIONPensionfunds and the payout ratio of pension funds. However,

this relationship is not significant (p = 0.449). This could possibly be caused by the small

subsample for this regression. It could imply that pension funds prefer dividends over share

repurchases but since this relationship is not significant this conclusion cannot be made.

Conclusively, Hypothesis 1 can partly be accepted as it is concluded that families and

individuals prefer share repurchases over dividends, while it is not concluded that

corporations and pension funds prefer dividends over share repurchases. However, it can be

concluded that corporations prefer share repurchases over dividends because in some

countries the dividend tax for corporations is also higher than its capital gains tax.

In all regressions FIRMSIZE is significantly negatively related to the payout ratio which

implies that larger firms will have a lower payout ratio. FIRMAGE is significantly positively

related to the payout ratio and therefore, older firms will have a higher payout ratio.

Furthermore, CASH and NONOP are significantly related to the payout ratio of families and

individuals (positive and negative respectively), CASH is significantly positively related to

the payout ratio of corporations, and MBR is significantly negatively related to the payout

ratio of pension funds.

31

Table 10 Regression results Taxation

This table provides the results of the regression model using equation 1. The dependent

variable is the payout ratio. TAXATION is the tax on dividends relative to the tax on capital

gains calculated by (1 − 𝜏𝑑𝑖𝑣,𝑡)/(1 − 𝜏𝑐𝑔,𝑡). Panel A shows the results for families and

individuals, Panel B for corporations, and Panel C for pension funds.

Panel A. Families and Individuals

Variable Predicted sign Coefficient p-value

Constant 1.5022 0.000***

TAXATIONFamilies,Individuals - -0.9403 0.001***

MBR - -0.0058 0.330

FIRMSIZE + -0.0329 0.000***

FIRMAGE + 0.0011 0.008***

ROA + 0.0044 0.171

CASH + 0.3489 0.015**

SALESGROWTH - 0.0031 0.860

NONOP - -0.0144 0.013**


N= 1.037, Adjusted R2 = 0.163, F-statistic = 5.031 (p = 0.000)

Panel B. Corporations


Constant 1.3675 0.000***

TAXATIONCorporations + -0.6577 0.000***

MBR - 0.0013 0.462

FIRMSIZE + -0.0422 0.000***

FIRMAGE + 0.0011 0.000***

ROA + -0.0008 0.593

CASH + 0.2364 0.001***

SALESGROWTH - -0.0001 0.993

NONOP - -0.0021 0.451


N= 4.506, Adjusted R2 = 0.128, F-statistic = 10.707 (p = 0.000)

Panel C. Pension funds


Constant 0.4368 0.593

TAXATIONPensionfunds + 0.4018 0.449

MBR - -0.0840 0.049**

FIRMSIZE + -0.0950 0.004***

FIRMAGE + 0.0038 0.033**

ROA + 0.0100 0.129

CASH + -0.4967 0.205


NONOP - -0.0061 0.631


N= 129, Adjusted R2 = 0.413, F-statistic = 5.744 (p = 0.000)

32

Table 11 Regression results Family firms actively managed by family members vs Non-

family firms

This table provides the results of the regression model using equation 2a. The dependent

variable is the dividend payout ratio. ACTIVEFAMILYFIRM is a dummy variable which is 1

for family firms actively managed by family members and 0 for non-family firms. The sample

contains family firms actively managed by family members and non-family firms.


Constant 0.2298 0.000**

ACTIVEFAMILYFIRM - 0.0233 0.363

MBR - 0.0001 0.990

FIRMSIZE + 0.0186 0.000***

FIRMAGE + 0.0001 0.499

ROA + 0.0141 0.000***

CASH + 0.0407 0.502


NONOP - 0.0110 0.001***


N= 5.069

Adjusted R2 = 0.059

F-statistic = 4.868 (p = 0.000)

Table 12 Regression results Family firms actively managed by family members vs

Family firms not actively managed by family members

This table provides the results of the regression model using equation 2b. The dependent

variable is the dividend payout ratio. MANAGEMENT is a dummy variable which is 1 for

family firms actively managed by family members and 0 for family firms not actively

managed by family members. The sample contains all family firms.


