IDEAS home Printed from https://ideas.repec.org/a/bla/finrev/v40y2005i1p37-65.html
   My bibliography  Save this article

Dividends, Corporate Monitors and Agency Costs

Author

Listed:
  • Kenneth A. Borokhovich
  • Kelly R. Brunarski
  • Yvette Harman
  • James B. Kehr

Abstract

We report new evidence on the hypothesis that dividends reduce agency costs. Consistent with dividends as a mechanism to reduce agency costs, we find that, on average, firms with a majority of strict outside directors on their boards experience significantly lower mean abnormal returns around the announcements of sizeable dividend increases. Our results are robust to multivariate controls for firm size, leverage, ownership, growth options, and change in dividend yield. However, we find no evidence that dividend increases reduce agency costs as measured by poison pills or outside blockholdings.

Suggested Citation

  • Kenneth A. Borokhovich & Kelly R. Brunarski & Yvette Harman & James B. Kehr, 2005. "Dividends, Corporate Monitors and Agency Costs," The Financial Review, Eastern Finance Association, vol. 40(1), pages 37-65, February.
    • Handle: RePEc:bla:finrev:v:40:y:2005:i:1:p:37-65
    DOI: 10.1111/j.0732-8516.2005.00092.x
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/j.0732-8516.2005.00092.x
    Download Restriction: no
    File URL: https://libkey.io/10.1111/j.0732-8516.2005.00092.x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Denis, David J. & Denis, Diane K. & Sarin, Atulya, 1997. "Ownership structure and top executive turnover," Journal of Financial Economics, Elsevier, vol. 45(2), pages 193-221, August.
    2. Stulz, ReneM., 1988. "Managerial control of voting rights : Financing policies and the market for corporate control," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 25-54, January.
    3. Agrawal, Anup & Mandelker, Gershon N., 1990. "Large Shareholders and the Monitoring of Managers: The Case of Antitakeover Charter Amendments," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 25(2), pages 143-161, June.
    4. J B Heaton, 2002. "Managerial Optimism and Corporate Finance," Financial Management, Financial Management Association, vol. 31(2), Summer.
    5. Dempsey, Stephen J & Laber, Gene, 1992. "Effects of Agency and Transaction Costs on Dividend Payout Ratios: Further Evidence of the Agency-Transaction Cost Hypothesis," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 15(4), pages 317-321, Winter.
    6. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    7. Borokhovich, Kenneth A & Brunarski, Kelly R & Parrino, Robert, 1997. "CEO Contracting and Antitakeover Amendments," Journal of Finance, American Finance Association, vol. 52(4), pages 1495-1517, September.
    8. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    9. Yermack, David, 1996. "Higher market valuation of companies with a small board of directors," Journal of Financial Economics, Elsevier, vol. 40(2), pages 185-211, February.
    10. G. William Schwert, 2000. "Hostility in Takeovers: In the Eyes of the Beholder?," Journal of Finance, American Finance Association, vol. 55(6), pages 2599-2640, December.
    11. Lippert, Robert L & Nixon, Terry D & Pilotte, Eugene A, 2000. "Incentive Compensation and the Stock Price Response to Dividend Increase Announcements," The Financial Review, Eastern Finance Association, vol. 35(4), pages 69-93, November.
    12. Stephen J. Dempsey & Gene Laber, 1992. "Effects Of Agency And Transaction Costs On Dividend Payout Ratios: Further Evidence Of The Agency-Transaction Cost Hypothesis," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 15(4), pages 317-321, December.
    13. Brickley, James A. & Lease, Ronald C. & Smith, Clifford Jr., 1988. "Ownership structure and voting on antitakeover amendments," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 267-291, January.
    14. Weisbach, Michael S., 1988. "Outside directors and CEO turnover," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 431-460, January.
    15. Noronha, Gregory M. & Shome, Dilip K. & Morgan, George E., 1996. "The monitoring rationale for dividends and the interaction of capital structure and dividend decisions," Journal of Banking & Finance, Elsevier, vol. 20(3), pages 439-454, April.
    16. Brown, Stephen J. & Warner, Jerold B., 1985. "Using daily stock returns : The case of event studies," Journal of Financial Economics, Elsevier, vol. 14(1), pages 3-31, March.
    17. Borokhovich, Kenneth A. & Parrino, Robert & Trapani, Teresa, 1996. "Outside Directors and CEO Selection," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(3), pages 337-355, September.
