How corporate governance affects payout policy under agency problems and external financing constraints

Journal of Banking & Finance 33 (2009) 2093–2101

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How corporate governance affects payout policy under agency problems and external financing constraints Joon Chae a, Sungmin Kim b, Eun Jung Lee b,* a b

Graduate School of Business, Seoul National University, Seoul, Republic of Korea Department of Business Administration, Hanyang University, Ansan, Republic of Korea

a r t i c l e

i n f o

Article history: Received 13 November 2008 Accepted 6 May 2009 Available online 13 May 2009 JEL classification: G30 G34 G35

a b s t r a c t This paper analyzes the effect of corporate governance on the payout policy when a firm has both agency problems and external financing constraints. We empirically test whether strong corporate governance would lead to higher payout to minimize agency problems (outcome hypothesis), or to lower payout to avoid costly external financing (substitute hypothesis). We find that firms with higher (lower) external financing constraints tend to decrease (increase) payout ratio with an improvement in their corporate governance. The results are consistent with our hypothesis that the relation between payout and corporate governance is reversed depending on the relative sizes of agency and external financing costs. Ó 2009 Elsevier B.V. All rights reserved.

Keywords: Payout policy Corporate governance Agency problems External financing constraints

1. Introduction Information asymmetry generates various problems in managing a company. For example, Jensen and Meckling (1976) argue that an agency problem causes managers to pursue their own interests, not the interests of shareholders. Myers and Majluf (1984) is another example suggesting that information asymmetry between insiders and outside investors can generate external financing constraints and raise the cost of external financing. This paper investigates the effect of corporate governance on a payout policy where both agency problems and external financing constraints exist because of asymmetric information. Paying more dividends is argued to decrease the free cash flow available that can be wasted on inefficient projects. Thus, dividends can generally suppress a firm’s agency problems (Easterbrook, 1984; Jensen, 1986; Zwiebel, 1996). However, more dividends may force managers to depend on more external financing in future investment projects. If the primary capital market is under-developed or if severe information asymmetry exists, more dividends can increase the firm’s cost of external financing (Rozeff, 1982). Therefore, this paper argues that a firm should decide its payout policy simultaneously considering both agency costs and external financing costs. * Corresponding author. Tel.: +82 31 400 5645; fax: +82 31 436 8180. E-mail addresses: [email protected] (J. Chae), [email protected] (S. Kim), [email protected] (E.J. Lee). 0378-4266/$ - see front matter Ó 2009 Elsevier B.V. All rights reserved. doi:10.1016/j.jbankfin.2009.05.003

Previous literature has mostly focused on the direct relationship between agency problems and dividend payments without explicitly considering external financing constraints. It is argued that efficient corporate governance systems including monitoring management and shareholder protection can suppress managers’ agency problems (La Porta et al. (2000) (henceforth referred to as LLSV (2000)) and Jiraporn and Ning (2006) etc.). LLSV (2000) empirically test two hypotheses, an outcome hypothesis and a substitution hypothesis. The outcome hypothesis states that better corporate governance will pay more dividends to decrease managers’ expropriation. On the other hand, the substitution hypothesis asserts that a company with weaker legal protections of minority shareholders will pay more dividends to establish its reputation and compensate minority shareholders. Their results, which generally support the outcome hypothesis, show that a country with better corporate governance pays more dividends. Meanwhile, Jiraporn and Ning (2006) find a negative correlation between dividend payout and the strength of shareholder rights, showing a case of the substitution hypothesis (LLSV, 2000). Knyazeva (2008) shows that weakly governed managers who engage in more dividend smoothing, have lower dividend variability, and fewer dividend cuts. These studies, however, do not explicitly consider the role of external financing constraints in the relation between corporate governance and dividend payout.

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This paper provides a basis for a company on how to determine its payout policy. Payout generates two counteracting effects: reducing agency problems by decreasing managers’ expropriation is a positive effect, while raising expected external financing costs is a negative one. Therefore, the company should decide its optimal payout policy considering these two effects. For example, a company with higher external financing costs does not want to pay out more to reduce its agency problems, especially when it has better corporate governance, since better corporate governance can suppress its agency problems. By considering external financing constraints explicitly in corporate payout decisions, this paper overcomes the limits and ambiguity in existing empirical papers that have focused on the simple relation between corporate governance and a payout policy. We empirically test whether better corporate governance leads to higher dividend payments to minimize agency problems (outcome hypothesis), or alternatively whether it leads to lower dividend payments to avoid costly external financing (substitution hypothesis). Our prediction is that, depending on the relative sizes of agency problems and external financing constraints, the relation between corporate governance and a payout policy would be different. If agency problems are serious and external financing constraints are not binding, better corporate governance increases payout. However, if external financing constraints are binding, a firm with strong corporate governance may want to retain more cash to decrease external financing costs since the firm’s strong corporate governance can control potential agency problems. We find that firms with higher external financing constraints tend to decrease payout amount even with higher agency costs as long as they have strong corporate governance. The results are consistent with our hypothesis that external financing costs would affect corporate payout decisions, and firms will minimize their cost of capital by reducing payout given improved corporate governance. The results remain robust even when we control for other firm characteristics. The empirical results show that firms are properly taking agency problems, external financing constraints, and corporate governance into consideration when deciding on their payout policies. The remainder of this article is organized as follows. Section 2 includes two hypotheses of this study. Section 3 explains the data and main variables. The empirical results are shown in section 4, and finally, Section 5 concludes.

2. Hypothesis development This study empirically tests two major hypotheses, the outcome hypothesis and the substitution hypothesis, under external financing constraints and agency problems. The outcome hypothesis states that managers tend to expropriate free cash flows for their own interests instead of using the cash for shareholders’ interests. Thus, shareholders prefer paying more dividends to retaining earnings when the company generates substantial free cash flows. Particularly, in a company where its governance system is more efficient, shareholders can effectively pressure managers to disgorge cash. However, the substitution hypothesis suggests another way that relates corporate governance to a payout policy. According to the substitution hypothesis by LLSV (2000), a firm with weak corporate governance pays more dividends to build up its reputation. For a firm with strong corporate governance, the firm should decrease dividends since it already maintains a good reputation. However, the substitution hypothesis by LLSV (2000) does not seem to have a strong theoretical ground for the case where a firm has strong shareholder protection. A firm with strong shareholder protection does not have any fundamental reason to keep cash within the firm since it can also disgorge cash. Therefore, we ex-

