Statement of the Problems Finance Essay

This paper is to test the relationship between management compensation and the dividend payout and the effect of public ownership, state ownership as well as family ownership will be taken into consideration. Dividend policy has long been a difficult task for the directors since it will be influenced by different factors. Different research papers have developed different models for the firms to apply a comprehensive dividend policy. Bhattacharyya and Morrill have figured out a negative relationship between management compensation and dividend payout by incorporating the US firm's data into their analysis. However, the corporation feature of US firm is not diversified and complicated as Hong Kong and Chinese firms listed on the Asian stock market. Thus, this paper will perform an empirical research by adopting the Hong Kong and Chinese firms' data to investigate the relationship between management compensation and dividend payout. Literature review Brealy and Myers (2003) have revealed that dividend policy is one of the ten important unsolved problems in the finance society. Up till now, we still not yet fully understand the factors which are influential to the dividend policy. There have been different researches investigating the relationship between dividend policy and the other components. There are several ways to distribute the dividends. In normal practice, most of the corporations would choose to declare cash dividend or stock repurchase. Söhnke M. Bartram, Philip Brown, Janice C.Y. How, and Peter Verhoeven has investigated roles of the firms and country level agency conflicts in determining the dividend policy. They found out the relationship between the protection level of the country and the dividend policy; and a negative relationship between investment opportunities and total payouts. That means in a high protection country, shareholders are more willing to receive less dividend for a better investment opportunity. Also, in 2001, Fenn and Liang have showed that management stock options and payouts are negatively correlated and there is a positive relationship between repurchases and management stock options. However, in the last two decades, Chun Chang (1993) suggested that there is a positive linkage between the management compensation and the payout because it can be used to eliminate manager's incentive to overretain funds and overspend. In 1987, Lewellen, W. G., C. Loderer, and K. Martin have found the executive pay is systematical to the dividend payout, which the result is consistent with Healy's (1985) observation. In 2003, Bhattacharyya has developed a model of dividend policy which elaborates the linkage between dividend and executive compensation based in the principal-agent paradigm. In his model, cash will either by distributed by directors/managers as dividend or re-invested by directors/managers in some positive net present value projects. There will be two classifications to distinguish different types of managers: High quality and low quality. His model assumes that high quality directors would invest the cash in some net present value projects while low quality directors would distribute cash in form of dividend to the shareholders. In other words, high productive directors getting higher pay would distribute fewer dividends than low productive directors getting lower pay. Empirically, it proved that there has been a negative relationship between management compensation and dividend payout. In 2008, Bhattacharyya and Morrill have conducted a tobit regression test using the US firms' data to develop a more formal model related to the management compensation to the proportion of earnings paid out as dividends and document empirical support for the hypothesis arising from the previous model. The result has perfectly revealed that management compensation and dividend payout are negatively correlated. However, it is difficult to judge whether those research can be applied to either Asian countries or Hong Kong because they are based on the foreign market data. The typical features of Hong Kong and Asian countries should be state-ownership and family ownership corporations. There are limited papers discussing about the relationship between the management under different ownership types and dividend payout. Most of the researches are based on the data extracted from the US firms (Publicly ownership). In 2003, Klaus Gugler found that state-controlled firms have large target payout ratios while family-controlled firms have a lower one but the data is based on foreign stock market. Objective of the study Dividend policy is a fundamental strategy in corporate finance because it is influenced by different unknown factors and will influence other components accordingly. A comprehensive payout policy would contribute to a better corporation performance in the future and present. At the same time, management compensation policy would also affect the overall performance of the corporation. With an appropriate compensation policy and payout, the corporation would be able to have a better performance as well as to attract more investors. Thus, it is essential for us to understand the relationship between payout and management compensation. Although there are researches discussing about its relationship, there are limited researches investigating into the Hong Kong and Asian market. It is difficult to judge the appropriateness of Bhattacharyya's model as it is based on the US firms' data. The objective of this paper is to investigate whether the Bhattacharyya's model and the former research papers can be applied to the Hong Kong and Asian markets which are very different from US firms. This paper conducts an empirical research by using Hong Kong listed corporations (majority) and the other significant Asian listed corporations to test if management compensation alone, management compensation of a state-controlled corporation or management compensation of a family controlled corporation will affect the payout ratio. Statement of hypotheses Methodology Time schedule/action plan

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