Constant 0.3360 0.000***

MANAGEMENT - 0.0371 0.304

MBR - 0.0128 0.047**

FIRMSIZE + 0.0082 0.399

FIRMAGE + -0.0012 0.009***

ROA + 0.0042 0.231

CASH + 0.1133 0.467

SALESGROWTH - -0.0375 0.049**

NONOP - -0.0062 0.322


N= 1.037

Adjusted R2 = 0.073

F-statistic = 2.394 (p = 0.000)

33

Family firms actively managed by family versus non-family firms and family firms not

actively managed by family members

To test the cross-sectional variation in the payout ratio as predicted in Hypothesis 2, two OLS

regressions are conducted using equation 2a and 2b. To examine the difference in the

dividend payout ratio between family firms actively managed by family members and non-

family firms, a subsample will be used including all family firms actively managed by family

members and non-family firms. This subsample consists of 5.069 observations. To test

whether family firms actively managed by family members pay lower dividends than family

firms not actively managed by family members, a subsample of family firms only will be used

to conduct the regression as stated in equation 2b. This subsample contains 1.037

observations. The results are presented in Table 11 and 12.

Table 11 shows the results of the regression to test whether family firms actively managed by

family members pay lower dividends than non-family firms. The regression shows a small

insignificant positive relationship between ACTIVEFAMILYFIRM and the dividend payout

ratio (p = 0.363). This could imply that family firms actively managed by family members

have a dividend payout ratio that is a little bit higher than that of non-family firms. However,

since this relation is not significant, this cannot be concluded. From the regression results it

cannot be concluded that family firms actively managed by family members pay lower

dividends than non-family firms.

Table 12 provides the results of the regression to test whether family firms actively managed

by family members pay lower dividends than family firms not actively managed by family

members. As can be seen in Table 12, there is a small positive relation between

MANAGEMENT and the dividend payout ratio but this relationship is not significant (p =

0.304). This could imply that family firms actively managed by family members pay higher

dividends than family firms not actively managed by family members.

Since ACTIVEFAMILYFIRM and MANAGEMENT both are (insignificantly) positively

related to the dividend payout ratio, it cannot be concluded that family control is used as an

alternative corporate governance mechanism in family firms actively managed by family

members. Also, it cannot be concluded that non-family firms use dividends as a corporate

governance mechanism. Since both relations are insignificant and the reverse of the

predictions, Hypothesis 2 cannot be accepted.

34

FIRMSIZE, ROA, and NONOP all are significantly positively related to the dividend payout

ratio of family firms actively managed by family members and non-family firms. This means

that larger firms and firms with a higher return on assets and non-operating income will have

a higher dividend payout ratio. MBR is significantly positively related to the dividend payout

ratio of family firms while FIRMAGE and SALESGROWTH are significantly negatively

related to their dividend payout ratio. This implies that firms with a higher MBR will have a

higher dividend payout ratio, while older firms and firms with a higher sales growth will have

a lower dividend payout ratio.

Dividends versus share repurchases

To test the cross-sectional variation in the payout ratio as predicted in Hypothesis 3, an OLS

regression is conducted using equation 3. For this regression a subsample of family firms only

will be used. This subsample contains 1.037 observations. The results are presented in Table

13.

As can be seen in Table 13, there is a negative relation between MANAGEMENT and the

payout ratio. However, this relationship is not significant (p = 0.304). This could imply that

the payout ratio of family firms actively managed by family members is lower than the payout

ratio of family firms not actively managed by family members. This could mean that family

firms not actively managed by family members pay more dividends than they do share

repurchases compared to family firms actively managed by family members. However, the

relationship is not significant so this conclusion cannot be made and therefore, Hypothesis 3

cannot be accepted.

