Agency Problems and Dividend Policies Around the World

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American Finance Association

Agency Problems and Dividend Policies around the World Author(s): Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, Robert W. Vishny Source: The Journal of Finance, Vol. 55, No. 1 (Feb., 2000), pp. 1-33 Published by: Blackwell Publishing for the American Finance Association Stable URL: http://www.jstor.org/stable/222549 Accessed: 16/12/2009 21:34 Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at http://www.jstor.org/action/showPublisher?publisherCode=black. Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.

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THE JOURNAL OF FINANCE * VOL. LV, NO. 1 * FEBRUARY 2000

Agency Problems and Dividend Policies around the World
RAFAELLA PORTA,FLORENCIOLOPEZ-DE-SILANES, ANDREI SHLEIFER, and ROBERTW. VISHNY* ABSTRACT This paper outlines and tests two agency models of dividends. According to the "outcomemodel," dividends are paid because minority shareholders pressure corporate insiders to disgorge cash. According to the "substitute model," insiders interested in issuing equity in the future pay dividends to establish a reputation for decent treatment of minority shareholders. The first model predicts that stronger minority shareholder rights should be associated with higher dividend payouts; the second model predicts the opposite. Tests on a cross section of 4,000 companies from 33 countries with different levels of minority shareholder rights support the outcome agency model of dividends.

(1976)) has preoccupied the attention of financial economists at least since Modigliani and Miller's seminal work (see Modigliani and Miller (1958) and Miller and Modigliani (1961)). This work established that, in a frictionless world, when the investment policy of a firm is held constant, its dividend payout policy has no consequences for shareholder wealth. Higher dividend payouts lead to lower retained earnings and capital gains, and vice versa, leaving total wealth of the shareholders unchanged. Contrary to this prediction, however, corporations follow extremely deliberate dividend payout strategies (Lintner (1956)). This evidence raises a puzzle: How do firms choose their dividend policies? In the United States and other countries, the puzzle is even deeper since many shareholders are taxed more heavily on their dividend receipts than on capital gains. The actual magnitude of this tax burden is debated (see Poterba and Summers (1985) and Allen and Michaely (1997)), but taxes generally make it even harder to explain dividend policies of firms. Economists have proposed a number of explanations of the dividend puzzle. Of these, particularly popular is the idea that firms can signal future profitability by paying dividends (see Bhattacharya (1979), John and WilTHE SO-CALLEDDIVIDEND PUZZLE (Black * The first three authors are from Harvard University, the fourth author is from the University of...
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