DIVIDENDS ON COMMON AND PREFERRED SHARES: THE RELATIONSHIP WITH THE OWNERSHIP CONCENTRATION IN RUSSIAN PUBLIC COMPANIES

(ProQuest: . denotes formula omitted.)1. IntroductionThe growing attention to the agency problem and to the role of dividends in mitigating an agency problem is explained, in particular, by the growing number of corporate scandals related to violation of shareholders' rights and to managers using insider information for personal enrichment. The corporate scandals, having resounded around the world during the recent decade, revealed serious drawbacks in corporate governance systems. Thus, the study of dividend policy, as a way to mitigate the agency problem and the factors affecting it, is of relevance in general and in the context of the Russian market, for example, in view of existence of such factors aggravating the agency problem as high concentration of ownership and weak legal protection of shareholders' rights.There is a limited number of studies based on Russian companies and dealing with the problems range in question. This research, in a way filling up the gap in the studies in place, is based on data on companies having two classes of shares simultaneously traded on RTS stock exchange during 2003-2009.2. Dividend policy, corporate governance and dual class shares structuresAccording to Jensen and Meckling (Jensen, Meckling, 1976), agency costs arise when the decisions taken by the managers entail destruction of the company's value and the investors have to incur monitoring costs. One of the mechanisms capable to reduce agency costs is decrease of the cash flow at the managers' disposal. Availability of an ample free cash flow results in managers adopting more investment programs even if with low net present value (NPV). Thus, payment of extra funds to shareholders in the form of dividends is more appropriate to avoid such funds spending in a way ineffective from the point of view of the company value maximization. Easterbrook (Easterbrook, 1984) notes that dividends are the main means of reduction of the cash flow available to managers and play an important role in the agency problem mitigation.Another argument in favour of dividend payment is the assertion that firm pay dividends in order to create a favourable image and avoid underestimate of the company in situations when the firm has to raise external capital. Increasing the dividends paid, the company has to resort to the capital market to raise funds to make investments. This entails thorough evaluation of the management's decisions by potential investors which also mitigates the agency problem.According to studies (such as, for example: (Shleifer, Vishny, 1997; La Porta et al., 2000)), pyramidal structures of property, cross-holdings, issue of two or more types of shares and other mechanisms used for changing the proportionality and distribution of risk and control within the company represent a source of agency costs. These instruments are capable to increase private benefits from control and the conflict of interests between major and minority shareholders and, accordingly, may affect the company's dividend policy. R.La Porta (La Porta et al., 2000) qualifies issue of two classes of shares as one of the most apparent and frequent ways of managers and shareholders "entrenchment". In companies with two classes of shares cash flow and voting rights are distributed unequally. Thus, in companies with two classes of shares the conflict of interests is more acute than in those with but a single class of shares. Co-existence of two classes of shares within a company enables the largest holder to maintain control over the company through holding a large portion of voting shares without the need to have hold of shares conferring rights to cash flow only. Thus, the largest shareholder is capable to control decision-taking within the company without assuming the costs burden. This enables a greater extent of benefiting at the expense of minority shareholders as compares to largest shareholders of companies with but a single class of shares. …