Power contestability among large shareholders and dividend payouts: a sociopolitical perspective

We extend principal-principal agency theory to explore how large shareholders may improve corporate governance in weak institutions by increasing the firm's dividend payout to small investors. We highlight a sociopolitical mechanism, arguing that contestable large shareholders tend to woo small investors to win the competition for control of the firm. Consequently, more contestable large shareholders are likely to pay higher dividends, benefiting small investors. Moreover, the impact of large shareholders' contestability on dividend payouts is more pronounced when they have stronger incentives for competition for control due to high deviation between large shareholders' cash flow and voting rights, low large shareholders' divergent interests, and high large shareholders' instability. Our analysis of 860 publicly listed firms in Taiwan from 1998 to 2019 supports our hypotheses and contributes to the behavioral corporate governance literature regarding ownership structure and dividends.