Fisheries Centre Research Reports

Abstract

The economic literature about dividends usually assumes that managers are perfect agents of investors, and it seeks to determine why these agents pay dividends. Other literature about the firm assumes that managers are imperfect agents and inquires how managers' interests may be aligned with shareholders' interests. These two lines of inquiry rarely meet. Yet logically any dividend policy or any other corporate policy should be designed to minimize the sum of capital, agency, and taxation costs. The purpose of this paper is to ask whether dividends are a method of aligning managers' interests with those of investors. It offers agency-cost explanations of dividends. Dividends are hard enough to explain when they occur in isolation; a combination of dividends and simultaneous raising of new capital is downright inexplicable. Yet the simultaneous or near-simultaneous payment of dividends and raising of new capital are common in business. Sometimes firms issue new stock at or around the time they pay dividends.