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The dividend policies of all‐equity firms: A direct test of the free cash flow theory
Author(s) -
Agrawal Anup,
Jayaraman Narayanan
Publication year - 1994
Publication title -
managerial and decision economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.288
H-Index - 51
eISSN - 1099-1468
pISSN - 0143-6570
DOI - 10.1002/mde.4090150206
Subject(s) - free cash flow , dividend , dividend payout ratio , equity (law) , agency cost , dividend policy , monetary economics , cash flow , debt , business , principal–agent problem , economics , financial economics , finance , corporate governance , shareholder , political science , law
This paper finds support for Jensen's (1986) hypothesis that dividends and debt are substitute mechanisms for controlling the agency costs of free cash flow. We find that dividend payout ratios of a sample of all‐equity firms are significantly higher than those of a control group of levered firms. Further, within the group of all‐equity firms, firms with lower managerial holdings have higher payout ratios. These results hold after controlling for free cash flow and growth rates. Overall, our evidence suggests that dividends and managerial ownership are substitute mechanisms for reducing agency costs in all‐equity firms.