2. Preliminary research and hypothesis setting

## 2.1. The relationship between dividend and firm value

The study of the relationship between dividend and firm value has been a major research topic in finance and accounting for a long time. In this section, we introduce the major hypotheses that explain the relationship between dividend and firm value, such as free cash flow hypothesis, dividend clientele hypothesis, and dividend catering hypothesis.

First, the free cash flow hypothesis argues that dividend has the effect of decreasing free cash flow and alleviating the agency problem, thereby increasing firm value. In other words, the surplus cash flow hypothesis predicts the positive relationship between dividend and firm value. Ref. [3] shows that there is a positive relationship between dividend and firm value, and this relationship is stronger in countries where investor protection is weak. Ref. [4] finds that there is a positive relationship between dividend and firm value. They interpreted the scale of dividend as having the ability to predict future profit in the context of the signal effect hypothesis of dividend.

Second, dividend clientele hypothesis does not predict the monotonic direction of the relationship between dividend and firm value. In this hypothesis, investor groups have diverse preferences and decide dividend policy to satisfy this preference. Ref. [5] argued that investors with high marginal tax rates tended to construct portfolios based on stocks with low dividend yields. Refs. [6, 7] found that the effect of dividend size change disclosure on share price is greater for firms with higher dividend yields, suggesting the existence of a group of preferred investors.

According to the dividend catering hypothesis proposed by Ref. [8], the relationship between dividend and firm value is time varying that is not stable. Company's dividend policy depends on how the market value of a company that paid dividends is evaluated compared to a company that does not pay. They first define the dividend premium as the difference in average market value between the companies that pay dividends and those that do not, and then find that many companies pay dividends in the year with a positive dividend premium, and that many firms omit dividends in negative years. Thus, according to this hypothesis, dividend and firm value are in a time-varying relationship with positive or negative relations depending on the year.

#### 2.2. Hypothesis setting

situation in Korea that pension funds can actively participate in the corporate dividend policy of their own country. The two-way causality between the dividend policy and the corporate value, which is a limitation of the existing research, is solved by the external pressure of the

Second, this study measures the main verification variables as the dividend level of a firm with a large share of the national pension. I tried to derive a more accurate empirical result by correcting the possible self-selection bias using propensity score matching (PSM). Also, I present the result of calibrating endogenous and heteroscedasticity using fixed-effect panel analysis and 2-stage least squares regression analysis (2SLS) for matched samples using PSM

Finally, the results of this study confirm that Korean companies have a positive relationship between dividend level and firm value. In addition, the fact that the NPS has a large share of corporate ownership has a positive effect on corporate value. Most of my results show that the dividend pressure of the national pension is not related to the enterprise value. However, when using 2SLS to control endogeneity, it is confirmed that the dividend pressure of the national pension has a negative effect on corporate value. The results of this study are expected to provide useful information for business executives related to corporate dividend policy or for voting right of NPS.

The study of the relationship between dividend and firm value has been a major research topic in finance and accounting for a long time. In this section, we introduce the major hypotheses that explain the relationship between dividend and firm value, such as free cash flow hypoth-

First, the free cash flow hypothesis argues that dividend has the effect of decreasing free cash flow and alleviating the agency problem, thereby increasing firm value. In other words, the surplus cash flow hypothesis predicts the positive relationship between dividend and firm value. Ref. [3] shows that there is a positive relationship between dividend and firm value, and this relationship is stronger in countries where investor protection is weak. Ref. [4] finds that there is a positive relationship between dividend and firm value. They interpreted the scale of dividend as having the ability to predict future profit in the context of the signal effect

Second, dividend clientele hypothesis does not predict the monotonic direction of the relationship between dividend and firm value. In this hypothesis, investor groups have diverse preferences and decide dividend policy to satisfy this preference. Ref. [5] argued that investors with high marginal tax rates tended to construct portfolios based on stocks with low dividend yields. Refs. [6, 7] found that the effect of dividend size change disclosure on share price is greater for firms with higher dividend yields, suggesting the existence of a group of preferred investors.

demand for the NPS.

to mitigate self-selection bias.

56 Firm Value - Theory and Empirical Evidence

hypothesis of dividend.

2. Preliminary research and hypothesis setting

2.1. The relationship between dividend and firm value

esis, dividend clientele hypothesis, and dividend catering hypothesis.

Ref. [9] compares the accounting characteristics of firms with large shareholdings of NPS to those that do not. Companies with a large share of the NPS are found to have higher profits and growth potentials and lower PERs than those that do not. In the case of stability, the ratio of debt to equity is reduced after the NPS has acquired a large amount of stake, suggesting that the NPS requires improvement of the financial structure of the enterprise. Companies with a large share of the NPS have lower payout ratio than those that do not, which supports the government's claim that it should strengthen the voting power of the NPS in relation to dividends.

