1. Introduction

The purpose of this study is to analyze the effect of the demand for higher dividends of Korea's National Pension Service (NPS) on firm value. The NPS is one of the top three pension funds in the world, together with Japan's public pension fund and Norwegian sovereign fund. At the same time, it is one of the fastest growing pension funds in the world. The NPS is expected to grow to \$ 1.21 trillion by 2025, from \$ 0.54 trillion in the first quarter of 2017. According to the

© 2016 The Author(s). Licensee InTech. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use, distribution, and eproduction in any medium, provided the original work is properly cited. © 2018 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

investment portfolio of the NPS, the portion of bonds invested in the first quarter of 2017 is 53.3% and the share of equity investments is 35.1%. Domestic equity investment accounted for 19.6% of total assets, and it reaches about 6.83% of the total amount. As of the second quarter of 2017, the NPS is the largest or the second largest shareholder of Korea's major conglomerates, including Samsung Electronics, Naver, and Hyundai Motor, and has more than 5% stake in more than 20% of the top 10 listed companies.

dividend increases can transform investors who have made short-term investments into longterm investors, which can increase the investment assets of companies and create jobs through

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On the other hand, there are opinions that it is not appropriate for the NPS to exercise dividend pressure with the voting rights as a weapon when management risks are high due to its opaque management environment. Determination of the dividend rate is one of the core management decisions of the enterprise. If the NPS directly demands the high dividend, companies will be severely constrained by financial strategy. At present, the investment tendency of Korean companies is considerably high compared with developed countries, and facility investment has also slowed down during the financial crisis but has steadily increased since 2002. Therefore, the increase of corporate dividend by NPS can reduce the entrepreneur-

In addition, the industrial structure of Korea is highly composed of industries with low dividend payout such as IT, automobile, and industrial goods, while the ratio of industries with high dividend payout such as finance, utility, and consumer goods is relatively low. Since the industrial structure is very sensitive to the global economy compared to developed countries with high dividend payout ratio, simple comparison of dividend payout ratio between countries may not be appropriate. Also, if free cash flow is cash dividend payable, other companies except the top 10 Chaebol group's companies cannot afford dividends. Therefore, it is unreasonable for the pension fund to make long-term investment decisions to pursue

While the expectation and concern about the dividend pressure of the NPS coexist, we examine whether the dividend increase of Korean companies due to ask of NPS has an effect on the firm value. Specifically, firm value is measured by Tobin's Q, and the dividend pressure of the NPS is measured through the intersection of the NPS's more than 5% stake and the dividend level.

Most of the results show that NPS's dividend pressure does not have a significant effect on firm value. However, it is confirmed that there is a significant positive relation between dividend level and firm value. In other words, Korean listed companies may consider increasing dividends as one of the ways to increase corporate value. In addition, firms with large shareholdings of NPS tend to have high corporate value. This implies that the expansion of the investment of the NPS to domestic enterprises improves the corporate value and the improved corporate value results in the better performance of the NPS, the largest shareholder, that is, a virtuous cycle structure is established. On the other hand, NPS dividend pressure has a negative effect on firm value in some analyzes after controlling endogeneity and heterogeneity, however, this is not the result of consistency in all analyses, so it is appropriate to generalize it

The contribution of this study is as follows. First, I examine the relationship between corporate dividend policy and firm value. The previous study focused on verifying the relationship between firm value and dividend policy determined by the firm itself. On the other hand, this study examines the relationship between corporate value and dividend policy based on the demand of NPS rather than voluntary decisions by companies. I have noted the special

ial motivation of companies and lead to decrease of firm value.

short-term high returns by high dividends.

through further studies in the future.

investment.

As the funding of the NPS grows, the returns of the pension funds become more important. This is because the yield of the national pension is linked to the welfare level of the people and the old age. As the low interest rate policy and the low growth trend have prolonged since the financial crisis, the NPS has been steadily demanding to increase the dividend to major domestic corporations in order to improve the pension management profit rate. Moreover, as the Enforcement Decree of the Capital Market Law was revised at the end of 2014 in Korea, NPS could demand dividends from invested companies even if the purpose of holding them is not management participation. This means that the government has provided legal grounds for the NPS to ask domestic companies to increase their dividends. In addition, the government has also encouraged companies to increase their dividends by introducing corporate taxation system for reserves for a limited period starting from 2014 in order to increase household incomes and stimulate investment of companies.

Although the dividend payout ratio and dividend ratio still do not reach the global level, cash dividends of Korean companies have increased sharply since 2014. The increase in dividend size is attributed to the increased demand from shareholders for dividends, including the NPS, and the government's policy to increase dividends. According to a recent survey of wealth management experts, more than half of the respondents said they should raise their dividend pressure levels above current levels. In addition, among some companies, dividends are considered to be effective in improving corporate image and investment, and companies are expected to participate in additional dividends.

In the meantime, Korean companies have been criticized by shareholders for their lowdividend payout ratio. In 2017, the global dividend yield is 2.48%, 2.46% in advanced economies, and 2.6% in emerging economies. However, in Korea, the average dividend yield of 522 companies, which made cash dividends in December 2016, is only 1.8%. According to market researcher Thomson Reuters, Korean listed companies' dividend levels in the first half of 2016 were 16th among 17 major countries. It has been pointed out that the dubious propensity of Korean companies to pay dividends in the global market hinders investment sentiment in the Korean market, resulting in "Korea discount." Under this circumstance, dividend pressure of the NPS contributes to resolving Korea discounts and realizes the high value of shareholder return through active voting rights and shareholder rights exercises.

