Two Agency-Cost Explanations of Dividends

TLDR

Dividend theory traditionally assumes managers act as perfect agents of investors, while alternative views treat them as imperfect agents, yet these perspectives rarely converge; in principle, any corporate policy, including dividends, should aim to minimize capital, agency, and tax costs. The study asks whether dividends serve to align managers’ interests with those of investors. The paper provides agency‑cost explanations for dividend policy.

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.