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Does Better Corporate Governance Encourage Higher Payout? : Risk, Agency Cost, and Dividend Policy

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  • BHATTACHARYA, Debarati
  • LI, Wei-Hsien
  • RHEE, S. Ghon

Abstract

We investigate whether corporate governance complements or substitutes for payout policy as an effective method of reducing agency cost through its interplay with the idiosyncratic risk of the firm. Corporate governance acts as a substitute for [complement to] the firm's dividend policy when its idiosyncratic risk is high [low]. Our empirical investigation reveals that moving from the weakest to the strongest quintile of corporate governance increases the predicted probability of dividend payout by 28% when the firm's idiosyncratic risk is at its lowest quintile. On the other hand, when the idiosyncratic risk is at its highest quintile, moving from the weakest to the strongest quintiles of corporate governance decreases the predicted probability of dividend payout by 32%. We also observe that the interplay of governance and idiosyncratic risk considerations shapes up managerial decisions for share repurchase, total payout, and dividend initiation.

Suggested Citation

  • BHATTACHARYA, Debarati & LI, Wei-Hsien & RHEE, S. Ghon, 2016. "Does Better Corporate Governance Encourage Higher Payout? : Risk, Agency Cost, and Dividend Policy," Discussion paper series HIAS-E-20, Hitotsubashi Institute for Advanced Study, Hitotsubashi University.
    • Handle: RePEc:hit:hiasdp:hias-e-20
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    References listed on IDEAS

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    1. Ante Džidić Silvije Orsag, 2019. "Dividend Smoothing and Investor Protection," Zagreb International Review of Economics and Business, Faculty of Economics and Business, University of Zagreb, vol. 22(2), pages 55-70, November.
    2. Smith, Deborah Drummond & Pennathur, Anita K. & Marciniak, Marek R., 2017. "Why do CEOs agree to the discipline of dividends?," International Review of Financial Analysis, Elsevier, vol. 52(C), pages 38-48.
    3. Anwer, Zaheer & Mohamad, Shamsher & Paltrinieri, Andrea & Hassan, M. Kabir, 2021. "Dividend payout policy of Shariah compliant firms: Evidence from United States," Pacific-Basin Finance Journal, Elsevier, vol. 69(C).
    4. Anwer, Zaheer & Azmi, Wajahat & Mohamad, Shamsher, 2023. "Shariah screening and corporate governance: The case of constituent stocks of Dow Jones US Indices," International Review of Economics & Finance, Elsevier, vol. 86(C), pages 976-1002.
    5. Azmi, Wajahat & Anwer, Zaheer & Mohamad, Shamsher & Shah, Mohamed Eskandar, 2019. "The substitution hypothesis of agency conflicts: Evidence on Shariah compliant equities," Global Finance Journal, Elsevier, vol. 41(C), pages 90-103.

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    More about this item

    Keywords

    Dividend policy; Idiosyncratic risk; Corporate governance; Stock repurchase; Dividend initiation; Agency costs;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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