40 results on '"AGENCY costs"'
Search Results
2. Non-controlling large shareholders and dynamic capital structure adjustment in China.
- Author
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Liao, Jia, Zhan, Yun, Yuan, Yu, and Xu, Ailing
- Subjects
- *
CAPITAL structure , *AGENCY costs , *GOVERNMENT business enterprises , *STOCKHOLDERS , *SPEED - Abstract
Using the sample of Chinese A-share listed firms from 2010 to 2020, this study examines the impact of non-controlling large shareholders (NCLSs) on corporate capital structure adjustment. The results show that NCLSs significantly increase the dynamic capital structure adjustment speed and reduce capital structure deviation. NCLSs have an asymmetric influence on capital structure adjustment speed for different deviation directions, i.e. compared to the speed of upward adjustment after a downward deviation of the capital structure, the effect of NCLSs on the speed of downward adjustment of the capital structure after an upward deviation is stronger. Whether in state-owned enterprises (SOEs) or non-state-owned enterprises (NSOEs), NCLSs significantly increase the dynamic capital structure adjustment speed. However, compared with SOEs, NCLSs in NSOEs have a more significant positive impact on the dynamic capital structure adjustment speed. The mechanism analysis suggests that reducing agency costs and mitigating financing constraints serve as the important channels through which NCLSs influence the dynamic adjustment of capital structure. This paper not only enriches and improves the theoretical basis of dynamic capital structure adjustment, but also helps to deepen the understanding of dynamic capital structure adjustment of Chinese listed firms. [ABSTRACT FROM AUTHOR]
- Published
- 2024
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3. Linkage Between Brand Value and Firm Performance: An Empirical Examination Using Fuzzy Set Qualitative Comparative Analysis.
- Author
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Bhaskaran, Rajesh Kumar, Sujit, Koyilathumpaday Sukumaran, and Waheed, Kareem Abdul
- Subjects
- *
ORGANIZATIONAL performance , *BRAND equity , *FUZZY sets , *STOCK exchanges , *STOCKHOLDERS , *AGENCY costs - Abstract
This study is designed with the data of Interbrand for ranking top 100 global brands. In this study, the linkage between brand values and financial performance was estimated using different performance measures that include both stock market and operating performance using Fuzzy Set Qualitative Comparative Analysis (fsQCA) technique. The study investigates the effect of brand value on profitability and shareholder. It is observed that the firms that have superior operating performance result in greater brand valuation. Performance of firms measured through profitability is found to be a significant factor in brand valuation. Brand valuation is also found to be significant determinant of profitability. Thus, higher brand quality improves the likelihood of repurchases and in turn improved cash flows. Firms with high agency conflicts tend to have lower brand value. Higher market valuation positively impacts brand valuation in the context of lower leverage and agency costs. The linkage of brand value to firm performance is the justification for marketer's investments toward branding initiatives as a mechanism that creates value. This study is the first of its kind to examine the impact of agency costs on brand value using fsQCA technique to understand valuation impact of brands. To measure the effect of branding and marketing initiatives of the firms on financial performance, this study integrated both econometric and financial modeling. [ABSTRACT FROM AUTHOR]
- Published
- 2023
- Full Text
- View/download PDF
4. Optimal Short-Termism.
- Author
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Hackbarth, Dirk, Rivera, Alejandro, and Wong, Tak-Yuen
- Subjects
AGENCY costs ,INCENTIVE (Psychology) ,STOCKHOLDERS ,PATIENCE ,DEFAULT (Finance) - Abstract
This paper develops a dynamic contracting (multitasking) model of a levered firm. In particular, the manager selects long-term and short-term efforts, and shareholders choose optimal debt and default policies. Excessive short-termism ex post is optimal for shareholders because debt has an asymmetric effect: shareholders receive all gains from short-term effort but share gains from long-term effort. We find that grim growth prospects and shareholder impatience imply higher optimal levels of short-termism. Also, an incentive cost effect and a real option effect create nontrivial patterns for the endogenous default threshold. Finally, we quantify agency costs of excessive short-termism, which underscore the economic significance of our results. This paper was accepted by Gustavo Manso, finance. [ABSTRACT FROM AUTHOR]
- Published
- 2022
- Full Text
- View/download PDF
5. How Do Managers and Shareholders Respond to Taxation? An Analysis of the Introduction of the UK Real Estate Investment Trust Legislation.
- Author
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Holland, Kevin, Lindop, Sarah, and Abdul Wahab, Nor Shaipah
- Subjects
REAL estate investment trusts ,STOCKHOLDERS ,TAXATION ,FISCAL policy ,TAX laws - Abstract
Corporate finance decisions, measurement of accounting profits, and market valuations are invariably made within the framework of a taxation system(s). Previous research indicates both ambiguity over the influence of taxation on managers' behaviour and limitations in the ability of shareholders to process tax information. The establishment of the UK's Real Estate Investment Trust (REIT) regime in 2006 allowed quoted companies to opt out of company level taxation. We examine managers' and shareholders' responses, that is, their ability to process information. When compared with shareholders, managers demonstrated a greater knowledge of the legislation, and of its applicability. For example, managers appeared to pre‐empt the effects of the legislation. Our findings have implications for tax policy makers and taxpayers, acting as a warning of the potential downside of increased cooperation when trying to make more appropriately formed legislation. Further, managers appeared to be willing to trade off the interests of shareholders for their own personal gain, which is surprising given the visibility of the REIT conversion process and illustrates the limitations of shareholder control over managers' behaviour. We find shareholders were able to accurately assess the general effects of the legislation but were unable to identify specific companies likely to benefit. Without any increase in shareholder sophistication, concerns exist over the effectiveness of shareholders in acting as monitors of managers' decision making. [ABSTRACT FROM AUTHOR]
- Published
- 2022
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6. AGAINST CORPORATE ACTIVISM: EXAMINING THE USE OF CORPORATE SPEECH TO PROMOTE CORPORATE SOCIAL RESPONSIBILITY.
