Dividend Policy, Agency Costs , and Earned EquityDividend Policy, Agency Costs , and Earned EquityHarry DeAngelo* Linda DeAngelo* René M. Stulz**June 2004AbstractWhy do firms pay dividends? If they didnt their asset and capital structures would eventually become untenable as the earnings of successful firms outstrip their investment opportunities. Had they not paid dividends, the 25 largest long-standing 2002 dividend payers would have cash holdings of $1.8 trillion (51% of total assets), up from $160 billion (6% of assets), and $1.2 trillion in excess of their collective
$600 billion in long-term debt. Their dividend payments prevented significant agency problems since theretention of earnings would have given managers command over an additional $1.6 trillion without access to better investment opportunities and with no additional monitoring. This logic suggests that firms with relatively high amounts of earned equity (retained earnings) are especially likely to pay dividends. Consistent with this view, the fraction of publicly traded industrial firms that pays dividends is high when the ratio of earned equity to total equity (total assets) is high, and falls with declines in this ratio, becoming near zero when a firm has little or no earned equity. We observe a highly significant relation between the decision to pay dividends and the ratio of earned equity to total equity or total assets, controlling for firm size, profitability, growth, leverage, cash balances, and dividend history. In our regressions, earned equity has an economically more important impact than does profitability or growth. Our evidence is consistent with the hypothesis that firms pay dividends to mitigate agency problems.
[email protected] or [email protected] or [email protected]*Marshall School of Business, University of Southern California; **Fisher College of Business, The Ohio State University. This research was supported by the Charles E. Cook/Community Bank and Kenneth King Stonier Chairs at USC and the Everett D. Reese Chair at OSU. René Stulz is grateful for the hospitality of the Kellogg Graduate School of Management at Northwestern University and the George G. Stigler Center for the Study of the Economy and State at the University of Chicago. We thank Qi Qin, Xuhu Wan, and Sam Zhang for research assistance, and especially April Xu for her diligent and outstanding work on this project. We also thank seminar participants at the University of Chicago for helpful comments.
M. K. D. Stulz, PhD, MBA, Director of the School of Business, University of Southern California; †Dr. Stulz led the CME-CM at the University of Southern California and was a former advisor at the American Enterprise Institute. Dr. K. D. Stulz was an early recipient of the Institute’s Distinguished Teaching Award for excellence in the field of economics. Dr. Stulz was involved in leading a pioneering effort to reform the economic policy system at home, making education available to nearly a quarter of all Americans without cost, and in an effort to encourage innovation and development in low-wage industries and to increase education opportunities for low-skill workers throughout the U.S.
Dr. Stulz was a Professor of Mathematics in the George W. Bush School of Education and was founding director of the Hoover Institution and director of the S.J.S. Program at the Hoover Institution and an intern for Harvard Business School. Dr. Stulz was also director of the S.J.S. Program at Columbia University. Dr. Stulz’s specialty was in creating a new, globally competitive, high-productivity productivity strategy—an economy in which an economy achieves productivity gains with efficiency and efficiency gains with innovation. Dr. Stulz was also a member of the Institute’s Research-Engagement Board, a former Deputy Director for the Center for Business Administration and a professor emeritus of economics emeritus at the University of Massachusetts Amherst, Boston (including Dr. K.D. Stulz), a former Senior Executive Director of the U.S. Department of Labor Bureau of Labor Statistics (USB) and an assistant professor of economics at Stanford University, Stanford and a research fellow at the Center for Economic and Policy Research at the Center for Economic and Policy Research at Stanford University. Dr. Stulz was also a Member of the National Council of Council Of Advisors of the International Coalition Against Labor Defaults, a pro-labor watchdog group that supported a minimum wage increase with some $13.15 per hour since 1989 under Democratic leaders like Congressman Tim Walberg of California and Senator Jeff Merkley of Oregon. The United States Chamber of Commerce, whose leaders in Congress have included business and labor leaders, has been strongly critical of President Obama’s proposed budget for U.S.-China relations that includes his proposed $724 billion for “strategic” military cooperation with China.
Dr. Stulz and her coauthors conducted research on the effectiveness of the economic policy tools that can guide a country’s economic activity, focusing on the influence of markets and economic activity on national economic competitiveness. They found that the market-oriented policy tools identified in the research demonstrated an increase in competitiveness with relative cost elasticities of goods and services, and the market-oriented strategies could be effective in protecting competitive advantages in industries that offer economic benefits such as manufacturing, education and government services. As a result
Dividend Policy, Agency