Corporate payout policy in dual-class firms

We examine corporate payout policy in dual-class firms. The expropriation hypothesis predicts that dual-class firms pay out less to shareholders because entrenched managers want to maximize the value of assets under control and the associated private benefits. The pre-commitment hypothesis predicts that dual-class firms pay out more to shareholders because firms use corporate payouts as a pre-commitment device to mitigate agency costs. Our results support the pre-commitment hypothesis. Dual-class firms have higher cash dividend payments and total payouts, and they use more regular cash dividends rather than special dividends or repurchases, compared to their propensity-matched single-class firms. Dual-class firms with severe free cash flow-related agency problems and few growth opportunities rely even more on corporate payouts as a pre-commitment mechanism. We also rule out the alternative explanation that dual-class firms pay out more because super-voting shareholders lack the ability to generate home-made dividends by selling shares since super-voting shares are often non-tradable or very illiquid.     

Agency problems,product market competition and dividend policies in Japan

This study investigates whether product market competition reduces agency problems between controlling shareholders and minority shareholders in Japan. In particular, we examine firms’ dividend policies in competitive versus concentrated industries. In a large sample of Japanese firms, we find that firms in more competitive industries pay more dividends, are more likely to increase dividends and are less likely to omit dividends. Furthermore, the impact of firm‐level agency problems on dividend payouts is weaker in highly competitive industries. The results suggest that product market competition can be an effective industry‐level governance mechanism that can force managers to disgorge cash to outside investors.     

Dividend payouts and catering to demands: Evidence from a dividend tax reform

Utilizing the 2012 dividend tax reform in China, this paper examines how firms make dividend payout decisions that cater to the controlling shareholders' demand, especially when controlling shareholders and outside minority shareholders have different dividend preferences. We find that firms increase dividend payouts when controlling shareholders demand higher dividends after the dividend tax reform. In particular, firms pay higher dividends when facing increased demand from controlling shareholders than when the demand is from minority investors. In addition, we find that firms that increase dividend payments due to the controlling shareholders' demand subsequently have more debt financing and poorer firm performance, suggesting that catering to the demands from controlling shareholders is subject to the Type II agency problem.     

Earned/contributed capital, dividend policy, and disclosure quality: An international study

We examine the agency cost version of the lifecycle theory of dividends by taking advantage of cross-country variations in disclosure environments. The outcome hypothesis posits that transparent disclosure environments lead to higher dividend payouts because shareholders can more accurately measure (and therefore demand) excess cash flows. In contrast, the substitute hypothesis argues that opaque disclosure environments lead to higher payouts because managers have stronger incentives to establish their reputation for fair treatment. Our empirical results confirm both hypotheses and contribute to the literature in two primary ways. First, we confirm that the lifecycle theory of dividends explains dividend payout patterns around the world. Second, and more important, we show that the firm’s disclosure environment plays a significant role in dividend payouts through its effect on agency costs; that is, we confirm an agency cost-inclusive lifecycle theory of dividends.     

Corporate Governance and Dividend Payout Policy: A Test Using Antitakeover Legislation

Managers strongly prefer not to pay dividends as dividend payouts reduce the amount of cash subject to managerial discretion ( Easterbrook, 1984 ; Jensen, 1986 ). Previous empirical tests of the relationship between corporate governance and dividend payout policy employ endogenous measures of this agency problem. Using a relatively exogenous measure that incorporates state antitakeover laws and the differences‐in‐differences approach, our analysis indicates that dividend payout ratios and propensities fall when managers are insulated from takeovers. The impact of antitakeover laws on dividend payouts is more pronounced for firms with poor corporate governance and small firms.     