- Author
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BUNTING, W. C.
- Subjects
SOCIAL responsibility of business ,CORPORATE finance ,CORPORATE speech ,STOCKHOLDERS ,GOVERNMENT corporations - Abstract
This Article offers a novel typography of expenditures on corporate social responsibility, highlighting that such spending often requires a public business corporation to engage in corporate speech. When this speech pertains to social or political issues unrelated to the company's business, this Article argues that such expenditures are generally not in the best interests of the firm's stockholders and terms this spending "corporate activism." Corporate activism is described as the product of agency costs and ideological conflict that derive from an expansion of corporate speech rights under the First Amendment. To protect shareholders from corporate activism, courts have relied upon various disciplining mechanisms that are often not up to the task. This Article offers a different solution, placing the responsibility squarely upon the board of directors of public corporations to limit "expressive" expenditures on corporate social responsibility that do not directly advance the best interests of a company's shareholders. As a tentative policy proposal, this Article suggests that the Securities and Exchange Commission encourage public companies that trade on U.S. stock exchanges to have a "Communications Committee" responsible for the oversight of all forms of corporate speech. [ABSTRACT FROM AUTHOR]
- Published
- 2022
7. Do Largest Shareholders Incentively Affect Financial Sustainability Under Holdings Heterogeneity? Regulation/Intermediary of Financial Constraints Through Managerial Behavior Games.
- Author
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Zhang, Lipai
- Subjects
FINANCIAL institutions ,REAL estate business ,STOCKHOLDERS ,AGENCY costs ,SUSTAINABILITY - Abstract
The real estate industry is characterized by a high degree of financial intensity and is more significant in certain areas. The relative enterprises require certain financial ability and large shareholders' controlling power to support their survivals and competitiveness. However, due to the multiple adverse impacts of current state policies on banks and private capital, the problem of capital restraints of real estate has become increasingly serious. From a corporate governance perspective, this paper studies the interactions among financial constraints, ownership concentration and corporate performance under different shareholding states: by analyzing the quantitative characteristics of equity structure and searching for the appropriate range of the largest shareholder holding ratio, which has considered both the financial sustainability and characteristics. It is found that raising the ownership concentration could enhance supervision effect rather than encroachment, effectively ease the financial constraints and improve the performance of enterprises, both of which are significant under high ownership concentration. Financial constraints play a significant intermediary effect in absolute holdings and have obvious regulatory effects in decentralized equity. Also, the mechanisms of ownership concentration are reflected in the strengthening of corporate supervision, reduced agency costs, improved operating efficiency, and increased investment attractiveness. The adjusted behavior adds to the responsibility awareness rather than free-ride psychology, forming a dynamic game on financial decisions. Their financial sustainability in areas would provide a nationwide reference for governance reform and managerial behavior. [ABSTRACT FROM AUTHOR]
- Published
- 2022
- Full Text
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8. An impact of the first and second-largest shareholders on a catering effect: evidence from Poland.
- Author
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PIELOCH-BABIARZ, ALEKSANDRA
- Subjects
STOCKHOLDERS ,CATERING services ,AGENCY costs ,DIVIDENDS ,EMINENT domain ,DIVIDEND policy - Abstract
Motivation: Dividend pay-out is a frequently undertaken research issue. However, there is no study on the impact of concentrated ownership on adjustment of dividend amount to investor sentiment for pay-outs. The paper contribute to the literature by filling the research gap regarding the catering effect in the context of principal-principal agency conflict and type II agency costs, monitoring hypothesis and expropriation hypothesis. Aim: The aim of the article is to investigate an impact of the first and second-largest shareholders on an adjustment of dividend pay-outs to investor sentiment for dividends. To achieve the aim, two hypotheses have been formulated, i.e. H1: if the first-largest shareholder is a strategic investor, a catering effect weakens; H2: an existence of significant second-largest shareholder moderates the extent to which companies cater to investor sentiment for dividends. Results: There are three main finding: 1) the number of shares held by the first-largest shareholder is lower in dividend payers, while the number of shares held by the second-largest shareholder is lower in dividend non-payers; 2) listed companies from electromechanical industry sector cater to investor sentiment for dividends; 3) both research hypotheses have not been satisfied. [ABSTRACT FROM AUTHOR]
- Published
- 2021
- Full Text
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9. POWER TO THE PRINCIPALS! AN EXPERIMENTAL LOOK AT SHAREHOLDER SAY-ON-PAY VOTING.
- Author
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KRAUSE, RYAN, WHITLER, KIMBERLY A., and SEMADENI, MATTHEW
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STOCKHOLDERS ,PUBLIC companies ,CHIEF executive officers ,EXECUTIVE compensation ,VOTING research ,AGENCY theory ,ORGANIZATIONAL performance ,LOSS aversion ,PAY for performance ,PROSPECT theory ,STOCKHOLDER wealth ,AGENCY costs ,EXPERIMENTAL design - Abstract
With recent legislation mandating that publicly traded corporations submit their CEOs' compensation for a nonbinding shareholder vote, a systematic understanding of shareholder preferences has never been so important. In spite of this, relatively little is known about what impacts shareholders' preferences and, subsequently, their ultimate voting behavior. We integrate two theories to help frame the question and to help predict shareholder behavior. Per agency theory, shareholders, as principals, will disapprove of high CEO rewards and poor firm performance, symmetrically assessing gains and losses. Per prospect theory, shareholders will be loss averse, responding much more strongly to being in a loss position than to being in a gain or neutral position. We combine these theories' predictions in two lab experiments in which we simulate a shareholder "say-on-pay" vote, hypothesizing that shareholders will be concerned with agency costs, but only when they are in a loss position. The results of these simulated votes suggest that shareholders do value "pay for performance," in keeping with agency theory. However, shareholders exhibit this focus on agency-normative prescriptions asymmetrically, showing loss aversion in keeping with prospect theory. This finding has significant implications for both theory and practice as shareholder votes become a regular and high-profile occurrence. [ABSTRACT FROM AUTHOR]
- Published
- 2014
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10. Value of Cash Holdings and Accounting Conservatism* Value of Cash Holdings and Accounting Conservatism.