tend the substitution hypothesis of LLSV (2000) by introducing external financing constraints in the relation between corporate governance and payout under agency problems. Rozeff (1982) points out positive and negative aspects of dividend payout. Dividend payout can lessen agency problems under information asymmetry, but it can increase a firm’s external financing costs in the future. Particularly, the pecking order theory by Myers and Majluf (1984) argues that external financing cost is relatively higher than internal financing cost for the companies with severe information asymmetry. Therefore, under information asymmetry, dividend payout can affect a firm’s value positively and negatively. Rozeff (1982) argues the optimal payout policy will be decided considering agency costs and external financing costs. Following his argument, we empirically investigate the relation between corporate governance and a payout policy by simultaneously analyzing both agency costs and external financing constraints. Companies, with agency problems and without severe external financing constraints, do not need to retain cash. Therefore, they will pay out more cash when there are severe agency problems. Strong corporate governance especially plays a role of paying dividends to force companies to disgorge cash (LLSV, 2000; Gugler, 2003). On the other hand, companies with weak corporate governance cannot curb agency problems like managers’ expropriation. In this case, managers attempt to retain more cash for their personal interests. Since Jensen (1986) and Chi and Lee (2005) imply that there exist agency problems when firms have substantial free cash flows, we consider firms with large free cash flows. Hypothesis 1. Without external financing constraints, firms with better corporate governance will pay out more cash when they have substantial free cash flows. If external financing constraints are severely binding, the argument stated above will change. Whenever a company pays out cash, it may face higher external financing costs in the future. In this case, the company does not want to increase dividends (Cleary, 2006). However, more cash inside the company can generate agency problems like managers’ expropriation. Therefore, the relative sizes of external financing and agency costs will decide a payout policy. Corporate governance can control agency problems since strong corporate governance empowers shareholders to monitor managers. Therefore, the company with strong corporate governance will pay out less cash. The retained cash will lessen the needs for costly external financing in the future. Hypothesis 2. With external financing constraints, firms with better corporate governance will pay out less cash when they have substantial free cash flows. Overall, efficient corporate governance can affect a firm’s optimal payout policy differently based upon the degree of the firm’s external financing constraints. If payout increases external financing costs relatively more than a decrease in managers’ expropriation under strong corporate governance, the firm will reduce its payout. On the other hand, if agency problems like managers’ expropriation are more important than external financing constraints, the firm will increase payout. In this study, we test these two hypotheses about the relation between corporate governance and a payout policy. We are interested in how agency costs and external financing costs affect payout amount related to corporate governance. Fig. 1 summarizes our hypotheses.

3. Sample selection and data The initial sample in this study is obtained from the Investor Responsibility Research Center’s (IRRC) corporate governance database. The IRRC collects data on corporate governance provisions

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Fig. 1. Summary of hypotheses.

from various sources, such as annual reports, proxy statements, and SEC 10-Q and 10-K documents. The IRRC provides information about various takeover protections at the individual firm level as of years 1990, 1993, 1995, 1998, 2000, 2002, and 2004. Its initial coverage in the 1990 database included companies in the Standard and Poor’s 500 Index and others that are followed by major news media (e.g., Fortune). Its coverage has expanded to smaller companies over time. Approximately, 1500 companies are covered in a given year. We use the data from 1993, 1995, 1998, 2000, 2002, and 2004.1 Using these data, Gompers et al. (2003) construct a corporate governance index that we use in this study.2 Payout amount and our control variables are taken from CRSP and COMPUSTAT. We use the forecast error in earnings and standard deviation of these forecasts, which are available through the Institutional Brokers Estimate System (IBES). Firms, in the financial industry (SIC codes 6000–6999) and the utility industry (SIC codes 4900–4999), are excluded because these industries are subject to regulations and have different characteristics of their accounting information compared to those in other industries. We exclude firms that do not have data on the governance index in the Investor Responsibility Research Center (IRRC). Table 1 displays the year-by-year distribution of the final sample. The final sample consists of 4399 firm-year observations. We employ four alternative measures of payout ratios:    

the the the the

ratio ratio ratio ratio

of of of of

the the the the

payout payout payout payout

amount3 to sales, amount to the book value of equity, amount to earnings, amount to the market value of equity.

We use two measures to represent corporate governance. Our first measure is the Gompers et al. (2003) corporate governance index (GINDEX), which counts the number of anti-takeover provisions in a firm’s charter and in the legal code of the state in which the firm is incorporated. Gompers, Ishii, and Metrick establish that more anti-takeover provisions are an indication of poor corporate governance. As a second measure, we replace the Gom1 Even though the data for 1990 are available, as Jiraporn and Ning (2006) do, we exclude the data from 1990. The definitions of some variables are changed between data sets in 1990 and in 1993 by the IRRC. 2 Various studies use the governance index by Gompers et al. (2003) to measure corporate governance, e.g., Jiraporn et al. (2006), Dittmar and Mahrt-Smith (2007), and Jiraporn and Ning (2006), etc. 3 The payout amount means dividends plus share repurchases. Other than cash dividends, a company can pay out its earnings through share repurchases, so we use the sum of the amount of share repurchases and cash dividends (Grullon and Michaely (2002)). We measure the dollar volume of stock repurchases using the Compustat data item, Purchase of Stock. This measure of repurchases is used in Bagwell and Shoven (1989), Berger et al. (1996), and Dittmar (2000).

pers, Ishii, and Metrick index by the index (OINDEX) developed in Bebchuk et al. (2009). The two indices are based on the same raw data, but the latter index uses only six provisions that seem to have the greatest impact on firm value according to Bebchuk et al. Since the aforementioned two variables represent how weak shareholder rights in a company are, we use the reciprocals of the two indices, i.e. CGI1 = 1/GINDEX and CGI2 = 1/OINDEX. The larger the CGI1 or CGI2 is, the better the corporate governance. We employ two alternative measures of free cash flow as a proxy for the perceived likelihood of agency conflicts (Chi and Lee, 2005; Lehn and Poulsen, 1989; Wu, 2004). The first measure is operating income minus taxes, interests expenses, and preferred and common dividends scaled by book assets and the second is EBITDA (earnings before interests, taxes, depreciation, and amortization) scaled by book value of assets. Extant theories predict that external financing costs are rising because of information asymmetry such as adverse selection costs (Myers and Majluf, 1984; Krasker, 1986). Thus, we proxy the level of a firm’s external financing constraints using measures of information asymmetry suggested by Krishnaswami and Subramaniam (1999). The first measure of information asymmetry is the residual volatility in daily stock returns. The second is the volatility in abnormal returns around earnings announcements. The third is the normalized forecast error, defined as the ratio of the forecast error in earnings to the earnings volatility of the firm. Firms with higher external financing constraints are expected to have higher residual volatility in daily stock returns, higher volatility in abnormal returns around earnings announcements, and higher normalized forecast errors. We construct dummy variables, equal to 1 if raw variables are above the sample median, and equal to 0, otherwise. We control firm specific variables such as leverage (LEV), firm size (SIZE), profitability (ROE), and growth rate (GROWTH). These variables are used in various studies as in Allen and Michaely (2002) and Pattenden and Twite (2008), etc. To reflect a firm’s Table 1 Sample distribution by year. The sample includes 4399 firms from 1993, 1995, 1998, 2000, 2002, and 2004. The original sample is compiled from the Investor Responsibility Research Center (IRRC) corporate governance. The table reports year-by-year distribution of the sample. Year

