Dividends, Corporate Monitors and Agency Costs


  • The authors would like to thank Mark Flannery, two anonymous referees, and the participants at the Southern Finance Association and Eastern Finance Association meetings for comments that greatly helped us improve the paper. All errors are those of the authors.


We report new evidence on the hypothesis that dividends reduce agency costs. Consistent with dividends as a mechanism to reduce agency costs, we find that, on average, firms with a majority of strict outside directors on their boards experience significantly lower mean abnormal returns around the announcements of sizeable dividend increases. Our results are robust to multivariate controls for firm size, leverage, ownership, growth options, and change in dividend yield. However, we find no evidence that dividend increases reduce agency costs as measured by poison pills or outside blockholdings.