- Author
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Louis, Henock, Sun, Amy X., and Urcan, Oktay
- Subjects
CASH flow ,CORPORATE accounting ,NET present value ,AGENCY costs ,VALUATION of corporations ,STOCKHOLDERS - Abstract
The article refers to accounting research and considers the idea that conservatism in corporate accounting can reduce the value destruction associated with cash holdings. The discussion focuses on the reduction of incentives to take on negative net present value (NPV) projects, the role of accounting practices in mitgating agency costs, and the direct benefit to shareholders that accounting conservatism provides. The article concludes that accounting conservatism increases the value of a corporation's cash holdings and it also increases the efficient use of cash holdings.
- Published
- 2012
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11. How Internal Control Protects Shareholders' Welfare: Evidence from Tax Avoidance in China.
- Author
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Chang, Hsihui, Dai, Xin, He, Yurun, and Wang, Maolin
- Subjects
INTERNAL auditing ,TAX evasion ,STOCKHOLDERS ,CORPORATE welfare ,AGENCY costs ,CORPORATE tax accounting - Abstract
This paper investigates how effective internal control protects shareholders' welfare in the context of corporate tax avoidance. Prior literature documents a positive association between internal control weakness and low tax avoidance. In this paper, we re-examine this association and complement prior research by finding that the direction of the association between internal control and tax avoidance depends on the level of tax avoidance. Specifically, for firms with low (high) levels of tax avoidance, internal control quality is positively (negatively) associated with tax avoidance. In additional analyses, we further explore how internal control mitigates agency costs for state-owned enterprises and tunneling activities. We show that for state-owned enterprises, which have lower incentives to avoid tax, effective internal control prevents managers from paying more taxes to cater to the controlling shareholders' interests. We also find that the association between tax avoidance and tunneling is reduced by effective internal control systems. Data Availability: Data are available from the public sources cited in the text. [ABSTRACT FROM AUTHOR]
- Published
- 2020
- Full Text
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12. Shareholder rights.
- Author
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Armour, John
- Subjects
STOCKHOLDERS ,CHARITIES ,SOCIAL & economic rights ,MARKET pricing ,SELF-control - Abstract
'Shareholder rights' are the legal entitlements of shareholders vis-à-vis companies in which they invest. A large body of research has sought to investigate how shareholder rights foster accountability of controllers. The concern has been that without accountability, managers and dominant shareholders will use their power to further their own interests at the expense of outside investors. A contrasting concern is that strengthening shareholder rights may come at the expense of other parties, which may also lead to misallocation of corporate resources. A recently-emerging body of research suggests that the relationship between shareholder rights and social welfare is not monotonic, but rather inverse-U-shaped. We argue that the calibration and impact of shareholder rights depends crucially on the institutional channel(s) through which they are implemented—voting, litigation, and/or market pricing. In particular, the market pricing channel intensifies the effects of shareholder rights in ways that can be excessive. This can harm not only other constituencies but also shareholders, as it can promote short-termism and systemic externalities. These problems are less pronounced for shareholder rights implemented through the voting channel. [ABSTRACT FROM AUTHOR]
- Published
- 2020
- Full Text
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13. Controlling Shareholders in the Twenty-First Century: Complicating Corporate Governance Beyond Agency Costs.
- Author
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Pargendler, Mariana
- Subjects
STOCKHOLDERS ,CORPORATE governance ,CORPORATION law ,NATIONALISM ,AGENCY costs - Abstract
The article focuses on the implication of controlling shareholders on corporate governance. Topics mentioned include good law jurisdictions, nonpecuniary private benefits of control, the different types of controlling shareholders, the role of nationalism in the development of corporate law and governance, and the efficiency of corporate governance in reducing agency costs
- Published
- 2020
14. The Law and Practice of Shareholder Inspection Rights: A Comparative Analysis of China and the United States.
- Author
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Hui Huang, Robin and Thomas, Randall S.
- Subjects
- *
PRACTICE of law , *STOCKHOLDERS , *CHINESE people , *AGENCY costs , *COMPARATIVE studies , *CORPORATE governance - Abstract
Shareholder inspection rights allow a shareholder to access the relevant documents of the company in which they hold an interest, so as to address the problem of information asymmetry and reduce the agency costs inherent in the corporate structure. While Chinese corporate governance and American corporate governance face different sets of agency cost problems, this Article shows that shareholder inspection rights play an important role in both China and the United States. On the books, while shareholder inspection rights in both countries are broadly similar, there are some important differences on issues such as the proper purpose requirement. The empirical analysis of this Article further sheds light on how inspection rights operate on the ground. A good number of inspection cases are filed in both China and in Delaware. These cases are resolved by the courts relatively quickly. While inspection rights in both countries are frequently used as a presuit discovery device, the types of subsequent litigation that can be filed in each country are quite different. Efforts are made to explain, and draw implications from, the similarities and differences on shareholder inspection rights between the two countries. [ABSTRACT FROM AUTHOR]
- Published
- 2020
15. Managerial Opportunism during Corporate Litigation.
- Author
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HASLEM, BRUCE
- Subjects
ACTIONS & defenses (Law) ,LEGAL costs ,LEGAL settlement ,STOCKHOLDERS ,CORPORATE governance ,AGENCY costs ,SETTLEMENT costs ,BUSINESS losses ,LEGAL judgments ,INFORMATION asymmetry - Abstract
Using a large sample of litigation events involving publicly listed defendants, we document a surprising fact. The resolution of litigation through a court's decision dominates settlement of litigation from the shareholders' point of view, even when the firm loses. We develop a model using agency costs within the firm to explain why the market views settlement as a negative outcome on average and find empirical evidence supporting the implications of the model. Specifically, firms with weak corporate governance settle litigation more quickly, and the market reacts more negatively to settlements involving firms with higher agency costs. [ABSTRACT FROM AUTHOR]
- Published
- 2005
- Full Text
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16. Large Shareholder Incentives and Auditor Choice.
