Agency Conflicts, Dividend Payout, and the Direct Benefits of Conservative Financial Reporting to Equity-Holders

45 Pages Posted: 25 Nov 2013 Last revised: 18 Dec 2013

See all articles by Henock Louis

Henock Louis

Pennsylvania State University - Smeal College of Business

Oktay Urcan

University of Illinois at Urbana-Champaign

Multiple version iconThere are 2 versions of this paper

Date Written: November 24, 2013

Abstract

Dividend payments are generally costly to shareholders. One principal reason for such payments is that they force managers to raise funds in the external capital markets to finance new projects, which presumably reduces their incentives to engage in empire-building activities. We posit that, because accounting conservatism can also mitigate managers’ incentives to engage in value-destroying projects, it could reduce the need for dividend payments and the associated costs. Accordingly, we find that dividend payments decrease with accounting conservatism. This effect holds even after we control for the underlying accounting factors that directly affect dividends, or limit the sample to firms that have no debt covenants pertaining to dividend payouts, indicating that the reason for the conservatism effect transcends the standard debt covenant restriction argument. More importantly, consistent with the agency cost explanation, the evidence also indicates that the conservatism effect increases with potential agency conflicts between managers and shareholders.

Keywords: Payout; Accounting conservatism; Agency costs

JEL Classification: M41; G35

Suggested Citation

Louis, Henock and Urcan, Oktay, Agency Conflicts, Dividend Payout, and the Direct Benefits of Conservative Financial Reporting to Equity-Holders (November 24, 2013). Available at SSRN: https://ssrn.com/abstract=2359031 or http://dx.doi.org/10.2139/ssrn.2359031

Henock Louis (Contact Author)

Pennsylvania State University - Smeal College of Business ( email )

University Park, PA 16802-3306
United States
814-865-4160 (Phone)
814-863-8393 (Fax)

Oktay Urcan

University of Illinois at Urbana-Champaign ( email )

515 E. Gregory Drive
4009 BIF MC-520
Champaign, IL 61820
United States
217-265-0383 (Phone)
217-244-0902 (Fax)

HOME PAGE: http://business.illinois.edu/profile/oktay-urcan/

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