    18. Robert L. Lippert & William T. Moore, 1995. "Monitoring Versus Bonding: Shareholder Rights and Management Compensation," Financial Management, Financial Management Association, vol. 24(3), Fall.
    19. Easterbrook, Frank H, 1984. "Two Agency-Cost Explanations of Dividends," American Economic Review, American Economic Association, vol. 74(4), pages 650-659, September.
    20. Ryngaert, Michael, 1988. "The effect of poison pill securities on shareholder wealth," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 377-417, January.
    21. Byrd, John W. & Hickman, Kent A., 1992. "Do outside directors monitor managers? *1: Evidence from tender offer bids," Journal of Financial Economics, Elsevier, vol. 32(2), pages 195-221, October.
    22. Denis, David J. & Denis, Diane K. & Sarin, Atulya, 1994. "The Information Content of Dividend Changes: Cash Flow Signaling, Overinvestment, and Dividend Clienteles," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 29(4), pages 567-587, December.
    23. John, Kose & Williams, Joseph, 1985. "Dividends, Dilution, and Taxes: A Signalling Equilibrium," Journal of Finance, American Finance Association, vol. 40(4), pages 1053-1070, September.
    24. Sudipto Bhattacharya, 1979. "Imperfect Information, Dividend Policy, and "The Bird in the Hand" Fallacy," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 259-270, Spring.
    25. Yoon, Pyung Sig & Starks, Laura T, 1995. "Signaling, Investment Opportunities, and Dividend Announcements," The Review of Financial Studies, Society for Financial Studies, vol. 8(4), pages 995-1018.
    26. Lie, Erik, 2000. "Excess Funds and Agency Problems: An Empirical Study of Incremental Cash Disbursements," The Review of Financial Studies, Society for Financial Studies, vol. 13(1), pages 219-247.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Mehmet Levent Erdaş & Emel Bachá Sımoes, 2020. "The Relationship between Audit Mechanisms and Dividend Payout Policy within the Framework of Corporate Governance: The Case of Turkey," Journal of Economy Culture and Society, Istanbul University, Faculty of Economics, vol. 62(0), pages 255-284, December.
    2. Éric Vernier & Régis Dumoulin & Hodonou Dannon, 2017. "Diversité du conseil d'administration et politique de dividende des grands groupes bancaires systémiques : théories et investigations empiriques," Post-Print hal-01856607, HAL.
    3. Hui Liang James & Hongxia Wang, 2021. "Independent director tenure and dividends," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 48(5-6), pages 1057-1091, May.
    4. Blau, Benjamin M. & Fuller, Kathleen P. & Van Ness, Robert A., 2011. "Short selling around dividend announcements and ex-dividend days," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 628-639, June.
    5. Anthonia T. Odeleye, 2018. "Quality of Corporate Governance on Dividend Payouts: The Case of Nigeria," African Development Review, African Development Bank, vol. 30(1), pages 19-32, March.
    6. Bradley Benson & Travis Davidson & Hui James & Hongxia Wang, 2022. "Board busyness and corporate payout: are all busy directors the same?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(3), pages 3711-3759, September.
    7. Anna Białek-Jaworska & Natalia Nehrebecka, 2016. "Determinants of Polish Enterprises' Propensity to Lease," Working Papers 2016-07, Faculty of Economic Sciences, University of Warsaw.
    8. repec:mth:ijafr8:v:8:y:2018:i:2:p:179-211 is not listed on IDEAS
    9. Hussein Abedi Shamsabadi & Byung-Seong Min & Richard Chung, 2016. "Corporate governance and dividend strategy: lessons from Australia," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 12(5), pages 583-610, October.
    10. Mehmet Levent Erdaş & Emel Bachá Sımoes, 2020. "The Relationship between Audit Mechanisms and Dividend Payout Policy within the Framework of Corporate Governance: The Case of Turkey," Journal of Economy Culture and Society, Istanbul University, Faculty of Economics, vol. 62(62), pages 255-284, December.
    11. Muhammad Sadiq Shahid, PhD & Dr.Faid Gul & Muhammad Rizwan & Muhammad Hassan Bucha, PhD, 2016. "Ownership Structure, Board Size, Board Composition And Dividend Policy: New Evidence From Two Emerging Markets," IBT Journal of Business Studies (JBS), Ilma University, Faculty of Management Science, vol. 12(2), pages 25-36.
    12. Jean-Michel Sahut & Frédéric Teulon, 2017. "What are the determinants of dividend policies? A new perspective in Emerging Markets," Economics Bulletin, AccessEcon, vol. 37(3), pages 2234-2246.
    13. Tasawar Nawaz & Roszaini Haniffa & Mohammad Hudaib, 2023. "From boots to suits: do military directors protect shareholders’ wealth?," Review of Quantitative Finance and Accounting, Springer, vol. 61(4), pages 1479-1511, November.