Besides, FIRMSIZE and NONOP both are significantly negatively related to the payout

policy which implies that larger firms and a larger non-operating income leads to a lower

payout ratio. Furthermore, FIRMAGE is significantly positively related to the payout ratio

which means that older firms have a lower payout ratio.

35

Table 13 Regression results payout ratio Family firms actively managed by family

members vs Family firms not actively managed by family members


variable is the payout ratio. MANAGEMENT is a dummy variable which is 1 for family firms

actively managed by family members and 0 for family firms not actively managed by family

members. The sample contains all family firms.


Contant 0.7006 0.000***

MANAGEMENT - -0.0329 0.304

MBR - -0.0075 0.219

FIRMSIZE + -0.0256 0.004***

FIRMAGE + 0.0010 0.011**

ROA + 0.0034 0.262

CASH + 0.1198 0.140


NONOP - -0.0155 0.009***


N= 1.037

Adjusted R2 = 0.122

F-statistic = 54.791 (p = 0.000)

Shareholder protection


regression is conducted using equation 4. To examine whether family firms pay lower

dividends in countries with stronger shareholder protection, a subsample of family firms only

will be used in conducting the regression as stated in equation 4. The subsample consists of

1.074 observations. The results are shown in Table 14.

The regression shows a significant negative relation (p = 0.003) between

SHAREHOLDERPROTECTION and the dividend payout ratio. This implies that the

dividend payout ratio of family firms is lower in countries with stronger shareholder

protection. This because the institutional environment will act as an alternative corporate

governance mechanism. This is in line with the prediction stated in Hypothesis 4 and

therefore, Hypothesis 4 can be accepted.

Furthermore, MBR, ROA, and SALESGROWTH are also significantly related to the

dividend payout ratio. However, the sign of the coefficient of MBR is the reverse of the

prediction (positive instead of negative). This implies that for family firms a higher MBR

results in a higher dividend payout ratio. ROA is significantly positively related to the

36

dividend payout ratio which means that a higher ROA leads to a higher dividend payout ratio.

The significant negative relation between the dividend payout ratio and SALESGROWTH

implies that family firms with a larger sales growth will have a lower dividend payout ratio.

Table 14 Regression results Shareholder protection


variable is the dividend payout ratio. SHAREHOLDERPROTECTION is a dummy variable

which is 1 for strong shareholder protection and 0 for weak shareholder protection. The

sample contains all family firms.


Constant 0.3360 0.000***

SHAREHOLDERPROTECTION - -0.1648 0.003***

MBR - 0.0096 0.075*

FIRMSIZE + 0.0010 0.900

FIRMAGE + -0.0009 0.013

ROA + 0.0083 0.006***

CASH + 0.0783 0.543

SALESGROWTH - -0.0348 0.034**

NONOP - -0.0051 0.581


N= 1.074

Adjusted R2 = 0.091

F-statistic = 2.921 (p = 0.000)

Family firms versus non-family firms during the 2008 financial crisis


regression is conducted using equation 5. Since Hypothesis 5 predicts that family firms paid

less dividends than non-family firms during the 2008 financial crisis, a subsample of the

observations of the year 2008 will be used. This resulted in a subsample with 597

observations. The results are presented in Table 15.

As can be seen in the regression results, there is a significant negative relationship between

FAMILYFIRM and the dividend payout ratio during the 2008 financial crisis (p = 0.096).

This implies that the dividend payout ratio of family firms was lower than the dividend payout

ratio of non-family firms during the 2008 financial crisis. Consequently, it can be concluded

that family firms paid lower dividends than non-family firms during the 2008 financial crisis.

Therefore, Hypothesis 5 can be accepted.

37

ROA is the only control variable which is significantly (positively) related to the dividend

payout ratio during the 2008 financial crisis. This implies that a higher ROA resulted in a

higher dividend payout ratio during the 2008 financial crisis.