N

Percent

1993 1995 1998 2000 2002 2004

564 624 725 719 807 960

12.82 14.19 16.48 16.34 18.35 21.82

Total

4399

100

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Table 2 Definitions of variables. This table reports the definitions of variables we use in this study. Variables

Definition

DIV/SALES DIV/EQUITY DIV/EARNINGS DIV/ME GINDEX OINDEX CGI

(Cash dividends + stock repurchases)/sales (Cash dividends + stock repurchases)/book value of equity (Cash dividends + stock repurchases)/earnings (Cash dividends + stock repurchases)/market value of equity Governance Index by Gompers et al. (2003) Governance Index developed in Bebchuk et al. (2009) CGI1 = 1/GINDEX CGI2 = 1/OINDEX We use two alternative measures of the free cash flow as a proxy for the agency problems. FCF1 = [operating income {(total income taxes the change in deferred taxes from the previous year to the current year) + gross interest expenses on debt + dividend payments}]/book value of assets. FCF2 = (earnings before interests, taxes, depreciation, and amortization)/book value of assets Dummy variable with the value of 1 if FCF1(FCF2) exceeds sample median, or 0 otherwise We use three proxies to measure the level of external financing constraints. EXD1 = Dummy variable with the value of 1 if the residual volatility in daily stock returns (STDRESID) is above sample median, or 0 otherwise. EXD2 = Dummy variable with the value of 1 if the volatility in abnormal returns around earnings announcements (STDABN) is above sample median, or 0 otherwise. EXD3 = Dummy variable with the value of 1 if the normalized forecast error (VOLEARN) is above sample median, or 0 otherwise Long term debt/book value of assets Log (total sales) Earnings/book value of equity (Book value of assets book value of equity + market value of equity)/book value of assets

FCF

DFCF EXD

LEV SIZE ROE GROWTH

capital structure, we use a debt ratio defined as long term debt/ book value of assets. Earnings to book value of equity (ROE) represents a firm’s profitability, and logarithm of total sales a firm’s size. The measure used in this study as a proxy for growth opportunities is the market-to-book ratio, defined as (book value of assets – book value of equity + market value of equity)/book value of assets (Smith and Watts, 1992; Berger et al., 1996; Harford, 1999; Wu, 2004). We summarize the definitions of all variables in Table 2.

4. Empirical evidence 4.1. Descriptive statistics Table 3 shows the descriptive statistics for the sample of firms. We employ four different measures of payout. DIV/SALES ratio averages 0.0363 (0.0156 median) and the average DIV/EQUITY ratio is 0.0961 (0.0382 median). DIV/EARNINGS ratio averages 0.7630 (0.3375 median) whereas the DIV/ME ratio averages 0.0298 (0.0179 median). Since these measures are ratios, they may have considerably large values when denominators (sales, book value of equity, earnings, and market value of equity) are small. For example, it is possible for a firm to pay out substantial cash when its sales are low. We conjecture that this is the reason that the measures of payout have larger means than medians. A proxy for free cash flows, operating income minus taxes, interests expenses, and preferred and common dividends scaled by book assets, has an average of 0.1164 and a median of 0.1173. We also include another proxy for free cash flows, EBITDA (earnings before interests, taxes, depreciation, and amortization) scaled by book value of assets. The average of this proxy is 0.1455 and the median 0.1464. The average and the median of GINDEX (OINDEX) is 9.09 (6.95) and 9.0 (7.0), respectively. The long-term debt to book value of assets ratio averages 19.97% (18.19% median). The average firm in the sample has 5103 million dollars in book value of assets and 4165 million dollars in sales, suggesting that our sample firms are large. Tobin’ Q, which proxies for growth opportunities, averages 1.79. 4.2. Bivariate analysis Table 4 presents the summary statistics of the main variables by groups of external financing constraints and free cash flows and tests the differences of the main variables between the two groups. To test the differences, we implement the T-test and Wilcoxon test.

When external financing constraints are relatively severe (EXD1 = 1), a company generally pays out less cash. For example, the average (the median) of DIV/EQUITY ratio is 0.0506 (0.0098) for the companies with EXD1 = 1 and 0.1417 (0.0687) with EXD1 = 0. The difference of DIV/EQUITY ratios between firms with EXD1 = 1 and EXD1 = 0 is statistically significant with p-value which is less than 0.0001. This result is robust to different measures of payout ratios. The average of GINDEX for the companies with EXD1 = 1 is 8.45, which is statistically different from the average of 9.72 with EXD1 = 0. It implies that a firm with external financing constraints has strong corporate governance. A firm with external financing constraints should establish a reputation for moderation in expropriating shareholders (LLSV, 2000). One way to build a reputation is by having efficient corporate governance. As a consequence, a firm with external financing constraints may have strong corporate governance. In addition, the companies constrained by external financing have lower asset values, sales, and ROE. Generally, a firm with smaller asset values, sales, and ROE has fewer resources to mitigate information asymmetry. Therefore, the firm may bear higher external financing costs. Finally, the table shows that a firm with external financing constraints shows a lower growth rate. It implies that, as in LLSV (2000), a firm with better growth prospect has a stronger incentive to reduce information asymmetry since it has a potential need for external financing. We are also interested in the relation between agency costs (e.g. managers’ expropriation) and payout. We group companies according to the amount of free cash flows, and obtain averages of the main variables. In terms of three payout ratios out of four, companies with more free cash flows pay out more cash. For instance, the average of DIV/EQUITY ratios of companies with more free cash flows is 0.1234, but the average of those with less free cash flows is only 0.0687. The difference of these two values is statistically significant. This evidence seems to imply that the companies with more agency problems will pay out more cash since they would like to prevent managers’ expropriation. The following multivariate analysis in Table 5 is employed to give us deeper insight into the relation between a firm’s corporate governance and its payout controlling for the size of free cash flows, a proxy for agency costs, and external financing constraints. 4.3. Regression analysis In Table 5, we analyze the relation between a firm’s corporate governance and payout policy according to the size of free cash