- Author
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Zhang, Shanshan, Ye, Kangtao, Cui, Yijing, and Zang, Wenjiao
- Subjects
AUDITORS ,STOCKHOLDERS ,AGENCY costs ,INVESTORS ,AUDITING - Abstract
SUMMARY: This study investigates the impact of large shareholder incentives on firms' auditor choice using a quasi-natural experiment setting provided by the split share structure reform in China. The reform converted the previously non-tradable shares held by large shareholders into tradable shares and thus enhanced the alignment of large shareholders' and outside investors' interests. We find that firms switch from large auditors to small auditors following the completion of the reform. The results are robust to the audit firm merging effect and the firm fixed effects. Further analyses reveal that the effect is more pronounced in firms with greater agency costs prior to the reform and in firms located in a weak legal environment. Taken together, these results suggest that a reduction in conflicts between large shareholders and outside investors leads to a declining demand for high-quality audits. JEL Classifications: M42; G34. Data Availability: Data are available from the public sources cited in the text. [ABSTRACT FROM AUTHOR]
- Published
- 2019
- Full Text
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17. Executive Stock Ownership Guidelines and Debtholder Wealth.
- Author
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Kang, Jun-Koo and Xu, Limin
- Subjects
EXECUTIVE compensation ,STOCK ownership ,COMMERCIAL loans ,SPREAD (Finance) ,AGENCY costs ,STOCKHOLDERS ,FINANCIAL statements - Abstract
We examine how the adoption of executive stock ownership guidelines affects debtholder wealth. We find that guideline adoption is associated with lower loan spreads, fewer collateral requirements, and fewer other restrictive covenants. The results are robust to using an instrumental variables approach. We further find that guideline adoption has a negative effect on bond yield spreads and that after the adoption, firms' risk-taking incentives are lower. These results suggest that guideline adoption benefits debtholders by lowering agency costs of debt. However, we also find that adoption of ownership guidelines is associated with a significant increase in stock prices, and that firms are more likely to increase financial reporting quality in the post-adoption period, indicating that guideline adoption incentivizes managers to improve firm fundamentals, benefiting both shareholders and debtholders. JEL Classifications: G21; G32; M12; M41. [ABSTRACT FROM AUTHOR]
- Published
- 2019
- Full Text
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18. ENHANCED SCRUTINY ON THE BUY-SIDE.
- Author
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Afsharipour, Afra and Laster, J. Travis
- Subjects
- *
MERGERS & acquisitions , *STOCKHOLDERS , *FIDUCIARY responsibility , *STANDARD of review (Law) , *AGENCY costs - Abstract
Empirical studies of acquisitions consistently find that public company bidders often overpay for targets, imposing significant losses on bidder shareholders. Numerous studies have connected bidder overpayment with managerial agency costs and behavioral biases that reflect management self-interest. For purposes of corporate law, these concerns implicate the behavior of fiduciaries--the officers and directors of the acquiring entity--and raise questions about whether those fiduciaries are fulfilling their duty of loyalty. To address comparable sell-side concerns, the Delaware courts developed an intermediate standard of review known as enhanced scrutiny. There has been little exploration, however, of whether the rationales for applying enhanced scrutiny to the actions of sell-side fiduciaries extend to comparable fiduciaries on the buy-side. This Article addresses this long-neglected question. Drawing upon the history of Delaware jurisprudence on enhanced scrutiny, it argues that enhanced scrutiny should extend to the decisions of buy-side fiduciaries. The Article also recognizes that, although doctrinally coherent, applying enhanced scrutiny to buy-side decisions would open the door to well-documented stockholder litigation pathologies that have undermined the effectiveness of enhanced scrutiny for sell-side decisions. To address these pathologies, the Delaware courts have recently encouraged the use of fully informed stockholder votes on the sell-side to lessen litigation risk. This Article reasons that a primary argument in favor of extending enhanced scrutiny to buy-side decisions rests not on the ability of the litigation itself to generate superior outcomes, but rather as an inducement to more frequent buy-side votes. This argument builds on recent empirical literature which finds that stockholder voting can provide an important counterbalance against the self-interest and biases that lead to bidder overpayment. [ABSTRACT FROM AUTHOR]
- Published
- 2019
19. The Role of Options in the Resolution of Agency Problems: A Comment.
- Author
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FARMER, ROGER E. A. and WINTER, RALPH A.
- Subjects
OPTIONS (Finance) ,SECURITIES trading ,STOCKHOLDERS ,MATHEMATICAL proofs ,STOCK ownership ,AGENCY costs ,EXTERNALITIES ,FINANCIAL markets ,FINANCE literature ,STOCK options - Abstract
THE AIM OF THE contracting literature in economics is to explain observed contractual arrangements, or organizations, as minimizing the costs of incentive conflicts. In the agency cost literature of financial economics, the contractual arrangement at issue is the mix of securities held by inside management of a firm and outside suppliers of capital--the ownership structure of the firm, in Jensen and Meckling's [8] terminology.
This article re-examines the role of options in the resolution of agency problems. We argue, in Section I, that options cannot eliminate the agency problem of excessive perquisite consumption, contrary to Haugen and Senbet. The essential point is that unless outside financing can be provided entirely by riskless debt, then outsiders must have a residual claim on the net income of the firm in some states of the world. Outsiders therefore share in the costs of increased perquisite consumption, whatever the ownership structure of the firm. This negative externality means that excessive perquisite consumption is inevitable.