Table 15 Regression results Financial crisis


variable is the dividend payout ratio. FAMILYFIRM is a dummy variable which is 1 for

family firms and 0 for non-family firms. The sample contains observations of the 2008

financial crisis.


Constant 0.2277 0.002***

FAMILYFIRM - -0.0799 0.096*

MBR - 0.0028 0.437

FIRMSIZE + 0.0176 0.054*

FIRMAGE + 0.0003 0.467

ROA + 0.0111 0.000***

CASH + 0.0173 0.920


NONOP - -0.0063 0.661


N= 597

Adjusted R2 = 0.074

F-statistic = 6.914 (p = 0.000)

V. CONCLUSION

This study examined the relationship between a specific firm type and its payout policy. It is

researched whether the payout policy differs between family firms and non-family firms.

Besides, it is tested if the payout policy is different for family firms actively managed by

family members and family firms not actively managed by family members.

Several regression models are used to test the variations in the payout ratio and dividend

payout ratio. First, the impact of the relative tax burden of dividends and capitals gains on the

payout ratio has been investigated. It is found that families and individuals prefer share

repurchases over dividends because they are exposed to higher dividend tax rates than tax

rates on capital gains. Although it was expected that corporations prefer dividends over share

repurchases because their dividend tax rates are lower than their tax rates on capital gains, the

results show a significant positive relationship. This can possibly be caused by the higher

dividend tax rates compared to tax rates on capital gains in France. Besides, a positive relation

between the relative tax burden of pension funds and their payout ratio is found, although not

38

significant. Second, it is tested whether family firms actively managed by family members

pay lower dividends than non-family firms and family firms not actively managed by family

members. Both relationships are found to be positive instead of negative which was expected,

although they were not significant. Third, it is researched whether family firms not actively

managed by family members prefer dividends over share repurchases. The results show a

negative relation, although not significant. Fourth, the impact of the institutional environment

on the dividend payout ratio of family firms has been tested. It is found that family firms pay

lower dividends in countries with stronger shareholder protection because the institutional

environment act as an alternative corporate governance mechanism. Last, the impact of the

2008 financial crisis on the dividend payout ratio has been investigated. A significant negative

relationship has been found which implies that family firms paid lower dividends than non-

family firms during the 2008 financial crisis. This can be due to survival-oriented actions by

the family firm at the cost of minority shareholders.

This study contributed to the literature by expanding it with research based on family firms.

There are a lot family-controlled firms in the world but the research about family firms is

relatively little compared to research about non-family firms. This creates opportunities to do

research in a relatively new field. Also, the results of this study can help firms in improving or

changing their corporate governance. It is also found that an institutional environment plays

an important role for firms and their minority shareholders. This can be helpful for countries

with weak shareholder protection in creating a better institutional environment.

A first limitation of this study is that the sample consists of little observations of pension

funds. The results of the analysis done on this small sample are less generalizable. Future

research should try to create a larger sample of pension funds. Second, to calculate the relative

tax burden for families and individuals an average tax rate on dividends is used. In future

research the dividend tax rates could be investigated more deeply and more specific dividend

tax rates could be assigned to the families and individuals. Third, this study focused on listed

firms. Future research could also take into account non-listed firms and for example,

investigate difference between listed and non-listed family firms.

39

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43

APPENDIX

Table A1 Variable definitions used in equation 1-5

Variable Equation Definition

Payout ratio 1, 3 The proportion of dividends paid relative to total

payout (dividends and share repurchases),

calculated by dividing dividends by dividends

plus share repurchases.

Dividend payout ratio 2a, 2b, 4 The dividend paid by the firm scaled by their net

income.

