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Governance and Payout Precommitment

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  • John, Kose
  • Knyazeva, Anzhela
  • Knyazeva, Diana

Abstract

We examine how firms structure payout and debt commitments to address governance weaknesses. Firms with severe agency conflicts precommit through a combination of dividends and debt or through dividends rather than debt alone. Such firms also shift their shareholder payouts towards regular quarterly dividends—a stronger commitment than special dividends or repurchases. Although dividend commitments are implicit, event study evidence supports their credibility and value relevance for firms with weak governance. Despite harsher penalties, debt alone cannot replace shareholder payouts as a means of addressing managerial agency conflicts.

Suggested Citation

  • John, Kose & Knyazeva, Anzhela & Knyazeva, Diana, 2015. "Governance and Payout Precommitment," Journal of Corporate Finance, Elsevier, vol. 33(C), pages 101-117.
    • Handle: RePEc:eee:corfin:v:33:y:2015:i:c:p:101-117
    DOI: 10.1016/j.jcorpfin.2015.05.004
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    More about this item

    Keywords

    Precommitment; Payout; Debt–dividend tradeoff; Corporate governance;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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