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


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.

Report No.: HIAS-E-20
Author(s): Debarati Bhattacharya(a)
Wei-Hsien Li(b)
S. Goon Rhee (c), (d)
Affiliation: (a) Palumbo Donahue School of Business, Duquesne University, USA
(b) Department of Finance, National Central University, Taiwan
(c) Shidler College of Business, University of Hawaii at Manor, USA
(d) Hitotsubashi Institute for Advanced Study, Hitotsubashi University, Japan
Issued Date: March 2016
Keywords: Dividend policy; Idiosyncratic risk; Corporate governance; Stock repurchase; Dividend initiation; Agency costs
JEL: G10, G30