TAXATIONFirmtype 1 The relative tax burden for families and

individuals, corporations, and pension funds,

calculated by (1 − 𝜏𝑑𝑖𝑣,𝑡)/(1 − 𝜏𝑐𝑔,𝑡)

MBR 1, 2a, 2b, 3, 4, 5 The market-to-book ratio, calculated by dividing

the market value of the firm by its book value.

FIRMSIZE 1, 2a, 2b, 3, 4, 5 The size of the firm, calculated by the log of

total sales.

FIRMAGE 1, 2a, 2b, 3, 4, 5 The age of the firm.

ROA 1, 2a, 2b, 3, 4, 5 The return on assets, calculated by dividing net

income by total assets.

CASH 1, 2a, 2b, 3, 4, 5 The cash and cash equivalents of the firm scaled

by total assets.

SALESGROWTH 1, 2a, 2b, 3, 4, 5 The growth of sales of the firm.

NONOP 1, 2a, 2b, 3, 4, 5 The non-operating income of the firms as a

percentage of total earnings.

ACTIVEFAMILYFIRM 2a A dummy variable; 1 for family firms actively

managed by family members and 0 for non-

family firms.

FAMILYFIRM 5 A dummy variable; 1 for family firms and 0 for

non-family firms.

MANAGEMENT 2b, 3 A dummy variable; 1 for family firms actively

managed by family members, 0 for family firms

not actively managed by family members.

SHAREHOLDER

PROTECTION

4 A dummy variable; 1 for strong shareholder

protection, 0 for weak shareholder protection.

CRISIS 5 A dummy variable; 1 for the 2008 financial

crisis, 0 for 2009 up to and including 2015.

FAMILYFIRM*CRISIS 5 A dummy variable; 1 for family firms during the

2008 financial crisis, 0 for non-family firms

during the financial crisis.

44

Table A2 Composition of the Minority Investor Protection Index

Extent of disclosure index (0-10) Extent of shareholders rights index (0-10)

Review and approval requirements for

related-party transactions

Shareholders’ rights and role in major

corporate decisions

Internal, immediate and periodic disclosure

requirements for related-party transactions

Extent of director liability (0-10) Extent of ownership and control index (0-

10)

Minority shareholders’ ability to sue and

hold interested directors liable for prejudicial

related-party transactions

Governance safeguards protecting

shareholders from undue board control and

entrenchment

Available legal remedies (damages,

disgorgement of profits, fines, imprisonment,

rescission of transactions)

Ease of shareholder suits index (0-10) Extent of corporate transparency index (0-

10)

Access to internal corporate documents Corporate transparency on significant

owners, executive compensation, annual

meetings and audits.

Evidence obtainable during trial

Allocation of legal expenses

Extent of conflict of interest regulation

index (0-10)

Extent of shareholder governance index

(0-10)

Simple average of the extent of disclosure,

extent of director liability and ease of

shareholders suits indices

Simple average of the extent of shareholder

rights, extent of ownership and control and

extent of corporate transparency indces

Strength of minority investor protection index (0-10)

Simple average of the extent of conflict of interest regulation and extent of shareholder

governance indices

Source: http://www.doingbusiness.org/data/exploretopics/protecting-minority-investors/what-measured

http://www.doingbusiness.org/data/exploretopics/protecting-minority-investors/what-measured

