Abstract
This paper posits that the relevance and indeed the assumptions of the dividends cost minimization model are restricted to those countries where shareholders rights are well protected. Alternatively, we propose an "investor power" hypothesis, which is closely akin to the La Porta et al. (2000) "outcome hypothesis". Our hypothesis states that the determining factor of dividends payout in a weak legal system is not the minimization of agency costs, instead it is the presence of certain powerful outside investors who can force firms to pay out dividends. Using two variants of the dividends cost minimization model and a modified version of the dividends partial adjustment model on a data set for 183 Pakistani listed firms, our results partially support the investor power hypothesis. Results of the mean-comparison tests as well as the regression models show that dividend-payout ratio decreases with the ownership percentage of individual shareholders and the incumbent managers. Our empirical results indicate that there is only weak evidence that institutional investors can force managers to pay dividends. Among the other variables, dividend payout ratio increases with the size of a firm and ownership percentage of associated companies, and decreases with financial leverage, coefficient of variation of net income, and growth opportunities.