Investor protection,taxation, and dividends

We test the impact of taxes and governance systems on dividend payouts across countries. We show that, unlike previous studies, firms in strong investor protection countries pay lower cash dividends than in weak protection countries when the classical tax system is implemented, but they repurchase more shares to maximise their shareholders' after-tax returns. In weak protection countries, cash dividends and repurchases are low and less responsive to taxes. Our results suggest that when investors are protected, they weigh the tax cost of dividends against the benefit of mitigating the agency cost, but, when they are not, they accept whatever dividends they can extract, even when this entails high tax costs.     

Managerial entrenchment and payout policy: A catering effect

Agency theory suggests that entrenched managers are less likely to pay dividends. However, according to the catering theory, external pressures from investors can force managers to increase dividend payments. Hence, we test whether entrenched managers respond to investor demand for dividends and share repurchases. Using a large sample of 9677 US firms over the period 1990–2016 (i.e. a total of 80,478 firm-year observations), we test and find evidence that managerial entrenchment negatively impacts dividend payments. Our findings suggest that catering effects weaken the negative impact of managerial entrenchment on payout policy and that in firms with entrenched managers an increase in the propensity to pay dividends is conspicuous only when there is external investor demand for dividends. Our results indicate that while insiders and institutional owners might not necessarily favour dividend payments, firms respond to catering incentives when dominated by insiders but not institutional owners. Overall, our findings are consistent with the view that dividend payments are a result of external pressures to reduce agency problems associated with firms run by entrenched managers.     

Stop the presses! Or wait,we might need them: Firm responses to local newspaper closures and layoffs

Media as a whole has been shown to play an important role as an information source, information intermediary, and monitor of public firms, but much less is known about whether local newspapers play a similar role. We attempt to shed light on this issue, and we investigate if and how firms respond to changes in the local newspaper industry, where closures and layoffs have become the norm. Compared to a sample of matched control firms, we find that following newspaper closures and large industry layoffs, nearby public companies boost dividend payouts. This result follows from prior research suggesting that investors pressure managers to increase dividends in response to growing agency problems. Cross-sectional analyses confirm that our results are driven by geographically-concentrated firms that rely more heavily on local newspapers as a monitor and information source. Our findings suggest that local newspapers play an important role as an information intermediary and monitor of public firms, and that the disappearance of local newspapers exacerbates agency problems in nearby firms that tend to be remedied by higher dividends.     

An international analysis of dividend smoothing

This study examines the extent to which agency-based models and asymmetric information theories explain dividend smoothing around the world. Tests on a cross-section of more than two thousand firms from twenty-four countries show that managers of firms with low market-to-book ratios and less cash engage in greater dividend smoothing. Further, firms with highly-concentrated ownership structure and strong corporate governance smooth dividends less. In addition, managers of firms in industries facing high levels of competition smooth dividends more. We also determine that the extent of legal protections provided to shareholders and the culture of the country in which the firm is incorporated, as well as tax regime, have additional explanatory power for dividend smoothing. Our results are most consistent with the simultaneous presence of agency and information asymmetry effects in the decision to smooth dividends.     

Agency Cost,Dividend Policy and Growth: The Special Case of REITs

Dividend distribution enhances information transmission, and mitigates agency conflicts by restricting managers’ access to free cash flow, and exposing firms to the scrutiny and monitoring by market participants when raising external capital. The reduction in agency costs and improvement in information dissemination reduce the cost of funds, and investment at more competitive cost of capital enhances firm value. For REITs, because of the mandated high dividend distribution, growth depends on the availability of external capital at competitive rates, such that mitigation of agency costs is critical to sustain growth. We examine the relation between dividends and growth with a sample of U.S. equity REITs. Our data reveal a significantly positive relation between externally financed growth and dividend payments. The relation is stronger among REITs with more growth opportunities, and REITs that issue new equity and debt. We interpret this evidence as consistent with the notion that by reducing agency costs and facilitating capital raising, dividends enhance growth.     

