The Outcome Versus Substitute Models of Dividends: A Change in Minority Shareholder Protection
62 Pages Posted: 8 Jul 2020
Date Written: May 20, 2020
The new Brazilian Company Law, enacted in 1976, increased the protection of minority shareholder rights, providing an experiment to test alternative agency theories of dividends. Are dividends an outcome of the effective legal protection of shareholders? Or are dividends a substitute for legal protection? In the pre-1977 low-legal protection Brazilian market, growing firms issuing equity in the future used to signal their type through higher dividends. With the new law protecting outside investors, dividend payouts do not generally increase, mature firms do not pay higher dividends, but growing firms cut them down, results that support the Substitute narrative of dividends.
Keywords: Agency Problems, Dividend Policy, Signaling
JEL Classification: G32, G35
Suggested Citation: Suggested Citation