This paper analyzes the problem of efficient ownership structure under the simplest set of conditions giving rise to an agency problem. When a manager-entrepreneur cannot fully finance investment with riskless debt, the residual return to investment must be shared with security holders. The optimal ownership structure solves the problem of dividing residual return across states between the manager and the security market, subject to the constraint that sufficient capital be raised. We argue that the manager's proportionate share of residual return is greater in the high-output states because the shadow cost--through the financing constraint--of increasing this share is lower in the high-output states. This provides an efficiency explanation of call options in managerial compensation packages. [ABSTRACT FROM AUTHOR]- Published
- 1986
- Full Text
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20. Costly Contracting and Optimal Payout Constraints.
- Author
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JOHN, KOSE and KALAY, AVNER
- Subjects
STOCKHOLDERS ,BONDHOLDERS ,CONFLICT management ,CONTRACTING out ,INDIVIDUAL investors ,AGENCY costs - Abstract
Motivated by the assumption of perfect capital markets, the firm has been traditionally viewed as a homogeneous unit whose clear objective is to maximize its market value. However, in an environment of costly contracting, some recent research has portrayed the firm as a collection of competing groups whose interests can conflict. This paper concentrates on the conflict between the two major groups—the stockholders and the bondholders—and derives an optimal set of contractual arrangements which minimize the costs of this conflict. In our model, these contracts will determine endogenously the optimal investment levels and the dividend policy of a levered firm. This paper presents a rigorous theoretical analysis of the form and optimality of constraints on dividend payouts to be serf-imposed by the shareholders of a levered firm in debt contracts. These optimal contracts are derived endogenously in a multi-period model which allows for divergence of interests between stockholders and bondholders. [ABSTRACT FROM AUTHOR]
- Published
- 1982
- Full Text
- View/download PDF
21. Executive Incentive Plans, Corporate Control, and Capital Structure.
- Author
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Mehran, Hamid
- Subjects
EXECUTIVE compensation ,STOCKHOLDERS ,AGENCY costs ,AGENCY theory ,CORPORATE finance ,CAPITAL structure - Abstract
Agency theory recognizes that the interests of managers and shareholders may conflict and that, left on their own, managers may make major financial policy decisions, such as the choice of a capital structure, that are suboptimal from the shareholders' standpoint. The theory also suggests, however, that compensation contracts, managerial equity investment, and monitoring by the board of directors and major shareholders can reduce conflicts of interest between managers and shareholders. This research investigates the relationship between the firm's capital structure and 1) executive incentive plans, 2) managerial equity investment, and 3) monitoring by the board of directors and major shareholders. This paper finds a positive relationship between the firm's leverage ratio and 1) percentage of executives' total compensation in incentive plans, 2) percentage of equity owned by managers, 3) percentage of investment bankers on the board of directors, and 4) percentage of equity owned by large individual investors. These findings are consistent with the predictions of agency theory, suggesting, in turn, that capital structure models that ignore agency costs are incomplete. [ABSTRACT FROM AUTHOR]
- Published
- 1992
- Full Text
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22. Agency Problems, Equity Ownership, and Corporate Diversification.
- Author
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Denis, David J., Denis, Diane K., and Sarin, Atulya
- Subjects
DIVERSIFICATION in industry ,AGENCY costs ,EQUITY (Law) ,EXECUTIVES' attitudes ,STOCKHOLDERS ,STOCKS (Finance) ,FINANCIAL crises ,MARKETS ,ECONOMIC competition ,LABOR turnover - Abstract
We provide evidence on the agency cost explanation for corporate diversification. We find that the level of diversification is negatively related to managerial equity ownership and to the equity ownership of outside blockholders. In addition, we report that decreases in diversification are associated with external corporate control threats, financial distress, and management turnover. These findings suggest that agency problems are responsible for firms maintaining value-reducing diversification strategies and that the recent trend toward increased corporate focus is attributable to market disciplinary forces. [ABSTRACT FROM AUTHOR]
- Published
- 1997
- Full Text
- View/download PDF
23. The Theory of Capital Structure.
- Author
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Harris, Milton and Raviv, Artur
- Subjects
CAPITAL structure ,CORPORATE finance ,CAPITAL market ,AGENCY costs ,MARKET volatility ,INFORMATION modeling ,DEBT ,EQUITY (Law) ,FINANCIAL executives ,STOCKHOLDERS ,LIQUIDATION ,RISK aversion - Abstract
This paper surveys capital structure theories based on agency costs, asymmetric information, product/input market interactions, and corporate control considerations (but excluding tax-based theories). For each type of model, a brief overview of the papers surveyed and their relation to each other is provided. The central papers are described in some detail, and their results are summarized and followed by a discussion of related extensions. Each section concludes with a summary of the main implications of the models surveyed in the section. Finally, these results are collected and compared to the available evidence. Suggestions for future research are provided. [ABSTRACT FROM AUTHOR]
- Published
- 1991
- Full Text
- View/download PDF
24. Shareholder Protection and Agency Costs: An Experimental Analysis.
- Author
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LaRiviere, Jacob, McMahon, Matthew, and Neilson, William
- Subjects
STOCKHOLDERS ,INVESTOR relations (Corporations) ,AGENCY costs ,DIVIDENDS ,LEGAL status of stockholders - Abstract
Two competing principal--agent models explain why firms pay dividends. The substitute model proposes that corporate insiders pay dividends to signal and build trust with outside shareholders who lack legal protection. The outcome model, in contrast, surmises that when shareholders have legal protection, they demand dividends from insiders to prevent them from expropriating corporate funds. Either way, dividends represent an agency cost paid to align the interests of shareholders and insiders. Expropriations by insiders and reduced investment by shareholders are also agency costs, but they are diffi- cult to identify with archival data. Using a laboratory experiment, we identify the impact of strengthened shareholder protection on all three types of agency costs. Dividend payout ratios are five times larger with stronger investor protection, insider expropriation ratios are twice as high, and outsider investment falls by 45%. Thus, we find evidence that strengthening shareholder protection introduces previously unidentified agency costs into the insider--investor relationship. [ABSTRACT FROM AUTHOR]
- Published
- 2018
- Full Text
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25. IMPACT OF A COMPANY'S DIVIDEND POLICY ON THE LIQUIDITY OF SHARES LISTED ON THE WARSAW STOCK EXCHANGE.