Payout Policy with Legal Restrictions

We hypothesize that firms that face limitations on debt may use increased dividend payments to mitigate the free cash flow problem. Limitations on debt are implicit in state laws that restrict the firm from making payouts when the asset‐to‐liability ratio is low. We find that: 1) firms incorporated in states with stricter payout restrictions pay more dividends, 2) the probability of paying dividends or repurchasing shares decreases as firms approach a binding payout constraint, and 3) bonding with dividends is less prevalent with increased managerial equity holdings. In addition, antitakeover and director liability laws have a less consistent effect on payout policy.     

Corporate dividend policy in practice: Evidence from an emerging market with a tax-free environment

Several theories have been proposed to explain why companies pay dividends. However, as of today, the dividend policy remains a puzzle as no convincing explanation has been given as to why firms pay cash dividends to their shareholders. This paper contributes to this debate by examining the dividend policy in an emerging market that has a tax-free environment. Specifically, we follow Brav et al. (2005) and examine this issue using survey and field interviews, in the particular context of the United Arab Emirates. Our results provide support for the proposition that dividend policy is conservative. We also find that dividends in the UAE are considered by managers as a residual cash flow, and are determined after investment decisions are made. When examining the determinants of dividend policy, we find that taxes are not important, that institutional investors are expected to play a role in disciplining managers, and that dividends may play a disciplinary role as well in controlling agency conflicts.     

The effect of financial reporting quality on corporate dividend policy

This study examines how financial reporting quality affects corporate dividend policy. We find that higher quality reporting is associated with higher dividends. This positive association is more pronounced among firms with more severe free cash flow problems and among firms with higher ownership by monitoring-type institutional investors. Further analysis of the relation between reporting quality and under?/over-payment of dividends suggests that reporting quality largely mitigates underpayment of dividends. Additionally, both a granger causality test and a difference-in-difference analysis of dividend changes around a quasi-exogenous reporting event yield evidence consistent with the direction of causality going from financial reporting to dividends. Overall, these findings are consistent with financial reporting quality acting as a governance mechanism that induces managers to pay dividends by disciplining free cash flow problems. Our findings support the view that dividends are the result of enhanced monitoring (Jensen 1986; La Porta, Lopez-de-Silanes, Shleifer, and Vishny 2000).     

The role of cross-listing,foreign ownership and state ownership in dividend policy in an emerging market

In this paper, we investigate if dividend policy is influenced by ownership type. Within the dividend literature, dividends have a signaling role regarding agency costs, such that dividends may diminish insider conflicts (reduce free cash flow) or may be used to extract cash from firms (tunneling effect) – which could be predominant in emerging markets. We expect firms with foreign ownership and those that are listed in overseas markets to have different dividend policies and practices than those that are not, and firms with more state ownership and less individual ownership to be more likely to pay cash dividends and less likely to pay stock dividends. Using firms from an emerging economy (China), we examine whether these effects exist in corporate dividend policy and practice. We find that both foreign ownership and cross-listing have significant negative effects on cash dividends, consistent with the signaling effect and the notion of reduced tunneling activities for firms with the ability to raise capital from outside of China. Consistent with the tunneling effect, we find that firms with higher state ownership tend to pay higher cash dividends and lower stock dividends, while the opposite is true for public (individual) ownership. Further analysis shows that foreign ownership mediates the effect of state ownership on dividend policy. Our results have significant implications for researchers, investors, policy makers and regulators in emerging markets.     

Dividend policy and permanence of earnings

We examine managers’ adjustment of dividends to information about earnings. We base our analysis on a ‘permanent earnings’ model of dividend behavior, which implies that dividends are changed primarily in response to permanent changes in earnings; transitory earnings changes have little or no effect on dividends. Within the permanent earnings framework, the permanent component of earnings may be the predominant factor affecting dividend payouts, or it may be one of the important factors affecting dividends. In the former case earnings and dividends are co-integrated; in the latter they are not. Using a sample of 337 firms over the 40 year period from 1950–1989, we find the data to be strongly consistent with the permanent earnings model. We also find that the data are more consistent with a model that relates dividend and earnings changes rather than levels. Thus, we conclude that earnings and dividends are not co-integrated. This contrasts with the implicitly co-integrated (levels) dividend model of Lintner (1956), and indicates that factors other than the permanent component of earnings, such as tax policy, clientele effects, transaction costs, etc. may have a significant impact on the long-run behavior of dividends.     

