Corporate governance and payout policy: Evidence from Korean business groups

• We examine whether good governance firms are associated with high dividend payouts.
• Firms in business groups have lower dividend payouts on average than others do.
• This is mainly due to poor shareholder protection of chaebol firms.
• This adverse effect exemplifies with the onset of the global financial crisis in 2008.
• Our evidence suggests that there exists entrenched control by chaebol firm owners.

Using a unique, comprehensive data set from a survey on corporate governance practices among Korean listed firms, this paper shows that business group (chaebol) firms have overall stronger governance practices but weaker shareholder rights and lower dividend payout ratios than independent firms do. We also find that the adverse effect of chaebol firms' weak shareholder rights on dividend payout ratios appears to exemplify with the onset of the global financial crisis in 2008. In addition, our regression results show that the positive correlation between corporate governance practices and dividend payout ratios is weaker among chaebol firms. Finally, we find that improving corporate governance enhances payout policies over time but is statistically significant only for independent firms. Our results suggest that the entrenched control by chaebol firm owners that stems from their control rights much above the cash flow rights puts less weight on protecting minority shareholders, resulting in smaller distributions of dividend payments.