Dividends and the Agency Cost of Free Cash Flows

Raúl Sergio González Treviño
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Raúl Sergio González Treviño: Facultad de Economía, Universidad Autónoma de Nuevo León.

Ensayos Revista de Economia, 2003, vol. XXII, issue 1, 1-18

Abstract: A leading explanation for the positive market reaction surrounding the announcement of dividend increases is that dividend payments mitigate the agency conflict between managers and shareholders. One implication of this theory is that those firms whose managers are less (more) entrenched should experience a stronger (weaker) market reaction around the announcement of dividend increases. Consistent with these predictions, we find an inverse U-shape relation between the market reaction to dividend increases and the level of managerial ownership in the firm.

Date: 2003
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