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Table 3 Descriptive statistics. The sample includes 4399 firms from 1993, 1995, 1998, 2000, 2002, and 2004. DIV/SALES is (cash dividends + stock repurchases) over sales. DIV/EQUITY is (cash dividends + stock repurchases) over book value of equity. DIV/EARNINGS is (cash dividends + stock repurchases) over earnings. DIV/ME is (cash dividends + stock repurchases) over market value of equity. FCF1 is operating income minus taxes, interests expenses, and preferred and common dividends scaled by book assets and FCF2 is EBITDA (earnings before interests, taxes, depreciation, and amortization) scaled by book value of assets. GINDEX is Governance Index by Gompers et al. (2003) and OINDEX is Governance Index developed in Bebchuk et al. (2009). CGI is 1/GINDEX. LEV is long-term debt to book value of assets and TOTAL ASSETS is book value of assets. ROE is earnings to book value of equity. GROWTH is (book value of assets book value of equity + market value of equity)/book value of assets. STDRESID is the residual volatility in daily stock returns. STDABN is the normalized forecast error, defined as the ratio of the forecast error in earnings to the earnings volatility of the firm. VOLEARN is the volatility in abnormal returns around earnings announcements. Variables

Mean

Median

Std

Max

Min

DIV/SALES DIV/EQUITY DIV/EARNINGS DIV/ME FCF1 FCF2 GINDEX OINDEX CGI LEV TOTAL ASSETS (Mil.) TOTAL SALES (Mil.) ROE GROWTH STDRESID STDABN VOLEARN

0.0363 0.0961 0.7630 0.0298 0.1164 0.1455 9.0859 6.9464 0.1233 0.1997 5103.45 4164.77 0.1134 1.7896 0.0251 0.0648 0.9982

0.0156 0.0382 0.3375 0.0179 0.1173 0.1464 9.0000 7.0000 0.1111 0.1819 1054.21 1091.34 0.1243 1.5303 0.0221 0.0566 0.4429

0.0625 0.3031 2.5142 0.0428 0.0963 0.0964 2.7520 2.0028 0.0492 0.1672 23606.19 12472.27 0.7327 0.8430 0.0127 0.0350 1.8564

1.0071 9.1394 67.1887 0.7087 0.7538 0.5977 18.0000 13.0000 0.5000 1.4761 750507.00 263989.00 9.5103 4.9942 0.1486 0.3711 19.9346

0.0000 0.0000 0.0000 0.0000 0.9751 0.8807 2.0000 2.0000 0.0556 0.0000 16.77 1.03 14.2431 0.2582 0.0059 0.0009 0.0000

Table 4 Bivariate test: Grouped by agency costs and external financing cost. The sample includes 4399 firms from 1993, 1995, 1998, 2000, 2002, and 2004. DIV/SALES is (cash dividends + stock repurchases) over sales. DIV/EQUITY is (cash dividends + stock repurchases) over book value of equity. DIV/EARNINGS is (cash dividends + stock repurchases) over earnings. DIV/ME is (cash dividends + stock repurchases) over market value of equity. FCF1 is operating income minus taxes, interests expenses, and preferred and common dividends scaled by book assets and FCF2 is EBITDA (earnings before interests, taxes, depreciation, and amortization) scaled by book value of assets. GINDEX is Governance Index by Gompers et al. (2003) and OINDEX is Governance Index developed in Bebchuk et al. (2009). LEV is long-term debt to book value of assets and TOTAL ASSETS is book value of assets. ROE is earnings to book value of equity. GROWTH is (book value of assets book value of equity + market value of equity)/book value of assets. EXD1 is dummy variable with the value of 1 if residual volatility in daily stock returns (STDRESID) is above sample median, or 0 otherwise. DFCF1 is dummy variable with the value of 1 if FCF1 exceeds sample median, or 0 otherwise. Numbers in [ ] denote medians. Difference tests show p-value from T-tests, where numbers in () denote p-value from Wilcoxon’s rank sum tests.

DIV/SALES DIV/EQUITY DIV/EARNINGS DIV/ME FCF1 FCF2 GINDEX OINDEX LEV TOTAL ASSETS TOTAL SALES ROE GROWTH

Total

EXD1 = 0

EXD1 = 1

T-test (p-Value)

DFCF1 = 0

DFCF1 = 1

T-test (p-value)

0.0363 [0.0156] 0.0961 [0.0382] 0.7630 [0.3375] 0.0298 [0.0179] 0.1164 [0.1173] 0.1455 [0.1464] 9.09 [9.0000] 6.95 [7.0000] 0.1997 [0.1819] 5103.45 [1054.2120] 4164.77 [1091.3370] 0.1134 [0.1243] 1.79 [1.5303]

0.0476 [0.0290] 0.1417 [0.0687] 1.0011 [0.5321] 0.0387 [0.0278] 0.1351 [0.1311] 0.1652 [0.1604] 9.72 [10.0000] 7.43 [7.0000] 0.2006 [0.1887] 8526.80 [1940.1765] 6693.72 [2032.4815] 0.1753 [0.1440] 1.84 [1.5833]

0.0250 [0.0036] 0.0506 [0.0098] 0.5251 [0.0878] 0.0210 [0.0043] 0.0977 [0.1038] 0.1258 [0.1309] 8.45 [8.0000] 6.46 [6.0000] 0.1987 [0.1680] 1684.76 [626.5870] 1639.27 [654.1110] 0.0516 [0.1000] 1.74 [1.4823]

0.0001 (0.0001) 0.0001 (0.0001) 0.0001 (0.0001) 0.0001 (0.0001) 0.0001 (0.0001) 0.0001 (0.0001) 0.0001 (0.0001) 0.0001 (0.0001) 0.7072 (0.0001) 0.0001 (0.0001) 0.0001 (0.0001) 0.0001 (0.0001) 0.0001 (0.0001)

0.0284 [0.0089] 0.0687 [0.0274] 0.7703 [0.2862] 0.0279 [0.0152] 0.0560 [0.0764] 0.0961 [0.1124] 9.16 [9.0000] 6.98 [7.0000] 0.2130 [0.1909] 5228.10 [936.7490] 3898.58 [983.2535] 0.0356 [0.0929] 1.55 [1.3682]

