USING DIVIDEND POLICY AND MANAGERIAL OWNERSHIP TO REDUCE AGENCY COSTS

In this study we examine dividends and chief executive officer (CEO) stock ownership as interrelated mechanisms that may be used to reduce agency costs. We find a significant nonmonotonic relation between dividend yield and CEO stock ownership. Our evidence shows that until the CEO becomes entrenched, increased executive stock ownership reduces agency costs and decreases dividend yield. Beyond that point, increased stock ownership increases dividend yield. Whether additional stock ownership can reduce agency costs depends upon the CEO's degree of control in the firm.     

THE AGENCY COST RATIONALE FOR REFUNDING DISCOUNTED BONDS

The purpose of this paper is to enhance the understanding of management's motivation for engaging in debt-for-debt exchange offers where new long-term debt with a higher coupon rate is substituted for outstanding debt that is trading at a substantial discount. Some previously advanced arguments that imply a positive effect of such refunding of debt are examined, and their weaknesses are discussed. Then an alternative argument utilizing agency cost theory is advanced, and empirical results are presented to support this alternative argument.     

A TEST OF THE EASTERBROOK HYPOTHESIS REGARDING DIVIDEND PAYMENTS AND AGENCY COSTS

Easterbrook (1984) argues that dividend payments may be an ambiguous signal unless the market can distinguish growing firms from disinvesting firms. Shares of growing firms that announce both financing and dividend increases are predicted to rise more in value than shares of firms announcing a dividend increase alone. We examine the relation between prior financing activity and the market response to initial dividends and find evidence consistent with the Easterbrook agency cost model.