How do bond investors perceive dividend payouts?

We explore how bond investors view corporate cash distributions through dividends and how that view influences corporate cost of debt. Explaining between 45 and 67 percent of variance in credit spreads at the time of issuance, our model reveals a non-linear association between dividend payouts and investment return expected by bondholders. In particular, while bondholders view cash disbursements in small amounts as a positive signal, large dividend payouts are viewed negatively. Our results thus provide support for both the signaling hypothesis and for the agency-cost-of-debt hypothesis. The results are robust even after controlling for firm size, growth opportunities, profitability, leverage, business risk, asset tangibility, and term structure. Exploiting the 2003 dividend tax cut as an exogenous shock, we demonstrate that our results are not vulnerable to endogeneity problems. Finally, we find no evidence of corporations timing the payouts strategically to influence the cost of debt.     

Dividend Policies of Privately Held Companies: Stand‐Alone and Group Companies in Belgium

This study examines the dividend policies of privately held Belgian companies, differentiating between stand‐alone companies and those affiliated with a business group. We find that privately held companies typically do not pay dividends. Compared to public companies, they are less likely to pay dividends and they have lower dividend payouts. Our results also suggest that group companies pay more dividends than stand‐alone companies, consistent with the hypothesis that tax‐exempt group firms redistribute dividend payments on the group's internal capital market. Group companies pay higher dividends if they have minority shareholders.     

Institutional tax clienteles and payout policy

This paper employs heterogeneity in institutional shareholder tax characteristics to identify the relation between firm payout policy and tax incentives. Analysis of a panel of firms matched with the tax characteristics of the clients of their institutional shareholders indicates that “dividend-averse” institutions are significantly less likely to hold shares in firms with larger dividend payouts. This relation between the tax preferences of institutional shareholders and firm payout policy may reflect dividend-averse institutions gravitating towards low dividend paying firms or managers adapting their payout policies to the interests of their institutional shareholders. Evidence is provided that both effects are operative. Plausibly exogenous changes in payout policy result in shifting institutional ownership patterns. Similarly, exogenous changes in the tax cost of institutional investors receiving dividends results in changes in firm dividend policy.     

Dividend Payouts and Corporate Governance Quality: An Empirical Investigation

Motivated by agency theory, we investigate how a firm's overall quality of corporate governance affects its dividend policy. Using a large sample of firms with governance data from The Institutional Shareholder Services, we find that firms with stronger governance exhibit a higher propensity to pay dividends, and, similarly, dividend payers tend to pay larger dividends. The results are consistent with the notion that shareholders of firms with better governance quality are able to force managers to disgorge more cash through dividends, thereby reducing what is left for expropriation by opportunistic managers. We employ the two‐stage least squares approach to cope with possible endogeneity and still obtain consistent results. Our results are important as they show that corporate governance quality does have a palpable impact on critical corporate decisions such as dividend policy.     

Elective stock and scrip dividends

We investigate firms' decisions to pay elective stock dividends, known in the UK as scrip dividends. Scrip dividends give investors the choice between receiving new shares or the equivalent value as a cash dividend. UK firms paying scrip dividends are more likely to be financially constrained, and scrip dividends are used more when access to external financing is costly. Our results are robust to using the 2008 financial crisis as an exogenous shock to credit supply. Cash preservation is the most important corporate incentive to use scrip dividends as they tend to be distributed in combination with dividend cuts and with major corporate investments such as debt-financed mergers and acquisitions. Analysis of US dividend reinvestment plans by which investors purchase new shares confirms firms' cash-preservation motives.