45

Table A3 Tax regulation United Kingdom1

Year Dividends to Capital gains Year Dividends to Capital gains

2015 Individuals Tax credit 10% 21% 2011 Individuals Tax credit 10% 28%

Basic rate taxpayers 10% Basic rate taxpayers 10%

Higher rate taxpayers 32.5% Higher rate taxpayers 32.5%

Additional rate taxpayers 37.5% Additional rate taxpayers 42.5%

Average 26.67% Average 28.33%

Corporations 0% Corporations 0%

Pension funds 0% Pension funds 0%

2014 Individuals

Tax credit 10% 23% 2010 Individuals Tax credit 10% 28%



Additional rate taxpayers 37.5% Additional rate taxpayers 42.5%







Additional rate taxpayers 37.5% Additional rate taxpayers 40%







Additional rate taxpayers 37.5% Additional rate taxpayers 40%




1 Retrieved from http://www.ey.com/gl/en/services/tax/global-tax-guide-archive

46

Table A4 Tax regulation Germany2

Year Dividends to Capital gains Year Dividends to Capital gains

2016 Individuals 25%* 5% non-

deductible

expense, 95%

tax exemptΔ


deductible

expense, 95%

tax exemptΔΔ

Corporations 5% non-deductible expense,

95% tax exempt+


95% tax exempt+



deductible

expense, 95%

tax exemptΔ


deductible

expense, 95%

tax exemptΔΔ


95% tax exempt+


95% tax exempt+



deductible

expense, 95%

tax exemptΔ


deductible

expense, 95%

tax exemptΔΔ


95% tax exempt+


95% tax exempt+



deductible

expense, 95%

tax exemptΔ


deductible

expense, 95%

tax exemptΔΔ


95% tax exempt+


95% tax exempt+

Pension funds 0% Pension funds 0% * Investment income is tax-free in an amount of EUR801 per year for a single taxpayer (EUR1,602 per year for a married couple filing jointly).

** Investment income is tax-free in an amount of EUR750 per year for a single taxpayer (EUR1,500 per year for a married couple filing jointly).

+ Only tax exempt with a minimum shareholding of 10%. Also, the parent is required to have a minimum shareholding of 10% as of 1 January of the calendar

year in which the dividend distribution takes place. Otherwise, the dividends are subject to trade tax. ++

The parent is required to have a minimum shareholding of 10% as of 1 January of the calendar year in which the dividend distribution takes place.

Otherwise, the dividends are subject to trade tax.

Δ The 95% tax exemption for capital gains received by a corporate shareholder is not granted to banks, financial services institutions and financial enterprises

(including holding companies) that purchase shares with the intention of realizing short-term profits for their own account. ΔΔ

If the shares were acquired before 2007 through a tax-free contribution of a qualifying business or a partnership interest in exchanges for changes, a seven

year holding period is required to qualify for the capital gain exemption. The exemption does not apply to capital gains derived from sales of shares that were

acquired before 2007 in a tax-free contribution of a qualifying business or a partnership interest within a period of seven years before the sale.


47

Table A5 Tax regulation France3


Year Dividends to Capital gains

2015 Individuals From EUR To EUR Percent For tax years closed on or

after 31 December 2012,

the corporate income tax

applies to 12% of the

gross capital gains

realizing on qualifying

participations.

Consequently, the

effective tax rate is 4%Δ

0 9,699 0

9,700 26,790 14

26,791 71,825 30

71,826 152,107 41

152,108 No limit 45

Average 26%

Corporations 5% service charge, 95% tax

exempt+

Pension funds 0%





gross capital gains


participations.

Consequently, the


0 9,689 0

9,690 26,763 14

26,764 71,753 30

71,754 151,955 41

151,956 No limit 45

Average 26%


exempt+

Pension funds 0%





gross capital gains


participations.

Consequently, the


0 6,010 0

6,011 11,990 5.5

11,991 26,630 14

26,631 71,396 30

71,397 151,199 41

151,200 No limit 45

Average 22.58%


exempt+

Pension funds 0%

2012 Individuals From EUR To EUR Percent 10% of the net capital

gains realized on

qualifying participations

during a fiscal year is

added back to profits

taxable at the standard rate

of corporate income tax.

Consequently, the

effective tax rate is 3.4%Δ

0 5,962 0

5,963 11,895 5.5

11,896 26,419 14

26,420 70,829 30

70,830 149,999 41

150,000 No limit 45

Average 22.58%


exempt+

Pension funds 0%

48

Table A6 Tax regulation France cont’d

* For a married couple, the first EUR3,050 of total taxable dividend income is exempt. The exempt

amount for single individuals is EUR1,525. +

Only tax exempt with a minimum shareholding of 5% for at least two years. Δ

When holding at least 10% of the share capital.