    14. Abdul Moin & Yilmaz Guney & Izidin El Kalak, 2020. "The effects of ownership structure, sub-optimal cash holdings and investment inefficiency on dividend policy: evidence from Indonesia," Review of Quantitative Finance and Accounting, Springer, vol. 55(3), pages 857-900, October.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Hussein Abedi Shamsabadi & Byung-Seong Min & Richard Chung, 2016. "Corporate governance and dividend strategy: lessons from Australia," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 12(5), pages 583-610, October.
    2. Kartal Demirg ne, 2015. "Determinants of Target Dividend Payout Ratio: A Panel Autoregressive Distributed Lag Analysis," International Journal of Economics and Financial Issues, Econjournals, vol. 5(2), pages 418-426.
    3. Carlos Martins, 2007. "Consistency of Dividend Signalling and Future Maturity Level:Evidence from UK Data," Working Papers de Economia (Economics Working Papers) 40, Departamento de Economia, Gestão e Engenharia Industrial, Universidade de Aveiro.
    4. Jabbouri, Imad, 2016. "Determinants of corporate dividend policy in emerging markets: Evidence from MENA stock markets," Research in International Business and Finance, Elsevier, vol. 37(C), pages 283-298.
    5. H.Kent Baker & Gary E. Powell & E.Theodore Veit, 2002. "Revisiting the dividend puzzle," Review of Financial Economics, John Wiley & Sons, vol. 11(4), pages 241-261.
    6. Alpa Dhanani, 2005. "Corporate Dividend Policy: The Views of British Financial Managers," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(7‐8), pages 1625-1672, September.
    7. Low, Angie & Makhija, Anil K. & Sanders, Anthony B., 2007. "The Impact of Shareholder Power on Bondholders: Evidence from Mergers and Acquisitions," Working Paper Series 2007-5, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    8. James, Hui & Benson, Bradley W. & Wu, Chen (Ken), 2017. "Does CEO ownership affect payout policy? Evidence from using CEO scaled wealth-performance sensitivity," The Quarterly Review of Economics and Finance, Elsevier, vol. 65(C), pages 328-345.
    9. Blau, Benjamin M. & Fuller, Kathleen P., 2008. "Flexibility and dividends," Journal of Corporate Finance, Elsevier, vol. 14(2), pages 133-152, April.
    10. Ouyang, Puman & Zhong, Ligang, 2023. "Asset redeployability and dividend payout policy," The Quarterly Review of Economics and Finance, Elsevier, vol. 90(C), pages 91-105.
    11. Komlan Sedzro, 2010. "A Unifying Approach For Comparing Onetime Payouts And Recurring Dividends," Global Journal of Business Research, The Institute for Business and Finance Research, vol. 4(2), pages 141-154.
    12. Hossain, Mahmud & Prevost, Andrew K. & Rao, Ramesh P., 2001. "Corporate governance in New Zealand: The effect of the 1993 Companies Act on the relation between board composition and firm performance," Pacific-Basin Finance Journal, Elsevier, vol. 9(2), pages 119-145, April.
    13. Céline Du Boys, 2006. "Pay out policy decisions in France A managerial perspective," Post-Print hal-02057673, HAL.
    14. Officer, Micah S., 2011. "Overinvestment, corporate governance, and dividend initiations," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 710-724, June.
    15. Loureiro, Gilberto & Makhija, Anil K. & Zhang, Dan, 2011. "Why Do Some CEOs Work for a One-Dollary Salary?," Working Paper Series 2011-7, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    16. Szilagyi, P.G., 2007. "Corporate governance and the agency costs of debt and outside equity," Other publications TiSEM 9520d40a-224f-43a8-9bf9-b, Tilburg University, School of Economics and Management.
    17. Frankfurter, George M. & Wood, Bob Jr., 2002. "Dividend policy theories and their empirical tests," International Review of Financial Analysis, Elsevier, vol. 11(2), pages 111-138.
    18. Borokhovich, Kenneth A. & Boulton, Thomas J. & Brunarski, Kelly R. & Harman, Yvette S., 2014. "The incentives of grey directors: Evidence from unexpected executive and board chair turnover," Journal of Corporate Finance, Elsevier, vol. 28(C), pages 102-115.
    19. Fuller, Kathleen P. & Goldstein, Michael A., 2011. "Do dividends matter more in declining markets?," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 457-473, June.
    20. Okun O. Omokhudu & Ohidoa Toluwa, 2018. "Agency Cost and Dividend Policy in Nigerian NonFinancial Quoted Firms," International Journal of Academic Research in Business and Social Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Business and Social Sciences, vol. 8(4), pages 325-350, April.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:finrev:v:40:y:2005:i:1:p:37-65. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/efaaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.