0.0442 [0.0235] 0.1234 [0.0506] 0.7557 [0.3827] 0.0318 [0.0202] 0.1767 [0.1614] 0.1949 [0.1884] 9.01 [9.0000] 6.92 [7.0000] 0.1863 [0.1743] 4978.97 [1169.7680] 4430.59 [1200.5120] 0.1911 [0.1515] 2.03 [1.7655]

0.0001 (0.0001) 0.0001 (0.0001) 0.8476 (0.0001) 0.0027 (0.0001) 0.0001 (0.0001) 0.0001 (0.0001) 0.0739 (0.1665) 0.3284 (0.5861) 0.0001 (0.0001) 0.7264 (0.0001) 0.1572 (0.0001) 0.0001 (0.0001) 0.0001 (0.0001)

flows, a proxy for agency costs, and external financing constraints. We employ pooled regressions, and control heteroskedasticity and autocorrelation of error terms using Newey and West (1987) standard errors. We control for industry effects by including dummy variables for each industry using one-digit SIC codes. Since the issues about payout and corporate governance are important only when a company has agency problems, first we construct an interaction variable, (CGI * DFCF), with corporate governance and

agency problems. Even though a company has agency problems, if it is equipped with efficient corporate governance, its agency problems can be suppressed. Therefore, the effectiveness of corporate governance in a company with agency problems is a key factor to decide its payout policy. Also, other than agency problems, availability of external financing is another important factor to decide the payout amount related to corporate governance. Thus, we need another three-way interaction variable (CGI * DFCF * EXD)

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Table 5 The effect of corporate governance on dividend payments under agency problems and external financing constraints. The sample includes 4399 firms from 1993, 1995, 1998, 2000, 2002, and 2004. DIV/SALES is (cash dividends + stock repurchases) over sales. DIV/EQUITY is (cash dividends + stock repurchases) over book value of equity. DIV/EARNINGS is (cash dividends + stock repurchases) over earnings. DIV/ME is (cash dividends + stock repurchases) over market value of equity. GINDEX is Governance Index by Gompers et al. (2003). CGI is 1/GINDEX. FCF1 is operating income minus taxes, interest expenses, and preferred and common dividends scaled by book assets. DFCF is dummy variable with the value of 1 if FCF1 exceeds sample median, or 0 otherwise. EXD1 is dummy variable with the value of 1 if residual volatility in daily stock returns (STDRESID) is above sample median, or 0 otherwise. EXD2 is dummy variable with the value of 1 if volatility in abnormal returns around earnings announcements (STDABN) is above sample median, or 0 otherwise. EXD3 is dummy variable with the value of 1 if normalized forecast error (VOLEARN) is above sample median, or 0 otherwise. Numbers in parentheses are t-statistics. Coefficient tests show whether the sum of the coefficients is significantly different from 0 by the Wald test. Numbers in [ ] denote p-values. Parameter

DIV/SALES (1)

Panel A. EXD: EXD1 (STDRESID) INTERCEPT 0.0540*** (6.02) 0.1549*** CGI*DFCF (b1) (9.28) 0.1277*** CGI*DFCF*EXD (b2) ( 6.75) CGI (b3) 0.0760*** ( 3.96) CONTROL VAR NO INDUSTRY DUMMY YES YEAR DUMMY YES ADJ RSQ 0.0564 Coefficient tests b1 + b3 b1 + b2 + b3

0.0789 [0.0001] 0.0489 [0.0150]

Panel B. EXD: EXD2 (STDABN) INTERCEPT 0.0570*** (6.24) 0.1427*** CGI*DFCF (b1) (8.02) 0.0840*** CGI*DFCF*EXD (b2) ( 4.25) CGI (b3) 0.0734*** ( 3.62) CONTROL VAR NO INDUSTRY DUMMY YES YEAR DUMMY YES ADJ RSQ 0.0528 Coefficient tests b1 + b3 b1 + b2 + b3

0.0693 [0.0020] 0.0147 [0.4877]

Panel C. EXD: EXD3 (VOLEARN) INTERCEPT 0.0627*** (7.00) 0.1262*** CGI*DFCF (b1) (7.53) 0.0776*** CGI*DFCF*EXD (b2) ( 3.78) CGI (b3) 0.0826*** ( 3.83) CONTROL VAR NO INDUSTRY DUMMY YES YEAR DUMMY YES ADJ RSQ 0.0549 Coefficient tests b1+b3 b1+b2+b3

* ** ***

0.0436 [0.0541] 0.0340 [0.1488]

DIV/EQUITY

DIV/EARNINGS

DIV/ME

(2)

(3)

(4)

(5)

(6)

(7)

(8)

0.0119 (1.08) 0.0763*** (4.49) 0.1228*** ( 6.35) 0.0426** ( 2.22) YES YES YES 0.1161

0.1076*** (4.62) 0.5786*** (6.52) 0.5202*** ( 5.57) 0.3515*** ( 7.03) NO YES YES 0.0298

0.1747*** ( 4.93) 0.2059** (2.04) 0.3998*** ( 4.33) 0.0855 ( 1.28) YES YES YES 0.1167

0.5806*** (4.15) 0.6816 (1.14) 2.2520*** ( 4.89) 2.3239*** ( 3.96) NO YES YES 0.0147

0.1885 ( 0.62) 0.1019 (0.15) 1.8414*** ( 3.85) 1.7866*** ( 2.96) YES YES YES 0.0169

0.0286*** (6.19) 0.0750*** (7.01) 0.0965*** ( 7.25) 0.0814*** ( 6.53) NO YES YES 0.0652

0.0127* (1.96) 0.0725 (6.33) 0.0794*** ( 5.82) 0.0646*** ( 5.03) YES YES YES 0.0904

0.0337 [0.1010] 0.0892 [0.0001]

0.2271 [0.0156] 0.2931 [0.0004]

0.1204 [0.2473] 0.2794 [0.0045]

1.6423 [0.0043] 3.8943 [0.0001]

1.6846 [0.0074] 3.5260 [0.0001]

0.0064 [0.6799] 0.1029 [0.0001]

0.0079 [0.6197] 0.0715 [0.0001]

