Corporate Governance, Leverage and Dividend Policy
Posted: 28 Dec 2005
Date Written: September 30, 2005
This paper develops an agency model of the firm where the endogenous choice of corporate governance is driven by a trade-off between control by strong shareholders and control through a tight capital structure. The existence of this trade-off is documented for the US-market. Empirically, companies with weaker shareholders are more highly levered, more likely to pay dividends, and conditional upon paying, pay higher dividends. A one standard deviation decrease in shareholder power increases the propensity to pay dividends by up to 13%. In the model, limited shareholder power is optimal and more valuable companies offer higher levels of shareholder power.
Keywords: governance index, leverage, dividends, corporate governance
JEL Classification: G30, G32, G35, G38
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