The association between agency cost and cash distributions through dividends and share repurchases

Kwang-Soo Lim, Purdue University

Abstract

The purpose of this dissertation is to explain why cash is distributed through dividends and share repurchases from the perspective of agency conflict. This study investigates the hypothesis that dividends and share repurchases help a firm to reduce agency costs. The distribution of excess cash in the form of dividends and share repurchases enhances the chance of a firm being scrutinized by the capital market which efficiently monitors the under-monitored management and restores the suboptimal level of leverage stemming from managers' risk aversion. The empirical results are generally consistent with the agency-cost-control hypothesis. Firms with higher dividend yield tend to have lower insiders ownership, lower institutional ownership, lower average shareholder ownership, and lower Tobin's q (and vice versa). The abnormal returns at the announcement of a dividend increase are negatively associated with insiders ownership, institutional ownership, average shareholder ownership, and Tobin's q. The abnormal returns at the announcement of a share repurchase are negatively associated with institutional ownership and Tobin's q, but are positively associated with insiders ownership and average shareholder ownership. Regarding the inconclusive results for share repurchases, we speculate share repurchases to be a less effective means of alleviating agency conflict due to its non-continual characteristics. Our evidence is inconclusive for the hypothesis that there is a systematic difference in the level of association between cash distributions and our agency cost proxies among four industries--manufacturing, regulated, financial, and service industry.

Degree

Ph.D.

Advisors

Ro, Purdue University.

Subject Area

Accounting

COinS