Year Dividends to Capital gains

2011 Individuals From EUR To EUR Percent 5% of the net capital gains

realized on qualifying

participations during a

fiscal year is added back

to profits taxable at the

standard rate of corporate

income tax. Consequently,

the effective tax rate is

1.72%Δ

0 5,962 0

5,963 11,895 5.5

11,896 26,419 14

26,420 70,829 30

70,830 No limit 41

Average 18.1%


exempt+

Pension funds 0%

2010 Individuals*

From EUR To EUR Percent 5% of the net capital gains








1.72%Δ

0 5,962 0

5,963 11,895 5.5

11,896 26,419 14

26,420 70,829 30

70,830 No limit 41

Average 18.1%


exempt+

Pension funds 0%

2009 Individuals*









1.72%Δ

0 5,874 0

5,875 11,719 5.5

11,720 26,029 14

26,030 69,782 30

69,783 No limit 40

Average 17.9%


exempt+

Pension funds 0%

2008 Individuals*









1.72%Δ

0 5,851 0

5,852 11,672 5.5

11,673 25,925 14

25,926 69,504 30

69,505 No limit 40

Average 17.9%


exempt+

Pension funds 0%

49

Table A7 Relative tax burden United Kingdom

Year Individuals Corporations Pension Funds

2015 0.9282 1.2658 1.2658

2014 0.9523 1.2987 1.2987

2013 0.9649 1.3158 1.3158

2012 0.9909 1.3514 1.3514

2011 0.9954 1.3889 1.3889

2010 0.9954 1.3889 1.3889

2009 1.0069 1.3889 1.3889

2008 1.0357 1.4286 1.4286

Table A6 Relative tax burden Germany


2015 0.7895 1 1.0526

2014 0.7895 1 1.0526

2013 0.7895 1 1.0526

2012 0.7895 1 1.0526

2011 0.7895 1 1.0526

2010 0.7895 1 1.0526

2009 0.7895 1 1.0526

2008 0.7895 1 1.0526

Table A8 Relative tax burden France


2015 0.7708 0.9896 1.0417

2014 0.7708 0.9896 1.0417

2013 0.8065 0.9896 1.0417

2012 0.8014 0.9834 1.0352

2011 0.8333 0.9666 1.0175

2010 0.8333 0.9666 1.0175

2009 0.8354 0.9666 1.0175

2008 0.8354 0.9666 1.0175

50

Table A9 Shareholder Protection Index United Kingdom

Year Extent of

conflict of

interest

regulation

index (0-10)

Extent of

disclosure

index (0-10)

Extent of

director

liability index

(0-10)

Ease of

shareholder

suits index (0-

10)

Extent of

shareholder

governance

index (0-10)

Extent of

shareholder

rights index

(0-10)

Extent of

ownership

and control

index (0-10)

Extent of

corporate

transparency

index (0-10)

Strength of

minority

investor

protection

index (0-10)*Δ

2016 8.3 10.0 7.0 8.0 7.3 8.0 6.0 8.0 7.8

2015 8.3 10.0 7.0 8.0 7.3 8.0 6.0 8.0 7.8

2014 8.3 10.0 7.0 8.0 7.3 8.0 6.0 8.0 7.8

2013 10.0 7.0 7.0 8.0

2012 10.0 7.0 7.0 8.0

2011 10.0 7.0 7.0 8.0

2010 10.0 7.0 7.0 8.0

2009 10.0 7.0 7.0 8.0

2008 10.0 7.0 7.0 8.0

* This is calculated as the simple average of the extent of conflict of interest regulation and extent of shareholder governance indices.

Δ The higher the value of the minority investor protection index, the stronger minority investor protection.

