Mandatory minimum dividend, agency problems, and corporate investment

This study aims to better understand the adverse consequences of mandatory dividend rules. Specifically, we identify two main reasons why some firms only pay the mandatory minimum dividend: financial constraints and private benefits. We also argue that the consequences of these rules for firms should depend on the reasons behind their choice to only pay the minimum dividend. Using a sample of publicly traded Brazilian companies and multivariate regressions, we find strong evidence that financially constrained firms are more likely to only pay the minimum dividend, with weak evidence that firms whose managers who use the dividend decision to enjoy private benefits are more likely to only pay the minimum dividend. Moreover, and consistent with our expectations, firms that only pay the mandatory minimum dividend due to financial constraints tend to have a higher value attached to their cash holdings, and they tend to reduce investments more intensely in response to shocks that increase the cost of external financing. Thus, we conclude that mandatory dividend rules can adversely affect some firms and that more flexible rules should be considered.