Dividends and strength of Japanese business group affiliation

While the study of dividend policy in Japan has investigated the role of group affiliation, it has heretofore neglected the impact of the strength of group affiliation. Using the strength of group association, a new variable in the study of dividend policy, we document that the probability of dividend payment by firms in Japanese business groups declines as the affiliation to the business group strengthens – a finding consistent with transferring cash from weakly associated firms to those strongly associated with the business group. Further, the contractual claimant position of main banks seems important as the ratio of short-term debt to long-term debt is negatively related to dividend payment in Japanese firms. Finally, we also reconfirm that dividends in Japan are positively related to firm size, profitability, and investment opportunities, and negatively to firm risk. These findings should be of much interest to managers, scholars, and policy-makers.

► Assesses dividend policies in Japan, a country with unusual cultural, legal, institutional, ownership, and information environments.
► Include the Fama–French firm variables, the life-cycle variables of DeAngelo et al. (2006), and the Hoberg and Prabhala's (in press) risk variables.
► Find that size, profitability, and investment opportunities are positively and risk and short- to long-term debt ratio are negatively related to dividends.
► We uniquely show that the dividend payment probability declines as the business group affiliation strengthens, providing evidence of tunneling.
► In Japan, dividend policy is used to redistribute excess cash from weakly aligned firms toward those at the core.