Using Dividend Policy and Managerial Ownership to Reduce Agency Costs

Abstract

In this study we examine dividends and chief executive officer (CEO) stock ownership as interrelated mechanisms that may be used to reduce agency costs. We find a significant nonmonotonic relation between dividend yield and CEO stock ownership. Our evidence shows that until the CEO becomes entrenched, increased executive stock ownership reduces agency costs and decreases dividend yield. Beyond that point, increased stock ownership increases dividend yield. Whether additional stock ownership can reduce agency costs depends upon the CEO's degree of control in the firm.

Dividend Policy and Agency Effects: A Look at Financial Firms

“…Although the statistical significance of CEO and institutional ownership diminishes in the dividend payout equations (3) and (4), hedge fund ownership maintains its significance in these equations as well. The results overall confirms the negative association between CEO ownership and dividends found in Hu and Kumar (2004) and Schooley and Barney (1994). The evidence also indicates that for these firms, institutional owners and, in particular, hedge funds serve as a viable substitute control mechanism for dividends.…”

“…Rozeff (1982) and Moh'd et al (1995) find that dividend payout significantly increases with ownership diffusion, as measured by the natural log of the number of common stockholders; Schooley and Barney (1994) get an identical result using dividend yield as the dependent variable. Hu and Kumar (2004) find that dividend payout significantly decreases in the presence of large shareholdings.…”

“…To avoid these costs, risky firms will lower dividend payouts and rely more on internal funding. Rozeff (1982), Schooley and Barney (1994) and Harada and Nguyen (2011) find a negative and statistically significant relationship between the beta and dividends. The price-to-book ratio serves as a proxy for the firm's investment prospects.…”

“…Firms in which the CEO owns shares should have less agency problems of equity and, therefore, less of a need to use the dividend as a disciplining mechanism. Both Hu and Kumar (2004) and Schooley and Barney (1994) find that dividend yield has a significant negative relationship with CEO stock ownership.…”

Determinants of Corporate Dividends Policy: Evidence from an Emerging Economy

“…The relationship between corporate ownership structure and dividend policy is documented in several studies (see for example : Shleifer & Vishny, 1986;Morck et al, 1988;Schooley & Barney, 1994;Bebchuk, 1999;Han et al, 1999;La Porta et al, 1999;La Porta et al, 2000;Short et al, 2002;Gugler & Yurtoglu, 2003;Chen et al, 2005;Jain, 2007;Renneboog & Trojanowski, 2007;Truong & Heaney, 2007;Abdelsalam et al, 2008;Al-Kawari, 2009;Kouki & Guizani, 2009;Mehrani et al, 2011;McKnight & Weir, 2009;Subramaniam et al, 2011;Thanatawee, 2013;Sáez & María Gutiérrez, 2014). Empirical evidence on the relationship between corporate ownership structure and corporate policy is not consistent.…”