Moreover, the top 30 of Korean companies recorded the highest surplus in 2017. 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 situation, the increase of the dividend of Korean companies can contribute to reducing the agency cost and strengthening the distribution function of profit. In addition, in the prolonged low-interest-rate framework, firms' dividend increases can transform investors who have made short-term investments into longterm investors, which can increase the investment assets of companies and create jobs through investment.

investment portfolio of the NPS, the portion of bonds invested in the first quarter of 2017 is 53.3% and the share of equity investments is 35.1%. Domestic equity investment accounted for 19.6% of total assets, and it reaches about 6.83% of the total amount. As of the second quarter of 2017, the NPS is the largest or the second largest shareholder of Korea's major conglomerates, including Samsung Electronics, Naver, and Hyundai Motor, and has more than 5% stake

As the funding of the NPS grows, the returns of the pension funds become more important. This is because the yield of the national pension is linked to the welfare level of the people and the old age. As the low interest rate policy and the low growth trend have prolonged since the financial crisis, the NPS has been steadily demanding to increase the dividend to major domestic corporations in order to improve the pension management profit rate. Moreover, as the Enforcement Decree of the Capital Market Law was revised at the end of 2014 in Korea, NPS could demand dividends from invested companies even if the purpose of holding them is not management participation. This means that the government has provided legal grounds for the NPS to ask domestic companies to increase their dividends. In addition, the government has also encouraged companies to increase their dividends by introducing corporate taxation system for reserves for a limited period starting from 2014 in order to increase

Although the dividend payout ratio and dividend ratio still do not reach the global level, cash dividends of Korean companies have increased sharply since 2014. The increase in dividend size is attributed to the increased demand from shareholders for dividends, including the NPS, and the government's policy to increase dividends. According to a recent survey of wealth management experts, more than half of the respondents said they should raise their dividend pressure levels above current levels. In addition, among some companies, dividends are considered to be effective in improving corporate image and investment, and companies are

In the meantime, Korean companies have been criticized by shareholders for their lowdividend payout ratio. In 2017, the global dividend yield is 2.48%, 2.46% in advanced economies, and 2.6% in emerging economies. However, in Korea, the average dividend yield of 522 companies, which made cash dividends in December 2016, is only 1.8%. According to market researcher Thomson Reuters, Korean listed companies' dividend levels in the first half of 2016 were 16th among 17 major countries. It has been pointed out that the dubious propensity of Korean companies to pay dividends in the global market hinders investment sentiment in the Korean market, resulting in "Korea discount." Under this circumstance, dividend pressure of the NPS contributes to resolving Korea discounts and realizes the high value of shareholder

Moreover, the top 30 of Korean companies recorded the highest surplus in 2017. 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 situation, the increase of the dividend of Korean companies can contribute to reducing the agency cost and strengthening the distribution function of profit. In addition, in the prolonged low-interest-rate framework, firms'

in more than 20% of the top 10 listed companies.

54 Firm Value - Theory and Empirical Evidence

household incomes and stimulate investment of companies.

return through active voting rights and shareholder rights exercises.

expected to participate in additional dividends.

On the other hand, there are opinions that it is not appropriate for the NPS to exercise dividend pressure with the voting rights as a weapon when management risks are high due to its opaque management environment. Determination of the dividend rate is one of the core management decisions of the enterprise. If the NPS directly demands the high dividend, companies will be severely constrained by financial strategy. At present, the investment tendency of Korean companies is considerably high compared with developed countries, and facility investment has also slowed down during the financial crisis but has steadily increased since 2002. Therefore, the increase of corporate dividend by NPS can reduce the entrepreneurial motivation of companies and lead to decrease of firm value.

In addition, the industrial structure of Korea is highly composed of industries with low dividend payout such as IT, automobile, and industrial goods, while the ratio of industries with high dividend payout such as finance, utility, and consumer goods is relatively low. Since the industrial structure is very sensitive to the global economy compared to developed countries with high dividend payout ratio, simple comparison of dividend payout ratio between countries may not be appropriate. Also, if free cash flow is cash dividend payable, other companies except the top 10 Chaebol group's companies cannot afford dividends. Therefore, it is unreasonable for the pension fund to make long-term investment decisions to pursue short-term high returns by high dividends.

While the expectation and concern about the dividend pressure of the NPS coexist, we examine whether the dividend increase of Korean companies due to ask of NPS has an effect on the firm value. Specifically, firm value is measured by Tobin's Q, and the dividend pressure of the NPS is measured through the intersection of the NPS's more than 5% stake and the dividend level.

Most of the results show that NPS's dividend pressure does not have a significant effect on firm value. However, it is confirmed that there is a significant positive relation between dividend level and firm value. In other words, Korean listed companies may consider increasing dividends as one of the ways to increase corporate value. In addition, firms with large shareholdings of NPS tend to have high corporate value. This implies that the expansion of the investment of the NPS to domestic enterprises improves the corporate value and the improved corporate value results in the better performance of the NPS, the largest shareholder, that is, a virtuous cycle structure is established. On the other hand, NPS dividend pressure has a negative effect on firm value in some analyzes after controlling endogeneity and heterogeneity, however, this is not the result of consistency in all analyses, so it is appropriate to generalize it through further studies in the future.

The contribution of this study is as follows. First, I examine the relationship between corporate dividend policy and firm value. The previous study focused on verifying the relationship between firm value and dividend policy determined by the firm itself. On the other hand, this study examines the relationship between corporate value and dividend policy based on the demand of NPS rather than voluntary decisions by companies. I have noted the special 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 demand for the NPS.

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

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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

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

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

costs, and the creation of jobs through investment expansion.

depending on the year.

2.2. Hypothesis setting

dividends.

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 to mitigate self-selection bias.

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.