Dividend payout ratio of corporate Korea is the lowest level in the major economies, and low payout ratio results in a "Korea discount" to undermine investor sentiment in South Korea companies in the global market. Moreover, recently, listed companies of major Chaebol groups in Korea have the highest level of reserve in history. In the case of firms with high free cash flow, it is known that active cash distribution is favorable for shareholders because it can suppress managerial pursuit of private interests and enhance the monitoring function of capital markets [1, 2]. In this context, the dividend pressure of the national pension can contribute to reducing the Korea discount, reducing the agency cost and strengthening the distribution function of profit. In addition, in the prolonged low-interest-rate framework, firms' dividends increase their investment assets by converting investors who have made short-term investments into long-term investors and the effect of job creation by expanding investment can be expected. In other words, aggressive voting rights for the expansion of the NPS can be expected to result in the elimination of the Korea discount, the reduction of agency costs, and the creation of jobs through investment expansion.

On the other hand, it is not right for the NPS to participate in the dividend policy, which is one of the key decision-makings of companies. If the NPS directly demands a high dividend, companies will be severely constrained by capital management plans. The dividend pressure of the NPS may help to improve short-term profitability, but it does not know how it will affect corporate value in the long run. Focusing on short-term profits is not consistent with NPS's intentions, namely, its responsibility to the old age and future of the people. Currently, the investment level of Korean companies is considerably higher than that of developed countries, and the proportion of consumer discretionary and industrial materials such as IT and automobiles, which have a low dividend payout ratio, is high among all industries. Therefore, an increase in dividends due to the external pressure of NPS may reduce the investment motivation of companies, leading to a decrease in investment, which may adversely affect the firm value. While the opposite effect of NPS dividend pressure is expected, we will examine how the dividend pressure of NPS affects the firm.

First logistics model for propensity score matching:

ing equation, Eq. (2), using the sample matched in Eq. (1).

Second OLS regression model for main analysis:

STD\_SALES) as control variables.

2016 which meet the following criteria.

2. excluding companies with negative net assets.

1. non-financial companies.

3.3. Sample selection

NPFi,t ¼ β<sup>0</sup> þ β1LEVi,t þ β2ROAi,t þ β3NIRi,t þ β4Marketi,t þ β5PERi,t þ β6DIVOUTi,t þ Ei,t

Ask of National Pension Service for Higher Dividend and Firm Value: Evidence from Korea

NPF is an indicator variable equal to 1 if NPS owns more than 5% of the company's stake and 0 otherwise. LEV is debt ratio and ROA is net income divided by average total assets. NIR is growth rate of net income. Market is an indicator variable equal to 1 if the company is listed on the KOSPI and 0 otherwise. PER is price-earnings ratio and DIVOUT is cash dividend divided by net income. In order to analyze the effect of NPS's dividend pressure on firm value, we analyze the follow-

Q is Tobin's Q, which measures firm value. DIV is the dividend level of the company, measured by DIVTA, DIVOUT, DIVRATE, ΔDIVTA, ΔDIVOUT, and ΔDIVRATE. The main interest variable of this study is the cross-section of Eq. (2), which is the variable indicating the dividend pressure of NPS. If β<sup>2</sup> has a statistically significant positive (+) value, then NPS's dividend pressure will increase the firm value. On the other hand, if β<sup>2</sup> has a statistically significant negative (�) value, the dividend pressure of NPS would decrease the firm value. We use variables that are known to affect investment in previous studies as control variables [11, 12]. Since the firm size and profitability affect investment, SIZE, which takes natural logarithm of total assets, and ROA, which shows profitability, are used as control variables. In the case of firms with high debt ratios, investment activity decreases due to the high bankruptcy risk [13]. We use LEV, which represents the debt ratio and Z, which measures the bankruptcy risk by Altman's Z-score. We use CFO, which divides cash flow from operating activities into total assets, and TANG, which divides the tangible assets into total assets, LOSS, which means net loss. We use MB, which is the market-to-book value ratio of equity, OPCYLCE, which takes natural logarithm of operating cycle, and volatility (STD\_CFO,

The sample in this study is all companies listed on the Korean Stock Exchange from 2011 to

3. companies with more than 5% shares of NPS and controlled groups matched using PSM.

4. companies that can obtain relevant financial information from data guide.

Qi,t <sup>¼</sup> <sup>β</sup><sup>0</sup> <sup>þ</sup> <sup>β</sup>1DIVi,t <sup>þ</sup> <sup>β</sup>2DIVi,t∗NPFi,t�<sup>1</sup> <sup>þ</sup> <sup>β</sup>3NPFi,t�<sup>1</sup> <sup>þ</sup>Xβii

(1)

59

Controlsi,t�<sup>1</sup> (2)

http://dx.doi.org/10.5772/intechopen.75578
