Governance and Payout Precommitment
53 Pages Posted: 3 Mar 2008 Last revised: 18 Aug 2015
Date Written: May 15, 2015
We examine how firms structure payout and debt commitments to address governance weaknesses. Firms with severe agency conflicts precommit through a combination of dividends and debt or through dividends rather than debt alone. Such firms also shift their shareholder payouts towards regular quarterly dividends – a stronger commitment than special dividends or repurchases. Although dividend commitments are implicit, event study evidence supports their credibility and value-relevance for firms with weak governance. Despite harsher penalties, debt alone cannot replace shareholder payouts as a means of addressing managerial agency conflicts.
Keywords: precommitment, payout, debt–dividend tradeoff, corporate governance
JEL Classification: G30, G35, G32, G34
Suggested Citation: Suggested Citation