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Dividends and the Agency Cost of Free Cash Flows

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  • Raúl Sergio González Treviño

    (Facultad de Economía, Universidad Autónoma de Nuevo León.)

Abstract

A leading explanation for the positive market reaction surrounding the announcement of dividend increases is that dividend payments mitigate the agency conflict between managers and shareholders. One implication of this theory is that those firms whose managers are less (more) entrenched should experience a stronger (weaker) market reaction around the announcement of dividend increases. Consistent with these predictions, we find an inverse U-shape relation between the market reaction to dividend increases and the level of managerial ownership in the firm.

Suggested Citation

  • Raúl Sergio González Treviño, 2003. "Dividends and the Agency Cost of Free Cash Flows," Ensayos Revista de Economia, Universidad Autonoma de Nuevo Leon, Facultad de Economia, vol. 0(1), pages 1-18, May.
  • Handle: RePEc:ere:journl:v:xxii:y:2003:i:1:p:1-18
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    References listed on IDEAS

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    1. Morck, Randall & Shleifer, Andrei & Vishny, Robert W., 1988. "Management ownership and market valuation," Scholarly Articles 29407535, Harvard University Department of Economics.
    2. McConnell, John J. & Servaes, Henri, 1990. "Additional evidence on equity ownership and corporate value," Journal of Financial Economics, Elsevier, vol. 27(2), pages 595-612, October.
    3. Cleveland, William S. & Devlin, Susan J. & Grosse, Eric, 1988. "Regression by local fitting : Methods, properties, and computational algorithms," Journal of Econometrics, Elsevier, vol. 37(1), pages 87-114, January.
    4. Hardle, Wolfgang & LIang, Hua & Gao, Jiti, 2000. "Partially linear models," MPRA Paper 39562, University Library of Munich, Germany, revised 01 Sep 2000.
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