Abstract

This paper investigates the relationship between Investment Opportunity Set (IOS) and dividend policy and if ownership structure moderates this relationship in an emerging economy context. The contracting theory based on Jensen’s free cash flow (FCF) theory is empirically examined using a series of firm characteristics including size, return on assets, board size, board composition, duality and debt to assets. The results suggest that in the Malaysian context, there is a strong support on the negative significant association between growth opportunities and dividend payout in the context of non-government linked companies (non-GLCs). Hence the theory backs the fact that high growth firms make lesser dividend payments. Further, on the interaction between IOS and family controlled firms, the negative relationship between high growth firms and dividend policy is weaker for family controlled firms.

Key words: Dividend policy, investment opportunity set, government ownership, family ownership, contracting theory, free cash flow theory.