Agency Problems &

Dividends Policies Around

the World

Hell
o!
Waqas

Agency Problems & Dividends Policies

Around the World
s
r
o
h
t
Au
Rafael La Porta
Florencio Lpez-de-silanes
Andrei Shleifer
Robert Vishny

Rafael La Porta
Professor. Finance @ Tuck
school of business at Dartmouth
College.
PhD & MA from Harvard in economics.
Researching focuses on the corporate
governance around the world.

FLORENCIO LOPEZDE-SILANES

Director of corporate governance &

family business.
Professor. Law & finance @ EDHEC.
Taught @ Harvard, Yale university,
and university of Amsterdam.

FLORENCIO LOPEZ-DE-SILANES

A young business leaders & one

of the most cited person in
economic & business topics.
Accused of financial misbehavior
amount of $150000, when was
the director of School of
Management at Yale in 2005.

Robert Ward
Vishny
Professor of Finance @ the

university of Chicago booth

school of business
PHD in Economics from Massachusetts institute of Technology.
Received his B.A. economics, from the university of Michigan.
Taught Financial Management & Corporation Finance over 20
years

Andrei Shleifer
Professor at Harvard university
and Russian American
economist.
Ph.D. from MIT & BA from Harvard
university.

Will Be Covered
Theoretical Issues
Data summary
Empirical Results
Conclusion

Agency problems and dividend

policies around the world
First, lets compare the two types of Agency
Models
1. Outcome Model of Dividends: Pay dividend
as the minority shareholders force insiders of
the corporate for cash disgorge.
2. Substitute Model of Dividends: Pay
dividends for the establishment of reputation &
so can raise equity finance later on in the
future.

DIVIDEND
PUZZLE

Based on the MM (Modigliani & Miller)

Theory, we can say that the dividend
policy has no relationship to the firm
value. So, there is no dividend puzzle in
a perfect world.

DIVIDENDS PUZZLE
predict firms
growth:
By paying dividends firms
can signal their future
profitability and success.
When the dividend rises
-decreases- the share price
will go up -down-. But
recently the result are more
mixed, and the dividend
can not help to predict

Agency problems:
Dividend policy addresses
agency problems among the
insiders and outsiders. The
insiders may avert the cash
to damage outsiders. So
thats the reason outsiders
prefer dividends.

Agency Approach to
Dividends
Agency
Problems &
Dividends
Policy under the
Common Law
and Civil Law

1. Common law
Countries have better
protection for investors
and the outsiders can
make higher dividends.

2. Civil law
Countries which has
weaker protection and
the outsiders can get
smaller dividends than
common law
countries.

I.

Theoretical
Issue

Agency problems and

Legal Regime

(Berle and Means(1932), Jensen &

Meckling (1976): Conflicts of interest
between corporate insiders like
controlling shareholders, managers
and outside investors like the
minority shareholders.

Detriment

Divert Corporate Asset to insiders

Dilution of Outsider investors

Transfer Pricing with other

entities they control

Law
Protection
Voting right on some important corporate matter
a) For the Election of Director.
b) The right to sue the company for damages.
LLSV(1998): Legal protection of outside investors differs
enormously across the countries.
a) Common Law: Better legal protection of minority.
b) Civil Law: Inferior legal protection of minority shareholder

Agency and Dividends

The role of Dividends in an Agency Context

Pay dividend: corporate return earning to investor and are no longer capable of
using these earning to benefit themselves. Dividends (a bird in the hand) are
better than retained earnings (a bird in the bush).

Agency and Dividends

Dividends as an outcome of Legal Protection

Minority shareholders use their legal power to force companies to disgorge cash.
(1) Voting for directors who offer better dividend.
(2) Selling share to potential hostile raiders.
(3) Suing company that benefit insider.
better protection= higher dividend payout
under good protection= G=(1-D)*ROE

Agency and Dividends

Dividends as a substitute for Legal Protection of
Shareholders (Substitution Model)
1. External financing= Pay dividend

Weak legal protection= High dividend payout

2. High growth prospects= High dividend payout(?)

Reason:
high growth prospects company will have a better
current use of fund.

Agency and Dividends

Summary of Prediction of Agency Models
1. Good protection = High payout ratio
2. Bad protection = Low payout ratio
3. Under good protection:
.
.

high growth company =>low payout ratio

low growth company =>high payout ratio

Substitution model:
Predict opposite.

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some concepts
Yellow

Blue

Red

Is the color of gold,

butter and ripe lemons.
In the spectrum of
visible light, yellow is
found between green
and orange.

Is the colour of the

clear sky and the deep
sea. It is located
between violet and
green on the optical
spectrum.

Is the color of blood,

and because of this it
has historically been
associated with
sacrifice, danger and
courage.

Yellow

Blue

Red

Is the color of gold,

butter and ripe lemons.
In the spectrum of
visible light, yellow is
found between green
and orange.

Is the colour of the

clear sky and the deep
sea. It is located
between violet and
green on the optical
spectrum.

Is the color of blood,

and because of this it
has historically been
associated with
sacrifice, danger and
courage.

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Conclusion
The result of this article is support the outcome agency model of dividends.
Poorly protected shareholders seem to take whatever dividends they can get.
The result of this article doesnt find the effect of taxes on dividend policies.

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