Agency problems and dividend policies around the w

AgencyProblemsandDividendPoliciesaroundtheWorldRAFAELLAPORTA,FLORENCIOLOPEZ-DE-SILANES,ANDREISHLEIFER,andROBERTW.VISHNY*ABSTRACTThispaperoutlinesandteststwoagencymodelsofdividends.Accordingtothe“outcomemodel,”dividendsarepaidbecauseminorityshareholderspressurecor-porateinsiderstodisgorgecash.Accordingtothe“substitutemodel,”insidersin-terestedinissuingequityinthefuturepaydividendstoestablishareputationfordecenttreatmentofminorityshareholders.Thefirstmodelpredictsthatstrongerminorityshareholderrightsshouldbeassociatedwithhigherdividendpayouts;thesecondmodelpredictstheopposite.Testsonacrosssectionof4,000companiesfrom33countrieswithdifferentlevelsofminorityshareholderrightssupporttheoutcomeagencymodelofdividends.THESO-CALLEDDIVIDENDPUZZLE~Black~1976!!haspreoccupiedtheattentionoffinancialeconomistsatleastsinceModiglianiandMiller’sseminalwork~seeModiglianiandMiller~1958!andMillerandModigliani~1961!!.Thisworkestablishedthat,inafrictionlessworld,whentheinvestmentpolicyofafirmisheldconstant,itsdividendpayoutpolicyhasnoconsequencesforshareholderwealth.Higherdividendpayoutsleadtolowerretainedearn-ingsandcapitalgains,andviceversa,leavingtotalwealthofthesharehold-ersunchanged.Contrarytothisprediction,however,corporationsfollowextremelydeliberatedividendpayoutstrategies~Lintner~1956!!.Thisevi-denceraisesapuzzle:Howdofirmschoosetheirdividendpolicies?IntheUnitedStatesandothercountries,thepuzzleisevendeepersincemanyshareholdersaretaxedmoreheavilyontheirdividendreceiptsthanoncapitalgains.Theactualmagnitudeofthistaxburdenisdebated~seePoterbaandSummers~1985!andAllenandMichaely~1997!!,buttaxesgen-erallymakeitevenhardertoexplaindividendpoliciesoffirms.Economistshaveproposedanumberofexplanationsofthedividendpuz-zle.Ofthese,particularlypopularistheideathatfirmscansignalfutureprofitabilitybypayingdividends~seeBhattacharya~1979!,JohnandWil-*ThefirstthreeauthorsarefromHarvardUniversity,thefourthauthorisfromtheUni-versityofChicago.TheyaregratefultoAlexanderAganinforexcellentresearchassistance,andtoLucianBebchuk,MihirDesai,EdwardGlaeser,DenisGromb,OliverHart,JamesHines,KoseJohn,JamesPoterba,RobertaRomano,RaghuRajan,LemmaSenbet,RenéStulz,DanielWolfenzon,LuigiZingales,andtwoanonymousrefereesforhelpfulcomments.THEJOURNALOFFINANCE•VOL.LV,NO.1•FEBRUARY20001liams~1985!,MillerandRock~1985!,andAmbarish,John,andWilliams~1987!!.Empirically,thistheoryhadconsiderableinitialsuccess,sincefirmsthatinitiate~orraise!dividendsexperiencesharepriceincreases,andtheconverseistrueforfirmsthateliminate~orcut!dividends~AharonyandSwary~1980!,AsquithandMullins~1983!!.Recentresultsaremoremixed,sincecurrentdividendchangesdonothelppredictfirms’futureearningsgrowth~DeAngelo,DeAngelo,andSkinner~1996!andBenartzi,Michaely,andThaler~1997!!.Anotheridea,whichhasreceivedonlylimitedattentionuntilrecently~e.g.,Easterbrook~1984!,Jensen~1986!,Fluck~1998,1999!,HartandMoore~1974!,Myers~1998!,Gomes~2000!,andZwiebel~1996!!,isthatdividendpoliciesaddressagencyproblemsbetweencorporateinsidersandoutsidesharehold-ers.Accordingtothesetheories,unlessprofitsarepaidouttoshareholders,theymaybedivertedbytheinsidersforpersonaluseorcommittedtoun-profitableprojectsthatprovideprivatebenefitsfortheinsiders.Asacon-sequence,outsideshareholdershaveapreferencefordividendsoverretainedearnings.Theoriesdifferonhowoutsideshareholdersactuallygetfirmstodisgorgecash.Thekeypoint,however,isthatfailuretodisgorgecashleadstoitsdiversionorwaste,whichisdetrimentaltooutsideshareholders’interest.TheagencyapproachmovesawayfromtheassumptionsoftheModigliani–Millertheorembyrecognizingtwopoints.First,theinvestmentpolicyofthefirmcannotbetakenasindependentofitsdividendpolicy,and,inpar-ticular,payingoutdividendsmayreducetheinefficiencyofmarginalin-vestments.Second,andmoresubtly,theallocationofalltheprofitsofthefirmtoshareholdersonaproratabasiscannotbetakenforgranted,andinparticulartheinsidersmaygetpreferentialtreatmentthroughassetdiversion,transferprices,andtheft—evenholdingtheinvestmentpolicyconstant.Insofarasdividendsarepaidonaproratabasis,theybenefitoutsideshareholdersrelativetothealternativeofexpropriationofretainedearnings.Inthispaper,weattempttoidentifysomeofthebasicelementsoftheagencyapproachtodividends,tounderstanditskeyimplications,andtoevaluatethemonacrosssectionofmorethan4,000firmsfrom33countriesaroundtheworld.Thereasonforlookingaroundtheworldisthatthese-verityofagencyproblemstowhichminorityshareholdersareexposeddiffersgreatlyacrosscountries,inpartbecauselegalprotectionofthesesharehold-ersvaries~LaPorta,Lopez-de-Silanes,Shleifer,andVishny~1997,1998!,henceforthreferredtoasLLSV!.Empirically,wefindthatdividendpoliciesvaryacrosslegalregimesinwaysconsistentwithaparticularversionoftheagencytheoryofdividends.Specifically,firmsincommonlawcountries,whereinvestorprotectionistypicallybetter,makehigherdividendpayoutsthanfirmsincivillawcountriesdo.Moreover,incommonbutnotcivillawcoun-tries,highgrowthfirmsmakelowerdividendpayoutsthanlowgrowthfirms.Theseresultssupporttheversionoftheagencytheoryinwhichinvestorsingoodlegalprotecti