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Does Better Corporate Governance Encourage Higher Payout? : Risk, Agency Cost, and Dividend Policy

Listed author(s):
  • BHATTACHARYA, Debarati
  • LI, Wei-Hsien
  • RHEE, S. Ghon
Registered author(s):

    We investigate whether corporate governance complements or substitutes for payout policy as an effective method of reducing agency cost through its interplay with the idiosyncratic risk of the firm. Corporate governance acts as a substitute for [complement to] the firm's dividend policy when its idiosyncratic risk is high [low]. Our empirical investigation reveals that moving from the weakest to the strongest quintile of corporate governance increases the predicted probability of dividend payout by 28% when the firm's idiosyncratic risk is at its lowest quintile. On the other hand, when the idiosyncratic risk is at its highest quintile, moving from the weakest to the strongest quintiles of corporate governance decreases the predicted probability of dividend payout by 32%. We also observe that the interplay of governance and idiosyncratic risk considerations shapes up managerial decisions for share repurchase, total payout, and dividend initiation.

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    File URL: http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/27754/3/070_hiasDP-E-20.pdf
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    Paper provided by Hitotsubashi Institute for Advanced Study, Hitotsubashi University in its series Discussion paper series with number HIAS-E-20.

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    Length: 50 p.
    Date of creation: 16 Mar 2016
    Handle: RePEc:hit:hiasdp:hias-e-20
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    1. repec:hrv:faseco:30728046 is not listed on IDEAS
    2. Kenneth Lehn & Annette Poulsen, 1989. "Free Cash Flow and Stockholder Gains in Going Private Transactions," Journal of Finance, American Finance Association, vol. 44(3), pages 771-787, 07.
    3. Lamont, Owen & Polk, Christopher & Saa-Requejo, Jesus, 2001. "Financial Constraints and Stock Returns," Review of Financial Studies, Society for Financial Studies, vol. 14(2), pages 529-554.
    4. Shleifer, Andrei & Vishny, Robert W, 1997. " A Survey of Corporate Governance," Journal of Finance, American Finance Association, vol. 52(2), pages 737-783, June.
    5. Baker, Malcolm & Wurgler, Jeffrey, 2004. "Appearing and disappearing dividends: The link to catering incentives," Journal of Financial Economics, Elsevier, vol. 73(2), pages 271-288, August.
    6. Kenneth M. Lehn & Mengxin Zhao, 2006. "CEO Turnover after Acquisitions: Are Bad Bidders Fired?," Journal of Finance, American Finance Association, vol. 61(4), pages 1759-1811, 08.
    7. Michael Faulkender & Rong Wang, 2006. "Corporate Financial Policy and the Value of Cash," Journal of Finance, American Finance Association, vol. 61(4), pages 1957-1990, 08.
    8. Michael S. Rozeff, 1982. "Growth, Beta And Agency Costs As Determinants Of Dividend Payout Ratios," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 5(3), pages 249-259, 09.
    9. Michaely, Roni & Thaler, Richard H & Womack, Kent L, 1995. " Price Reactions to Dividend Initiations and Omissions: Overreaction or Drift?," Journal of Finance, American Finance Association, vol. 50(2), pages 573-608, June.
    10. Lehn, Kenneth & Poulsen, Annette, 1989. " Free Cash Flow and Stockholder Gains in Going Private Transactions," Journal of Finance, American Finance Association, vol. 44(3), pages 771-787, July.
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