Effects of Agency and Transaction Costs on Dividend Payout Ratios: Further Evidence of the Agency‐transaction Cost Hypothesis

Abstract

In this study we replicate and extend an agency-transaction cost model of dividend payout previously hypothesized and supported in the literature. We find no statistical difference between the estimated regression model obtained for the original seven-year sample period, 1974-80, and that obtained for our seven-year period, 1981-87. The latter period is characterized by significantly lower inflation, stronger economic growth, and lower taxes. The intertemporal stability of the model suggeststhat it is useful for predicting dividend payout at the individual firm level.

Dividend Policy, Corporate Control and the Tax Status of the Controlling Shareholder

“…Crutchley and Hansen 1989, Dempsey and Laber 1992, Moh'd, Perry and Rimbey 1995 provide evidence consistent with Rozeff's prediction. Easterbrook (1984) theorises that high dividends are used as a self-disciplining mechanism forcing the firm to raise outside equity, thereby facing the scrutiny of outsiders such as financial analysts and journalists.…”

Examining the Impact of the 1986 Tax Reform Act on Corporate Dividend Policy: A New Methodology

“…(4) For Rozeff's (1982) original variables that pass the stepwise procedure, temporal stability of our models after the TRA passage is found to hold. This finding is consistent with Dempsey and Laber (1992). (5) The above results are invariant with respect to the two variations of the dependent variable.…”

“…Selecting the end of the period maintains consistency with all previous studies employing variations of Rozeff' s model. Dempsey and Laber (1992) use alternative two-year and four-year mean payout definitions and find the model to be robust over these shorter time horizons. Model (2) incorporates three types of dummy variables; DV, Ij , and Z.…”

Dividends, Corporate Monitors and Agency Costs

“…The results of studies on dividends and agency costs generally suggest that the dividend payout decision is significantly related to the degree of the agency costs within the firm. For example, Dempsey and Laber (1992) report that the dividend yield is negatively related to the proportion of stock held by insiders and positively related to the number of common shareholders within the firm. Noronha, Shome, and Morgan (1996) examine the relation between agency cost variables and dividend payout ratios, segmented by the level of the firm's growth opportunities.…”