- Author
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GNIADKOWSKA-SZYMAŃSKA, AGATA
- Subjects
DIVIDEND policy ,LIQUIDITY (Economics) ,AGENCY costs ,ENDOGENEITY (Econometrics) ,STOCKHOLDERS - Abstract
This study investigates the informational effect of stock liquidity on dividend payouts. Using a sample of Polish listed companies during 2000 - 2012, I do not find a relation between stock liquidity and dividend payouts. This result is robust to the use of alternative measures of liquidity, and holds after we control for endogeneity concerns. In accord with my hypothesis that stock liquidity provides information and increases insiders' incentive to pay out dividends, I do not find that the relation between stock liquidity and dividend payouts is more pronounced when the information environment is opaque, and when conflict between controlling shareholders and minority investors is severe. The aim of this study is to show the dependencies occurring between dividend policy and the liquidity of shares of a company. The basic thesis of this study is that decisions on dividend payments positively affect the liquidity of the shares of a company. [ABSTRACT FROM AUTHOR]
- Published
- 2017
- Full Text
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26. Disproportional Control Rights and the Governance Role of Debt.
- Author
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Dey, Aiyesha, Nikolaev, Valeri, and Wang, Xue
- Subjects
DEBT ,STOCKHOLDERS ,CAPITAL market ,AGENCY costs ,FINANCIAL market reaction - Abstract
We examine the governance role of debt in the context of U.S.-based dual class ownership structures. We hypothesize that the use of debt alleviates the conflict between shareholder classes by balancing the power of controlling insiders. We document that dual class firms have higher leverage and a greater propensity to issue private debt; they also more frequently use cash sweeps and performance-based covenants. Dual class firms with greater agency conflicts and a greater need to access the capital market appear to rely more extensively on debt. These findings are consistent with controlling insiders bonding against the agency costs associated with dual class ownership. The governance role of debt is further corroborated by the valuation effect of debt for dual class companies. Private debt issuances trigger greater positive market reactions to the inferior dual class stock in relation to both the superior dual class stock and a matched sample of single class firms. Further, leverage attenuates the previously documented adverse effect of dual class status on Tobin's q. Taken together, our analyses suggest that dual class firms use debt as a complementary governance mechanism. This paper was accepted by Mary Barth, accounting. [ABSTRACT FROM AUTHOR]
- Published
- 2016
- Full Text
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27. MONITOR AND CONTROL IN COMPANIES: AN AGENCY THEORY APPROACH.
- Author
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CĂRĂUŞU, Dumitru-Nicuşor
- Subjects
- *
STOCKHOLDERS , *AGENCY theory , *AGENCY costs - Abstract
The aim of this paper is to survey what are the potential benefits and drawbacks of the most common mechanisms a shareholder can use to monitor and control a manager according to the agency theory. Despite the wide array of policies and instruments shareholders have at their disposal, all the mechanisms exhibits inherit flaws which limit their applicability. From the powerful boards to the ownership structure, management compensation plans, capital structure and market for corporate control, all are able to some degree to mitigate the conflict between shareholders and managers but raise others dilemmas regarding applicability and effectiveness, inquiring additional consideration. Ultimately there isn't a single solution for every environment but rather a specific mix according to the specific environment of each company, so policy makers need to take into consideration all the characteristics of the firm and only after issue recommendations, norms and laws. [ABSTRACT FROM AUTHOR]
- Published
- 2015
28. AGENCY THEORY AND OPTIMAL CAPITAL STRUCTURE.
- Author
-
GRIGORE, MARIA ZENOVIA and ŞTEFAN-DUICU, VIORICA MIRELA
- Subjects
COMMERCIAL credit ,FINANCIAL executives ,STOCKHOLDERS ,DEBT ,DEBTOR & creditor - Abstract
In the corporate finance, the agency theory tries to explain the behavior of various agents that intervene in the company's funding (managers, shareholders and debt holders) and to analyze the impact of these behaviors on the financial structure. Accordingly to the agency theory, the optimal financial structure of the capital results from a compromise between various funding options (equity, debts and hybrid securities) that allow the reconciliation of conflicts of interests between the capital suppliers (shareholders and creditors) and managers. The indebtedness allows shareholders and managers to adhere to same objectives, but causes other conflicts (between managers and shareholders, on the one hand, and creditors, on the other side). The optimal level of indebtedness is the one that allows the minimization of overall agency costs. [ABSTRACT FROM AUTHOR]
- Published
- 2013
29. Does Cross-Listing Benefit the Shareholders? Evidence from Companies in the GCC Countries?
- Author
-
Bahlous, Mejda
- Subjects
STOCKHOLDERS ,RATE of return on stocks ,PARAMETER estimation ,FINANCIAL risk ,LIQUIDITY (Economics) ,NONPARAMETRIC estimation - Abstract
The goal of this study is to estimate the impact of cross-listing on stock returns, on liquidity, and on risk. A sample of 24 companies from the Gulf Cooperation Council countries which cross-listed their stocks in a foreign market over the period 2000–2010 were chosen for study. An event study estimating abnormal returns related to the cross-listing event as well as parametric and nonparametric tests find that there is (1) a significant abnormal return of about 6 % that lasts until 6 days after the cross-listing day and starts fading away thereafter (2) a significant increase in liquidity during the event period for most firms and (3) on average a decrease in risk. Our results also suggest that cross-listing had a small impact on market risk measured by the average beta but led to a decrease in the total risk measured by standard deviation of returns and a decrease in the potential loss measured by the average value at risk at the 5 % confidence. Additionally, an analysis based on the foreign market of secondary listing suggests that the benefit of cross-listing varies with the market of secondary listing. The positive abnormal return is more obvious for companies that cross-listed in Kuwait, Bahrain, and London. The most obvious increase in liquidity is for firms that cross-listed in London or in Bahrain and the biggest decrease in risk is for companies that cross-listed in London. We conclude overall that cross-listing in London benefits the shareholders the most as it leads to positive significant abnormal returns, an increase in liquidity, and a decrease in risk. [ABSTRACT FROM AUTHOR]
