Shareholder Activism and Dividend Policy of the Firms: The Moderating Role of Financial Distress

Abstract

Shareholder activism (SHA) has caught the fancy of all the stakeholders in the corporate world, including policymakers. It is here for the long haul. However, the role of SHA in operating performance and valuation is equivocal. In addition, there is a dearth of research on SHA’s impact on profit distribution decisions. This research gap is the primary motivation for the current study. Measuring SHA is a challenge, which is undertaken in the study in the form of building an SHA index. Panel data of 76 diversified non-financial firms is gathered for 5 years (2015–2016 to 2019–2020). Static and dynamic panel data econometrics are deployed to estimate three models (baseline, square and model with the interaction term). It is found that SHA linearly and positively impacts the dividend pay-out. In addition, financial stability (inverse of financial distress) positively moderates the SHA’s association for dividends. Investors preferring dividends can use these findings to their gain, is one of the main implications of the study. It is recommended that policymakers should take some legislative action to protect managers from the negative influence of SHA, especially regarding dividend decisions.