Resumo

A set of good corporate governance practices is suggested as able to control management activity and prevent managers from incurring in moral hazard problems and the emergence of excessive management power as predicted by the Managerial Power Hypothesis. Ownership Structure has been considered to be able to influence many firm policies. Under the Agency Theoretical framework, the Management Monitoring Hypothesis proposes that dividend policy may be used as management control mechanism given that dividend distribution affects the free cash flow available for managers.

Nonfinancial firm as shareholder of other firm is focused on firm performance as well as the relation among firms. For that, good management behavior is an important requirement. The paper aims to analyze whether the Management Monitoring Hypothesis holds for Brazilian firms with a nonfinancial firm as the dominant controlling shareholder. The proposal is that a nonfinancial firm as a controlling shareholder will use dividend payout in a way to avoid excess free cash flow in hands of managers.

Under the Agency Theoretical framework agency conflicts between shareholders and managers require most attention. Ownership structure is not a corporate governance mechanism but the role of shareholders on management control seems to be relevant. Controlling blockholders are able to influence firm policies. One important control over management is avoiding excess free cash flow available which might lead to the undesirable undertaking of negative net present value projects. Such control may be obtained through dividend policy given that dividend distribution will reduce excess free cash flow.

A set of dividend models were estimated by the generalized method of moments (GMM) for an unbalanced panel data, composed of 1.890 firm-year observations of 234 companies listed on the BM&FBovespa, in the period 1996-2012.

The results indicate that nonfinancial firms as large shareholders increase dividend payout. This result is in accordance with the monitoring hypothesis which predicts the reduction of free cash flow available for managers through dividend policy.

The work presents an additional contribution to the understanding of the Brazilian company’s dividend policy by providing evidence in the context of the agency conflicts. In fact, nonfinancial firms as large shareholders seem to have an important role in determining the dividend policy in Brazil. They seem to use it to avoid excess free cash flow available for managers. Besides being good to firm management such policy is also beneficial to minority shareholders.

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