- Published
- 2013
- Full Text
- View/download PDF
30. Do Board Characteristics Influence the Shareholders' Assessment of Risk for Small and Large Firms?
- Author
-
Christy, Jonathan A., Matolcsy, Zoltan P., Wright, Anna, and Wyatt, Anne
- Subjects
BOARDS of directors ,STOCKHOLDERS ,RISK assessment ,BUSINESS size ,VOLATILITY (Securities) ,RATE of return on stocks ,AGENCY costs ,EXPERIMENTAL design ,MATHEMATICAL models ,LEAST squares ,REGRESSION analysis ,SENSITIVITY analysis - Abstract
This paper investigates the association between board characteristics and shareholders' assessment of their exposure to economic and agency risks as reflected in the volatility of stock returns. Our hypotheses incorporate prior evidence that small and large firms have 'dramatically' different board structures, reflecting the firms' different monitoring and advising needs. We hypothesize and find evidence that only the shareholders of well-established large firms are able to generate positive net benefits, in the form of lower equity risk, from independent boards and well-connected independent directors with multiple directorships. We also find professional and formal industry degree qualifications on the board are associated with shareholders' risk assessment for some small firms consistent with the focus of small firms on building growth and scale. While we find evidence that formal industry professional affiliations (weak evidence) and MBAs provide benefits for the shareholders of large firms, there is limited evidence that financial expertise on the board systematically influences shareholders' risk assessments for small or large companies. The key conclusion from the evidence in this paper is that a 'one size fits all' approach to governance in relation to the board of directors may not meet the diverse needs of companies at different stages of economic development. [ABSTRACT FROM AUTHOR]
- Published
- 2013
- Full Text
- View/download PDF
31. Large shareholders and accounting research.
- Author
-
Hope, Ole-Kristian
- Subjects
STOCKHOLDERS ,ACCOUNTING ,CORPORATE governance ,POLITICAL science ,COST ,PROPERTY ,FAMILIES ,EMPLOYEES - Abstract
Abstract: Large shareholders are a potentially very important element of firms’ corporate governance system. Whereas analytical research is typically vague on who these large shareholders are, in practice there are important variations in the types of large owners (and the different types of large owners could play very different governance roles). After briefly reviewing the standard agency cost arguments, in this article I emphasize the heterogeneity of concentrated ownership and in particular focus on the roles of families, institutions, governments, and employee ownership. I also discuss the role of large shareholders in private (i.e., unlisted) firms, where ownership tends to be more concentrated than in publicly traded firms. Finally, I briefly discuss variations in ownership structures across selected countries. [Copyright &y& Elsevier]
- Published
- 2013
- Full Text
- View/download PDF
32. Corporate Governance and Capital Structure Dynamics.
- Author
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MORELLEC, ERWAN, NIKOLOV, BORIS, and SCHÜRHOFF, NORMAN
- Subjects
CORPORATE governance ,CAPITAL structure ,STOCKHOLDERS ,EXECUTIVES ,CASH flow ,AGENCY costs ,REFINANCING ,LIQUIDATION - Abstract
We develop a dynamic tradeoff model to examine the importance of manager-shareholder conflicts in capital structure choice. In the model, firms face taxation, refinancing costs, and liquidation costs. Managers own a fraction of the firms' equity, capture part of the free cash flow to equity as private benefits, and have control over financing decisions. Using data on leverage choices and the model's predictions for different statistical moments of leverage, we find that agency costs of 1.5% of equity value on average are sufficient to resolve the low-leverage puzzle and to explain the dynamics of leverage ratios. Our estimates also reveal that agency costs vary significantly across firms and correlate with commonly used proxies for corporate governance. [ABSTRACT FROM AUTHOR]
- Published
- 2012
- Full Text
- View/download PDF
33. Family firms, debtholder-shareholder agency costs and the use of covenants in private debt.
- Author
-
Bagnoli, Mark, Liu, Hsin-Tsai, and Watts, Susan
- Subjects
FAMILY-owned business enterprises ,STOCKHOLDERS ,DEBT ,AGENCY costs ,CREDIT ,MONEYLENDERS - Abstract
We ask whether the private debt contracts of family firms contain more restrictive covenants tied to accounting numbers than those of non-family firms. Our examination of Dealscan data indicates that credit agreements of Standard and Poor (S&P) 500 family firms are more likely to include accounting-based covenants that limit the lender(s)' risk that managers will divert cash or assets to shareholders than those of S&P 500 non-family firms. The likelihood is further increased by presence of a dual class stock system that includes supervoting shares. Our results suggest that lenders are more willing to rely on accounting-based covenants to solve the shareholder-private lender agency problem in family firms given that the reporting quality is higher due to better alignment of owner and manager interests in such firms. [ABSTRACT FROM AUTHOR]
- Published
- 2011
- Full Text
- View/download PDF
34. CAPITAL STRUCTURE THEORIES: A CRITICAL APPROACH.
- Author
-
Brendea, Gabriela
- Subjects
CAPITAL structure ,INFORMATION asymmetry ,AGENCY theory ,MARKET timing ,AGENCY costs ,STOCKHOLDERS - Abstract
This paper reviews the most important theories of capital structure, specifying the practical implications, as well as the strengths and weaknesses of these theories. Each theory is briefly described and some critical comments on the empirical implications are made. Both classical and modern theories of capital structures are discussed in terms of contributions they make to the field of corporate finance, as well as problematical issues such as unsolved explanations and conflicting results. The review highlights the fact that there was a transition from Modigliani and Miller's (1958) irrelevance proposition to the modern theories (i.e., trade-off theory, pecking order theory, agency theory, market timing theory) which postulate that the market value of the firm is dependent of the firm's debt ratio, because of the existence of taxes, financial distress costs, agency costs, information asymmetry and market imperfections on the financial market (Baker & Wurgler, 2002; Jensen & Meckling, 1976; Modigliani & Miller, 1963; Myers, 1984). [ABSTRACT FROM AUTHOR]
