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
Date Written: November 24, 2013
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: Suggested Citation