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Earnings, Book Values, and Dividends in a Stewardship Setting with Moral Hazard

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  • JAMES A. OHLSON

Abstract

The paper addresses the following question: in a multiple†date agency setting, under what conditions will the dividend policy be of no incentive relevancy? It is shown that if the accounting data—earnings, book values, and dividends — satisfy standard owners' equity accounting constructs, and if these indicate that paying dividends is a zero NPV activity, then dividend policy incentive irrelevancy applies. The basic idea is to ensure that the (history of) abnormal (residual) earnings summarize the relevant information and the solution to the incentive problem. The paper also compares classical value irrelevancy with incentive irrelevancy, and the analysis shows that conditions for incentive irrelevancy are more stringent.

Suggested Citation

  • James A. Ohlson, 1999. "Earnings, Book Values, and Dividends in a Stewardship Setting with Moral Hazard," Contemporary Accounting Research, John Wiley & Sons, vol. 16(3), pages 525-540, September.
    • Handle: RePEc:wly:coacre:v:16:y:1999:i:3:p:525-540
    DOI: 10.1111/j.1911-3846.1999.tb00594.x
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    References listed on IDEAS

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    1. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    2. Richard A. Lambert, 1983. "Long-Term Contracts and Moral Hazard," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 441-452, Autumn.
    3. Merton H. Miller & Franco Modigliani, 1961. "Dividend Policy, Growth, and the Valuation of Shares," The Journal of Business, University of Chicago Press, vol. 34, pages 411-411.
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    Cited by:

    1. Colin Clubb & Martin Walker, 2014. "Payout Policy Relevance and Accounting-based Valuation," Abacus, Accounting Foundation, University of Sydney, vol. 50(4), pages 490-516, December.
    2. repec:dau:papers:123456789/3507 is not listed on IDEAS
    3. repec:dau:papers:123456789/2814 is not listed on IDEAS
    4. Dutta, Sunil & Reichelstein, Stefan J., 2004. "Stock Price, Earnings and Book Value in Managerial Performance Measures," Research Papers 1873, Stanford University, Graduate School of Business.
    5. Michael S. Luehlfing & William R. McCumber & Huan Qiu, 2023. "CEO Social Capital and the Value Relevance of Accounting Metrics," Risks, MDPI, vol. 11(4), pages 1-35, April.

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