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Dividend payout and corporate governance along the corporate life-cycle

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  • Thomas O'Connor

    ()
    (Department of Economics Finance and Accounting, National University of Ireland, Maynooth)

Abstract

Manuscript Type: Empirical Research Question/Issue: This study seeks to test the outcome and substitution agency models of dividends at different stages of the corporate life-cycle. Research Findings/Insights: In a sample of 220 firms from 21 emerging market countries, I show that the outcome model of dividends, which predicts that dividend payout increases in the strength of shareholder rights, prevails all along the corporate life-cycle, but only where creditor rights are strong. Hence, the agency cost of equity and debt version of the outcome model of dividends holds. I find no evidence in support of the substitution model of dividends. Theoretical/Academic Implications: The findings in this paper serve to highlight the profound influence that creditors exert on corporate payout policy. When shareholders enjoy considerable legal rights, but not so creditors, creditors demand, and firms consent to lower dividends. Furthermore, I find no evidence to suggest that firms substitute (large) dividends for poor governance in emerging markets.

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Bibliographic Info

Paper provided by Department of Economics, Finance and Accounting, National University of Ireland - Maynooth in its series Economics, Finance and Accounting Department Working Paper Series with number n228-12.pdf.

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Length: 32 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:may:mayecw:n228-12.pdf

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Postal: Maynooth, Co. Kildare
Phone: 353-1-7083728
Fax: 353-1-7083934
Web page: http://economics.nuim.ie
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Related research

Keywords: Corporate Governance; Agency Models of Dividends; Corporate Life-Cycle; Creditor Rights; Emerging Markets.;

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  1. Klapper, Leora F. & Love, Inessa, 2004. "Corporate governance, investor protection, and performance in emerging markets," Journal of Corporate Finance, Elsevier, vol. 10(5), pages 703-728, November.
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  3. Aggarwal, Reena & Erel, Isil & Stulz, Rene M. & Williamson, Rohan, 2007. "Differences in Governance Practices between U.S. and Foreign Firms: Measurement, Causes, and Consequences," Working Paper Series 2007-14, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
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  6. Rene M. Stulz & Craig Doidge & Andrew Karolyi, 2004. "Why Do Countries Matter So Much for Corporate Governance?," NBER Working Papers 10726, National Bureau of Economic Research, Inc.
  7. Denis, David J. & Osobov, Igor, 2008. "Why do firms pay dividends? International evidence on the determinants of dividend policy," Journal of Financial Economics, Elsevier, vol. 89(1), pages 62-82, July.
  8. Paul A. Gompers & Joy L. Ishii & Andrew Metrick, 2002. "Corporate Governance and Equity Prices," Center for Financial Institutions Working Papers 02-32, Wharton School Center for Financial Institutions, University of Pennsylvania.
  9. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
  10. Gustavo Grullon & Roni Michaely & Bhaskaran Swaminathan, 2002. "Are Dividend Changes a Sign of Firm Maturity?," The Journal of Business, University of Chicago Press, vol. 75(3), pages 387-424, July.
  11. Easterbrook, Frank H, 1984. "Two Agency-Cost Explanations of Dividends," American Economic Review, American Economic Association, vol. 74(4), pages 650-59, September.
  12. Bartram, Söhnke M. & Brown, Philip & How, Janice C.Y. & Verhoeven, Peter, 2007. "Agency Conflicts and Corporate Payout Policies: A Global Study," MPRA Paper 23244, University Library of Munich, Germany.
  13. Mitton, Todd, 2004. "Corporate governance and dividend policy in emerging markets," Emerging Markets Review, Elsevier, vol. 5(4), pages 409-426, December.
  14. Chen, Kevin C.W. & Chen, Zhihong & Wei, K.C. John, 2009. "Legal protection of investors, corporate governance, and the cost of equity capital," Journal of Corporate Finance, Elsevier, vol. 15(3), pages 273-289, June.
  15. Brockman, Paul & Unlu, Emre, 2011. "Earned/contributed capital, dividend policy, and disclosure quality: An international study," Journal of Banking & Finance, Elsevier, vol. 35(7), pages 1610-1625, July.
  16. Brockman, Paul & Unlu, Emre, 2009. "Dividend policy, creditor rights, and the agency costs of debt," Journal of Financial Economics, Elsevier, vol. 92(2), pages 276-299, May.
  17. Art Durnev & E. Han Kim, 2007. "Explaining Differences in the Quality of Governance Among Companies: Evidence from Emerging Markets," Journal of Applied Corporate Finance, Morgan Stanley, vol. 19(1), pages 16-24.
  18. Chae, Joon & Kim, Sungmin & Lee, Eun Jung, 2009. "How corporate governance affects payout policy under agency problems and external financing constraints," Journal of Banking & Finance, Elsevier, vol. 33(11), pages 2093-2101, November.
  19. DeAngelo, Harry & DeAngelo, Linda & Stulz, Rene M., 2006. "Dividend policy and the earned/contributed capital mix: a test of the life-cycle theory," Journal of Financial Economics, Elsevier, vol. 81(2), pages 227-254, August.
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