0.0067 (0.56) 0.0639*** (3.56) 0.0834*** ( 4.18) 0.0419** ( 2.03) YES YES YES 0.1128

0.1402*** (6.93) 0.5701*** (5.52) 0.4337*** ( 4.09) 0.3586*** ( 6.51) NO YES YES 0.0283

0.1683*** ( 4.68) 0.1865* (1.68) 0.3326*** ( 3.39) 0.1303** ( 2.16) YES YES YES 0.1257

0.7180*** (5.60) 0.0800 ( 0.13) 0.7076 ( 1.39) 2.3070*** ( 3.63) NO YES YES 0.0142

0.1251 ( 0.38) 0.5573 ( 0.81) 0.4710 ( 0.95) 1.7780*** ( 2.77) YES YES YES 0.0159

0.0336*** (7.33) 0.0538*** (4.76) 0.0403*** ( 2.84) 0.0802*** ( 6.19) NO YES YES 0.0595

0.0127* (1.77) 0.0533*** (4.58) 0.0263* ( 1.87) 0.0627*** ( 4.79) YES YES YES 0.0881

0.0219 [0.3434] 0.0614 [0.0101]

0.2115 [0.0593] 0.2222 [0.0059]

0.0563 [0.6430] 0.2763 [0.0064]

2.3870 [0.0002] 3.0945 [0.0001]

2.3353 [0.0008] 2.8063 [0.0001]

0.0264 [0.1070] 0.0667 [0.0001]

0.0094 [0.5624] 0.0357 [0.0333]

0.0068 (0.60) 0.0408** (2.38) 0.0737*** (-3.65) 0.0467** ( 2.11) YES YES YES 0.1212

0.1627*** (8.09) 0.3969*** (5.03) 0.1549 ( 1.19) 0.4216*** ( 6.70) NO YES YES 0.0283

0.1521*** ( 4.45) 0.0147 (0.15) 0.1342 ( 1.13) 0.1521** ( 2.29) YES YES YES 0.1516

0.7525*** (5.82) 0.2016 ( 0.36) 0.9145 ( 1.58) 2.3690*** ( 3.49) NO YES YES 0.0159

0.0951 ( 0.29) 0.5783 ( 0.86) 0.8592 ( 1.49) 1.8427*** ( 2.68) YES YES YES 0.0178

0.0366*** (7.92) 0.0382*** (3.58) 0.0295* ( 1.84) 0.0835*** ( 5.97) NO YES YES 0.0606

0.0158** (2.25) 0.0451*** (3.99) 0.0278* ( 1.78) 0.0654*** ( 4.61) YES YES YES 0.0896

0.0058 [0.8084] 0.0795 [0.0026]

0.0247 [0.7955] 0.1795 [0.1135]

0.1374 [0.2175] 0.2715 [0.0229]

2.5705 [0.0001] 3.4850 [0.0001]

2.4210 [0.0004] 3.2802 [0.0002]

0.0453 [0.0049] 0.0748 [0.0003]

0.0204 [0.2169] 0.0482 [0.0194]

Indicate statistical significance at 10% levels. Indicate statistical significance at 5% levels. Indicate statistical significance at 1% levels.

among corporate governance, agency costs, and external financing constraints. Here, DFCF and EXD are dummy variables and CGI is 1/ GINDEX, a continuous variable. As Jensen (1986) and Chi and Lee (2005) imply that there might have more serious agency problems when firms have substantial

free cash flows, there will be two interesting cases; the first one is when there are substantial free cash flows without external financing constraints (DFCF = 1 and EXD = 0), and the second one is when there are substantial free cash flows with external financing constraints (DFCF = 1 and EXD = 1).

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J. Chae et al. / Journal of Banking & Finance 33 (2009) 2093–2101

First we investigate the case given DFCF = 1 and EXD = 0 to test the Hypothesis 1. This is the situation where agency costs are higher and external financing constraints lower. In column (1), Panel A, Table 5, we find the negative significant coefficient for CGI

( 0.0760). This evidence is consistent with the result from Jiraporn and Ning (2006). On the other hand, we find the positive and significant coefficient for CGI * DFCF (0.1549). This positive and significant coefficient suggests that agency problems weaken the

Table 6 The effect of corporate governance on dividend payments under agency problems and external financing constraints using alternative proxies for external financing constraints. The sample includes 4434 firms from 1993, 1995, 1998, 2000, 2002, and 2004. DIV/SALES is (cash dividends + stock repurchases) over sales. DIV/EQUITY is (cash dividends + stock repurchases) over book value of equity. DIV/EARNINGS is (cash dividends + stock repurchases) over earnings. DIV/ME is (cash dividends + stock repurchases) over market value of equity. GINDEX is Governance Index by Gompers et al. (2003). CGI is 1/GINDEX. FCF1 is operating income minus taxes, interest expenses, and preferred and common dividends scaled by book assets. DFCF is dummy variable with the value of 1 if FCF1 exceeds sample median, or 0 otherwise. EXD4 is dummy variable with the value of 1 if analyst coverage is below sample mean, or 0 otherwise. EXD5 is dummy variable with the value of 1 if firm age is below sample mean, or 0 otherwise. EXD6 is dummy variable with the value of 1 if book value of assets is below sample mean, or 0 otherwise. Numbers in parentheses are t-statistics. Coefficient tests show whether the sum of the coefficients is significantly different from 0 by the Wald test. Numbers in [ ] denote p-values. Parameter

DIV/SALES (1)

Panel A. EXD: EXD4 (analyst coverage) INTERCEPT 0.0496*** (6.42) CGI*DFCF (b1) 0.1780*** (9.26) 0.1225*** CGI*DFCF*EXD (b2) ( 5.96) CGI (b3) 0.0821*** ( 4.43) CONTROL VAR NO INDUSTRY DUMMY YES YEAR DUMMY YES ADJ RSQ 0.0570 Coefficient tests b1 + b3 b1 + b2 + b3

0.0959 [0.0002] 0.0266 [0.1487]

Panel B. EXD: EXD5 (firm age) INTERCEPT 0.0487*** (5.99) 0.1421*** CGI*DFCF (b1) (7.83) 0.0601*** CGI*DFCF*EXD (b2) ( 2.94) CGI (b3) 0.0842*** ( 4.39) CONTROL VAR NO INDUSTRY DUMMY YES YEAR DUMMY YES ADJ RSQ 0.0505 Coefficient tests b1 + b3 b1 + b2 + b3

0.0580 [0.0001] 0.0022 [0.9108]

Panel C. EXD: EXD6 (firm size) INTERCEPT 0.0474*** (5.48) 0.2377*** CGI*DFCF (b1) (8.42) 0.1514*** CGI*DFCF*EXD (b2) ( 5.40) CGI (b3) 0.0820*** ( 4.33) CONTROL VAR NO INDUSTRY DUMMY YES YEAR DUMMY YES ADJ RSQ 0.0551 Coefficient tests b1 + b3 b1 + b2 + b3

