Dividend Policy, Shareholder Rights, and Corporate Governance
34 Pages Posted: 20 Sep 2006
Date Written: September 18, 2006
Grounded in agency theory, this study explores agency costs as a determinant of dividend policy. Specifically, we examine how dividends are related to the strength of shareholder rights. The evidence reveals an inverse association between dividend payouts and shareholder rights, indicating that firms pay higher dividends where shareholder rights are more suppressed. This evidence is consistent with the substitution hypothesis (La Porta et al., 2000), which contends that firms with weak shareholder rights need to establish a reputation for not exploiting shareholders. As a result, these firms pay dividends more generously than do firms with strong shareholder rights. In other words, dividends substitute for shareholder rights. Finally, there is evidence that regulation influences the association between dividends and shareholder rights.
Keywords: dividend policy, shareholder rights, corporate governance
JEL Classification: G30, G32, G34
Suggested Citation: Suggested Citation