Impact of Share Pledging on Dividend Payouts and Governance Dynamics

Abstract

This chapter explores the relationship between insider share pledging and firms' dividend payout decisions. The dataset comprises of firms listed on NSE in India from 2013 to 2021. The authors employ multivariate regression analysis to test this relationship, and findings reveal that a 1% increase in share pledging (% of promoter's pledged shares to their holdings) correlates with a 0.87% increase in dividend payout. Similarly, a 1% increase in share pledging (% of the promoter's pledged shares to total outstanding shares of the firm) results in a substantial rise of 2.61% in dividend payout. The authors conduct PSM as a robustness check to validate the results. These results indicate that dividend payments serve as a credible mechanism to mitigate the adverse effects of pledging. This relationship is stronger in firms with better internal and external governance. Dividend payouts tend to increase with share pledging for firms with a higher percentage of independent directors and institutional shareholding. This study provides valuable insights for investors and policymakers.