* ** ***

0.1557 [0.0001] 0.0043 [0.8074]

DIV/EQUITY

DIV/EARNINGS

DIV/ME

(2)

(3)

(4)

(5)

(6)

(7)

(8)

0.0067 (0.62) 0.0677*** (3.37) 0.0593*** ( 2.92) 0.0543*** ( 2.83) YES YES YES 0.1093

0.1031*** (5.51) 0.5917*** (5.17) 0.3356** ( 2.32) 0.4082*** ( 7.14) NO YES YES 0.0274

0.2151*** ( 5.47) 0.0808 (0.64) 0.0040 (0.03) 0.1685*** ( 2.79) YES YES YES 0.0966

0.5174*** (4.12) 0.8897 (1.27) 1.9521*** ( 3.23) 2.2103*** ( 3.67) NO YES YES 0.0141

0.2684 ( 0.83) 0.0385 (0.04) 1.1486* ( 1.76) 1.6950*** ( 2.69) YES YES YES 0.0161

0.0251*** (5.61) 0.0385*** (3.33) 0.0014 (0.11) 0.0930*** ( 7.27) NO YES YES 0.0564

0.0006 ( 0.10) 0.0314** (2.44) 0.0197 (1.44) 0.0725*** ( 5.54) YES YES YES 0.0826

0.0135 [0.5877] 0.0458 [0.0243]

0.1836 [0.0031] 0.1520 [0.0492]

0.0878 [0.3650] 0.0837 [0.3702]

1.3207 [0.0182] 3.2728 [0.0001]

1.6565 [0.0313] 2.8051 [0.0001]

0.0545 [0.0003] 0.0532 [0.0003]

0.0411 [0.0001] 0.0214 [0.1676]

0.0016 (0.15) 0.0639*** (3.36) 0.0581*** ( 2.79) 0.0488*** ( 2.54) YES YES YES 0.1093

0.0980*** (4.95) 0.5445*** (6.11) 0.2541*** ( 2.65) 0.4021*** ( 7.29) NO YES YES 0.0262

0.2088*** ( 5.62) 0.1930** (2.00) 0.1890** ( 1.96) 0.1519*** ( 2.57) YES YES YES 0.0974

0.5208*** (3.98) 0.0515 ( 0.08) 0.3119 ( 0.48) 2.3283*** ( 3.65) NO YES YES 0.0128

0.4082 ( 1.41) 0.7920 ( 1.16) 0.1758 (0.27) 1.7041*** ( 2.66) YES YES YES 0.0157

0.0240*** (5.23) 0.0613*** (5.66) 0.0386*** ( 3.11) 0.0879*** ( 6.89) NO YES YES 0.0581

0.0022 (0.34) 0.0543*** (4.78) 0.0179 ( 1.43) 0.0710*** ( 5.44) YES YES YES 0.0825

0.0151 [0.7326] 0.0430 [0.0447]

0.1425 [0.0003] 0.1116 [0.1758]

0.0411 [0.9647] 0.1479 [0.1333]

2.3798 [0.4988] 2.6917 [0.0001]

2.4961 [0.3501] 2.3203 [0.0001]

0.0265 [0.0408] 0.0651 [0.0001]

0.0168 [0.0017] 0.0346 [0.0260]

0.0122 (1.07) 0.1452*** (5.08) 0.1296*** ( 4.50) 0.0560*** ( 2.88) YES YES YES 0.1114

0.0993*** (4.85) 0.6621*** (5.75) 0.3060** ( 2.36) 0.4152*** ( 7.49) NO YES YES 0.0259

0.2241*** ( 5.45) 0.0043 ( 0.03) 0.0987 (0.68) 0.1670*** ( 2.75) YES YES YES 0.0967

0.4778*** (3.60) 2.0540* (1.85) 2.6592** ( 2.49) 2.1928*** ( 3.53) NO YES YES 0.0141

0.2798 ( 0.91) 0.4495 (0.36) 1.2836 ( 1.11) 1.7087*** ( 2.72) YES YES YES 0.0159

0.0245*** (5.37) 0.0671*** (4.03) 0.0324* ( 1.88) 0.0908*** ( 7.13) NO YES YES 0.0570

0.0012 ( 0.18) 0.0169 (0.91) 0.0304 (1.60) 0.0721*** ( 5.53) YES YES YES 0.0826

0.0892 [0.2972] 0.0404 [0.0445]

0.2469 [0.0001] 0.0591 [0.4364]

0.1713 [0.2726] 0.0726 [0.4411]

0.1388 [0.2100] 2.7980 [0.0001]

1.2593 [0.1507] 2.5429 [0.0001]

0.0236 [0.0003] 0.0561 [0.0001]

0.0552 [0.0001] 0.0248 [0.0961]

Indicate statistical significance at 10% levels. Indicate statistical significance at 5% levels. Indicate statistical significance at 1% levels.