- Published
- 2011
35. Corporate governance, accounting and finance: A review.
- Author
-
Brown, Philip, Beekes, Wendy, and Verhoeven, Peter
- Subjects
CORPORATE culture ,ACCOUNTING ,STOCKHOLDERS ,ORGANIZATIONAL behavior ,SOCIOLOGY of corporations ,CORPORATE finance - Abstract
We review accounting and finance research on corporate governance (CG). In the course of our review, we focus on a particularly vexing issue, namely endogeneity in the relationships between CG and other matters of concern to accounting and finance scholars, and suggest ways to deal with it. Given the advent of large commercial CG databases, we also stress the importance of how CG is measured and in particular, the construction of CG indices, which should be sensitive to local institutional arrangements, and the need to capture both internal and external aspects of governance. The 'stickiness' of CG characteristics provides an additional challenge to CG scholars. Better theory is required, for example, to explain whether various CG practices substitute for each other or are complements. While a multidisciplinary approach to developing better theory is never without its difficulties, it could enrich the current body of knowledge in CG. Despite the vastness of the existing CG literature, these issues do suggest a number of avenues for future research. [ABSTRACT FROM AUTHOR]
- Published
- 2011
- Full Text
- View/download PDF
36. Agency Costs and the Size Discount: Evidence from Acquisitions.
- Author
-
Offenberg, David
- Subjects
- *
AGENCY costs , *DISCOUNT prices , *MERGERS & acquisitions , *CORPORATE governance , *SCHOLARS , *STOCKHOLDERS - Abstract
Many scholars have found a negative relationship between a firm's size and its value, as measured by Tobin's q. This result is called the size discount. There are hypotheses about why the size discount exists, but none have been rigorously empirically tested. This paper argues that the size discount is created by the inability of shareholders to minimize agency costs in larger companies. Statistical tests suggest that the size discount only appears in large firms with managers that impose excessive agency costs upon their shareholders. Empiricists who use Tobin's q to proxy for growth opportunities may need a different proxy. [ABSTRACT FROM AUTHOR]
- Published
- 2010
37. Common Agency and the Public Corporation.
- Author
-
Rose, Paul
- Subjects
- *
BUSINESS models , *MUNICIPAL corporations , *STOCKHOLDERS , *AGENCY costs , *INVESTORS , *ORGANIZATIONAL behavior - Abstract
The article discusses the alternative model called a common agency theory for public corporations in California. This agency is created when multiple principals influence a single agent describing a shareholder/management relationship with competing preferences on corporate management. Also explained is the investor activities and arguments that increasing shareholder power lead to the decrease of agency costs caused by management expropriation.
- Published
- 2010
38. Agency Cost Reduction Associated with EU Financial Reporting Reform.
- Author
-
Pae, Jinhan, Thornton, Daniel B., and Welker, Michael
- Subjects
FINANCIAL statements ,ACCOUNTING ,COST control ,INDUSTRIAL costs ,BUSINESS enterprises ,STOCKHOLDERS ,CASH flow ,STOCKS (Finance) - Abstract
We predict and find that regulations expected to harmonize and strengthen firms' financial reporting in the European Union (EU) in the early 2000s increase Tobin's Q ratios of firms with high agency costs due to (1) concentration of control (entrenchment) and (2) an excess of the largest shareholder's voting rights over cash flow rights. These results are consistent with stronger reporting standards enhancing firm value by mitigating incentives for controlling shareholders to expropriate minority shareholders. Increases in Tobin's Q associated with financial reporting reform are concentrated in EU firms that (1) are not cross-listed in the U.S., (2) have families as their largest shareholders, or (3) have a largest shareholder who holds 20 percent or more of the firm's cash flow rights. These results suggest that minority shareholders of firms with the most severe perceived information asymmetries are among the major beneficiaries of EU financial reporting reform. [ABSTRACT FROM AUTHOR]
- Published
- 2008
- Full Text
- View/download PDF
39. Employee stock ownership and corporate R&D expenditures: evidence from Taiwan's information-technology industry.
- Author
-
Hsiang-Lan Chen and Yen-Sheng Huang
- Subjects
EMPLOYEE ownership ,STOCKHOLDERS ,RESEARCH & development ,AGENCY costs ,INFORMATION technology - Abstract
This study investigates how employee stock ownership affects corporate R&D expenditures for information-technology firms listed on the Taiwan Stock Exchange during 1996–2001. The empirical results indicate a positive association between implementing employee stock ownership and R&D expenditures. The evidence thus supports the argument that employee stock ownership could help alleviate agency conflicts between employees and shareholders, and reduce agency costs, in turn enabling firms to make sizable R&D expenditures. [ABSTRACT FROM AUTHOR]
- Published
- 2006
- Full Text
- View/download PDF
40. Costos de agencia y costos de transacción como determinantes de la tasa de pago de dividendos en Chile.
- Author
-
Maquieira V., Carlos and Danús S., Mónica
- Subjects
- *
DIVIDENDS , *TRANSACTION costs , *AGENCY costs , *PUBLIC companies , *GROWTH rate , *STOCKS (Finance) , *STOCKHOLDERS - Abstract
We study the determinants of the dividend payout ratio considering a model that minimizes the sum of transaction and agency costs. Using a cross-sectional analysis on a sample of 60 Chilean public traded companies from 1986 to 1992, we examine the relationship between the dividend payout ratio and the expected growth rate, the beta, the percentage of shares helds by insiders and the number of stockholders. We find a positive and statistically significant relationship between the dividend payout ratio and the expected growth rate, which can be consistent with the signaling hypothesis. [ABSTRACT FROM AUTHOR]
- Published
- 1998
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