Financing Constraints，agency Cost And Governance Effects Of Dividend Policy

Dividend policy is a classical and constantly updated research topic in the financialresearch field. Despite of the variety of theoretical perspectives and a large number ofempirical studies emerging, there is no consistent answer to the problem of how to formulatethe dividend decision, which provides the space and possibility of theory improvement.On the basis of theoretical literature and the analysis of reality background, this paperproposes a standard to evaluate whether a dividend policy is reasonable from the perspectiveof governance effect of dividend policy. It focuses on two questions as following:The primary question is the existence of the governance effect of dividend policy. Carriedout in accordance with the overall inspection and partial inspection:(1) Take a corporategovernance index (CGI) as proxy variable of the overall degree of corporate governancemechanism, and verify the dividend policy’s substitution or supplement effects to thecorporate governance mechanism in the dual role of financing constraints and agency costs;(2) Verify the dividend policy’s relationship with two specific governancemechanisms-management compensation incentive(as incentive mechanism) and equitybalance(as restriction mechanism), in the partial inspection, to find out the substitution orcompensation effect.It followed by evaluating the governance effect of dividend policy. Take dividend policy asendogenous or exogenous factors of governance effects respectively:(1) to analyse the effectof the dividend policy in the financing constraints and agency costs via an empirical analysisbased on the two-tier stochastic frontier model(2-tier SFA), the classic Lintner dividend modeland Rozeff dividend balance model (2) The dividend policy can be regarded as exogenousfactors because the governance effects of dividend policy should eventually be reflected in thecorporate value. In the real world, dividend policy can’t be optimal, which cause the loss ofthe efficiency. With the stochastic frontier analysis, evaluation of the governance effects ofdividend policy will transfer to a measure of the governance efficiency of dividend policy inthe company perspective, and draw the specific characteristics of the role of dividend policy.The main conclusions are as follows:Firstly, impeccable corporate governance mechanism can play substitution role in dividendspayment without financing constraints and agency costs, which indicates that dividends paymenth as a certain corporate governance effect. When we consider the influence of agencycosts solely, well governed corporations will pay dividend to restrain agency costs,conventional governance mechanisms have supplement effects. After adding the affect of financing constraints, these corporations prefer to reduce dividend payment, which exerts asubstitution effects.Those results show dividend policy has corporate governance effectindeed.Secondly, under the dual role of agency costs and financing constraints, the executivecompensation incentives and dividend policy in listed companies show an obvioussubstitution tendency. The management layer don’t enhance dividend payout ratio to giveshareholders more in return due to an increase in the salaries. Equity balance to the dividendpolicy is a supplementrather than substitutes.Thirdly, in current Chinese capital market, financing constraints is the dominant factorcausing the deflected dividend level of listed companies, that is, the loss of the governanceeffect of dividend policy. Meanwhile the effect of agency costs is relatively small and their neteffect makes the actual payout ratio of Chinese listed companies lower than the relativelyoptimal levels.Fourthly, the relationship between the cash dividend payout ratio and the company value isa "U" shape of the quadratic nonlinear: when the level of the cash dividend payout ratio oflisted companies is not high, the increase of the payment rate will reduce the value of thecompany; and when the payment rate reach a certain level, the increase of the payment ratewill enhance the value of the company.The probable contribution of this paper is:(1)It proposes clearly one point that governance effect of dividend policy could be thecriterion of listed companies’ dividend policy decision, and build the framework for theinspection of governance effect of dividend policy including a whole and partial inspectionfrom the endogenous and exogenous perspective. This paper also provides a reference forresearches on other areas related to financing constraints and agency costs.Different from the previous literature which are only concerned with the exogenous ofdividend policy relative to the value of the company, this paper try to examine theeffectiveness of the dividend policy from two angles of endogenous and exogenous.(2) As a special corporate governance mechanism, the validity of dividend policy dependson their own level primarily. Then, the relative validity of dividend policy assumes as thedeviation between optimal dividend level and actual dividend payout. In the definition of sucha deviation, the validity of the dividend policy can be understood as a corporate governanceefficiency by using dividend policy for the endogenous variables. Based on stochastic frontiermethod, the idea of Lintner model and Rozeff dividend balance model, this paper builds atwo-tier stochastic frontier dividend model, and evaluate the effect of dividend policy via empirical analysis.It also finds out the governance effect of dividend policy in financingconstraints and agency costs and the reasons of loss of the effectiveness.(3) The ultimate goal of the governance effect of dividend policy is to achieve thepromotion of the corporate value. Different from most of the previous literature simply usingaccounting indicators, economic indicators, market indicators to regression analysis to test therelationship between the corporate value and the dividend policy, this paper try to measurethe governance effect of dividend policy in the view of relative efficiency by the stochasticfrontier model, which can reduce the bias causing by the information asymmetry andsubjectivity.