Abstract

This study examines the impact of foreign investments on firms' dividend payments, Foreign investors are perceived to require the excessive payment of cash dividends and eventually deter the firm from investing for the future growth. Numerous studies have examined this issue by exploring the relation between the foreign ownership and the cash dividend payment. Their results differ on which ratio of dividend payment is used for the dependent variable of the regression analysis. When the dividend yield and dividend payout ratio are used, their relation with the foreign ownership is not significant. When, however, the dividend payment divided by total assets is used, its relation with the foreign ownership is significant. There are also several statistical issues on their empirical methodology. The most prominent problem is the lead and lag relation between the foreign investment and the dividend payment. While foreign investors force firms to pay more cash dividends, they could have invested in the firm paying cash dividends. In either way, the positive relation between them should be resulted in the regression, but the positive coefficient for the foreign investment cannot tell an increase in dividend payments is caused by foreign investors. This lead-lag problem has been mentioned but never been controlled in existing studies. In this study, this problem is mitigated by carefully constructing samples according to the lead and lag relation between the foreign investment and dividend payments. During the period between 2000 and 2006, firms made initial public offering are selected and identified when the foreign investment is made. If the foreign investment is made, we then identify the dividend payment is made prior to the foreign investment. Based on these criteria, the whole sample is divided by two sub-samples, one consists of firms with dividend payment prior to the foreign investment, and the other consists of remaining firms. This study examines the impact of foreign investment on the dividend policy using the overall sample and two sub-samples through panel regressions. The foreign investment is found not to be related to the dividend payout ratio and dividend yield but to be significantly related to the dividend ratio when the overall sample is used. This result is consistent with one reported in the existing literature. The foreign investment is also found not to be significantly related to the dividend payout ratio and dividend yield but to related to the dividend ratio when the sub-sample of firms with dividend payment prior to the foreign investment is used. This result suggests that foreign investors have been attracted by the dividend payment and they have not induced the excessive cash dividends. On the other hand, the foreign investment is found to significantly influence the cash dividend payment when the sub-sample excluding firms with dividend payment prior to the foreign investment is used. This result suggests that when the lead-lag relationship between the foreign investment and dividend payment is controlled, the foreign ownership has indeed influenced the dividend payment policy of Korean firms.

Keywords

• Foreign investment
• Dividend Policy
• Dividend Payments
• Panel Analysis

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