The Effect of Institutional Ownership on Payout Policy: Evidence from Index Thresholds

Abstract

We show that higher institutional ownership causes firms to pay more dividends. Our identification relies on a discontinuity in ownership around Russell index thresholds. Our estimates indicate that a one-percentage-point increase in institutional ownership causes a $7 million (8%) increase in dividends. We also find differences in shareholder proposals and voting patterns that suggest that even nonactivist institutions play an important role in monitoring firm behavior. The effect of institutional ownership on dividends is stronger for firms with higher expected agency costs. Received December 5, 2014; accepted December 24, 2015 by Editor David Denis.