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negative relation between corporate governance and payout. We also observe that the sum of the coefficients of CGI * DFCF (0.1549) and CGI ( 0.0760) is positive (0.0789) and significant. Based upon this result, we argue that a firm with strong corporate governance increases payout with serious agency problems. The sum of the coefficients of CGI * DFCF (0.0763) and CGI ( 0.0426) in column (2) Table 5, ceteris paribus, is also positive (0.0337), supporting the Hypothesis 1 (outcome hypothesis). The positive sum of the coefficients of CGI * DFCF and CGI can be interpreted as support for the results of LLSV (2000). LLSV (2000) argue that companies in a country with higher shareholder protection pay out more cash, and our evidence confirms their results at the firm level. These results do not change when controlling for variables, such as leverage, size, profitability, industry, etc (coefficients of these variables are not reported for brevity). Leverage has a negative relation with payout. Firm size, profitability, and growth opportunity have a positive relation with payout. These findings are qualitatively consistent with existing literature. Other results of Panel A with various dependent variables of payout ratios, show that the coefficients of CGI * DFCF are all positive. Panel B and C also have similar results. This explains that when firms have substantial free cash flows (DFCF = 1) and lower external financing constraints (EXD = 0), firms generally pay out more cash as corporate governance improves. Second, we investigate the case given DFCF = 1 and EXD = 1 to test the Hypothesis 2. This is the situation where possible agency costs are high and there are also external financing constraints. The results support the argument that external financing constraints also have an impact on payout policy, such as agency costs, as corporate governance improves. Consider column (1), Panel A, Table 5, given DFCF = 1 and EXD = 1, the coefficient of CGI * DFCF * EXD is negative ( 0.1277) and significant. The negative coefficient implies that external financing constraints force the firm to decrease payout. The sum of the coefficients of CGI * DFCF (0.1549), CGI * DFCF * EXD ( 0.1277) and CGI ( 0.0760) is still negative ( 0.0489) and significant. This result shows a negative relation between payout amount and corporate governance under agency problems and external financing constraints. The sum of the coefficients of CGI * DFCF, CGI * DFCF * EXD and CGI in column (2) Table 5, ceteris paribus, is also significantly negative ( 0.0892) when DFCF = 1 and EXD = 1. In summary, better corporate governance seems to increase payout of a firm suffering from agency problems if external financing constraints do not exist. However, once external financing constraints bind, a firm with better corporate governance tends to decrease payout. Panel B and C include results robust to different measures of external financing constraints. We use the volatility in abnormal returns around earnings announcements in Panel B and the normalized forecast error in Panel C, respectively, as proxies for external financing constraints. In Panel B, results with these specifications are also similar to those in Panel A. We find a similar yet weaker pattern with a normalized forecast error as the proxy for external financing constraints. All results in this section strongly confirm Hypothesis 2. Conclusively, firms with external financing constraints and agency problems (reflected in free cash flows) will pay smaller dividends as their governance system becomes more efficient so that the system can control agency problems. The deciding factor of payout policy is the relative importance of the two; external financing constraints and agency costs (Rozeff, 1982). Our results shed light on the interpretation of studies about the relation between payout and corporate governance under agency costs. In general, previous studies exclusively investigate the outcome hypothesis and the substitution hypothesis in the same pool of firms. Therefore, if a positive effect of strong governance on div-

idends is cancelled by a negative effect as in the substitution hypothesis, empiricists may end up with a false conclusion that no relation exists between corporate governance and payout. We, on the other hand, explicitly show that the two contradicting effects can be observed in different firms. Firms with less external financing constraints partly support the outcome hypothesis, i.e., paying out more cash as corporate governance becomes more efficient. The opposite case, which has more external financing constraints, shows that firms decrease payout since efficient corporate governance can control agency problems even though agency problems such as managers’ expropriation exist. We also implement fixed effects regressions to analyze the panel data.4 In general, results are consistent with our hypotheses as in Table 5. Firms with external financing constraints (EXD = 1) and agency problems (DFCF = 1) will pay smaller dividends as their governance systems become more efficient, which is consistent with our Hypothesis 2. The results are robust to different measures of external financing constraints. 4.4. Robustness tests In this subsection, we consider three alternative proxies for information asymmetry as a measure of external financing constraints (e.g., Leary and Roberts, 2007; Guariglia, 2008). The proxies for the external financing constraints are analyst coverage5, a firm’s age, and its size. We construct dummy variables for the above proxies; 1 for the firms with external financing constraints and 0 for the others. If a firm’s size is smaller, age is younger, and analyst coverage is less, then we assume that the firm has more information asymmetry. Generally, the younger, smaller, and the less analyst covered companies are less well known to investors and do not have enough resources for efficient internal control and transparency. In this case, outside investors will face severe information asymmetry against managers, so external financing will lead to higher costs. Table 6 shows that our results are robust to changes in the proxy for the external financing constraints. In Panel A, we find results supporting hypothesis 1 with various regression specifications and different proxies for external financing constraints and payout. Conclusively, firms with better corporate governance will pay more dividends when they have substantial free cash flows and lower external financing constraints. The significant and negative values of b1 + b2 + b3 (sum of coefficients) in Table 6 support Hypothesis 2 which states that firms with better corporate governance will pay less dividends when they have substantial agency problems and external financing constraints. We find similar, confirmatory evidence in Panel B and C with the firm age and the firm size, respectively as a proxy for external financing constraints. Overall, the results from these robustness tests using alternative measures of external financing constraints still support our hypotheses. 5. Conclusion This paper investigates how payout policies change according to a firm’s strength of shareholder rights under external financing constraints and agency problems. When we investigate the relation between payout policies and corporate governance, we simultaneously consider agency problems between managers and shareholders, and external financing constraints between insiders and outside investors. Previous literature mostly analyzes the direct relation between corporate governance and dividend policies. However, we notice that the external financing constraint is more 4

Detailed results are available by the authors upon request. Analyst coverage is the number of estimates for company, for the fiscal period indicated. We use the number of estimates from the IBES. 5

J. Chae et al. / Journal of Banking & Finance 33 (2009) 2093–2101

binding as a company pays more dividends. Therefore, a firm’s payout policy, agency problems, corporate governance, and needs for outside financing should be considered at the same time. This paper uses a sample of firms with the corporate governance index compiled by Gompers et al. (2003) to test the relation between corporate governance and payout. We find that the relation between corporate governance and payout changes according to the levels of agency problems and external financing constraints. When agency problems measured by free cash flows are relatively more severe than external financing constraints, we show that firms pay more dividends with more efficient corporate governance. However, when we additionally consider external financing constraints over agency problems, we observe evidence that companies with higher external financing constraints decrease dividends even with higher agency costs as their corporate governance becomes better. Based upon all results of our analyses, we conclude that the relation between corporate governance and payout cannot be asserted without considering two important factors: agency costs and external financing constraints. By considering these, a firm can optimize its payout policy to maximize its value. Acknowledgements Joon Chae acknowledges financial support from the management research center of Seoul National University. The usual disclaimer applies. References Allen, F., Michaely, R., 2002. Payout policy. In: Constantinides, G., Harris, M., Stulz, R. (Eds.), North-Holland Handbooks of Economics. North-Holland, Amsterdam, pp. 337–429. Bagwell, L., Shoven, J., 1989. Cash distributions to shareholders. Journal of Economic Perspectives 3, 129–140. Bebchuk, L., Cohen, A., Ferrell, A., 2009. What matters in corporate governance. Review of Financial Studies 22, 783–827. Berger, P., Ofek, E., Yermack, D., 1996. Managerial entrenchment and capital structure decision. Journal of Finance 62, 1411–1438. Chi, J., Lee, D., 2005. The conditional nature of the value of corporate governance. Working Paper, Texas A&M University. Cleary, S., 2006. International corporate investment and the relationships between financial constraint measures. Journal of Banking and Finance 30, 1559–1580. Dittmar, A., 2000. Why do firms repurchase stock? Journal of Business 73 (3), 331– 355. Dittmar, A., Mahrt-Smith, J., 2007. Corporate governance and the value of cash holdings. Journal of Financial Economics 83, 599–634.

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