51

Table A10 Shareholder Protection Index Germany

Year Extent of

conflict of

interest

regulation

index (0-10)

Extent of

disclosure

index (0-10)

Extent of

director

liability index

(0-10)

Ease of

shareholder

suits index (0-

10)

Extent of

shareholder

governance

index (0-10)

Extent of

shareholder

rights index

(0-10)

Extent of

ownership

and control

index (0-10)

Extent of

corporate

transparency

index (0-10)

Strength of

minority

investor

protection

index (0-10)*Δ

2016 5.0 5.0 5.0 5.0 7.0 8.0 6.0 7.0 6.0

2015 5.0 5.0 5.0 5.0 7.0 8.0 6.0 7.0 6.0

2014 5.0 5.0 5.0 5.0 7.0 8.0 6.0 7.0 6.0

2013 5.0 5.0 5.0 5.0

2012 5.0 5.0 5.0 5.0

2011 5.0 5.0 5.0 5.0

2010 5.0 5.0 5.0 5.0

2009 5.0 5.0 5.0 5.0

2008 5.0 5.0 5.0 5.0


Δ The higher the value of the minority investor protection index, the stronger minority investor protection.

52

Table A11 Shareholder Protection Index France

Year Extent of

conflict of

interest

regulation

index (0-10)

Extent of

disclosure

index (0-10)

Extent of

director

liability index

(0-10)

Ease of

shareholder

suits index (0-

10)

Extent of

shareholder

governance

index (0-10)

Extent of

shareholder

rights index

(0-10)

Extent of

ownership

and control

index (0-10)

Extent of

corporate

transparency

index (0-10)

Strength of

minority

investor

protection

index (0-10)*Δ

2016 5.7 8.0 3.0 6.0 7.3 6.0 8.0 8.0 6.5

2015 5.7 8.0 3.0 6.0 7.3 6.0 8.0 8.0 6.5

2014 5.7 8.0 3.0 6.0 7.3 6.0 8.0 8.0 6.5

2013 8.0 3.0 5.0 5.3

2012 8.0 3.0 5.0 5.3

2011 8.0 3.0 5.0 5.3

2010 8.0 3.0 5.0 5.3

2009 8.0 3.0 5.0 5.3

2008 8.0 3.0 5.0 5.3


Δ The higher the value of the minority investor protection index, the stronger minority investor protection

53

Table A12 VIF values 1


Variable VIF VIF

ACTIVEFAMILYFIRM 1.111

-

1.031

1.190

1.109

1.074

1.157

1.002

1.002

-

1.179

1.322

1.207

1.367

1.227

1.021

1.035

1.102

MANAGEMENT

MBR

FIRMSIZE

FIRMAGE

ROA

CASH

SALESGROWTH

NONOP


Variable VIF

MANAGEMENT 1.182

MBR 1.259

FIRMSIZE 1.323

FIRMAGE 1.208

ROA 1.375

CASH 1.231

SALESGROWTH 1.032

NONOP 1.038

Family firms Corporations Pension funds

Variable VIF VIF VIF

TAXATION 2.494 1.285 6.727

MBR 1.427 1.059 3.949

FIRMSIZE 1.912 1.660 3.135

FIRMAGE 1.919 1.355 6.671

ROA 1.650 1.132 1.276

CASH 1.694 1.291 7.481

SALESGROWTH 1.066 1.017 1.258

NONOP 1.051 1.018 1.287

54


Variable VIF

SHAREHOLDERPROTECTION 5.865

MBR 1.369

FIRMSIZE 1.881

FIRMAGE 1.996

ROA 1.543

CASH 1.654

SALESGROWTH 1.091

NONOP 1.057


Variable VIF

FAMILYFIRM 1.467

MBR 1.064

FIRMSIZE 1.607

FIRMAGE 1.369

ROA 1.131

CASH 1.301

SALESGROWTH 1.012

NONOP 1.014

the differences in the payout policy of family firms …

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