Impact of Leverage, Dividend Payouts and Ownership Concentration on Firm Value Creation in Presence and Absence of Growth Opportunities

Abstract

study examines the impact of firm’s financial decisions i.e. leverage, dividend payouts and corporate ownership concentration on firm market value, while dependent on absence or presence of growth opportunities. Ownership concentration is analyzed to be an important determinant of shareholder’s wealth under agency cost of theory. Theoretical background supports a dual impact of leverage, dividend payout and ownership concentration on firm value based on availability and non-availability of growth opportunities. The study would benefit firms to build optimal financial policy based on tradeoff between underinvestment and overinvestment costs under firm value maximization goal in Pakistan. A sample of 164 non-financial firms listed on Karachi stock exchange of Pakistan for the period of 2004 to 2011 is studied. Using Panel data methodology, Generalized system of Estimating Equations is attempted to be applied for results demonstrating dual impact of leverage, cash dividends and ownership concentration in presence and absence of growth opportunities. Leverage indicates a negative relationship in presence of growth opportunities while sign turn to be positive in absence of growth opportunities. Furthermore, leverage effect is checked based on subdivision with short term debt and long term debt. Cash dividends and bonus shares are found to have uncertain relation in presence of growth opportunities and positive relation in absence of growth opportunities. The results also demonstrate corporate ownership concentration relevancy in alteration of firm financial decision policies indicating presence of agency costs in Pakistan.