Agency costs and the dividend decision

Abstract

We examine the relation between the firm's agency costs and the decision to distribute cash to shareholders by declaring a nonrecurring special dividend or by significantly increasing the firm's regular dividend. The independence of the board of directors, the voting rights of outside blockholders and the presence of antitakeover charter amendments all proxy for the level of agency costs within the firm. We find firms that significantly increase their regular dividend are more likely to have a greater proportion of independent directors on their boards and greater outside blockholdings, and are less likely to adopt antitakeover charter amendments than firms that declare a special dividend. The evidence supports the notion that firms with greater agency costs are more likely to pay a special dividend, whereas firms with lower agency costs are more likely to increase their regular dividend.