Corporate financial policies under managerial control: Theory and evidence

Most of the dividend literature makes the simplified assumption that dividends are determined in the best interests of shareholders. This assumption is however in contrast to the fact that corporate managers often possess large scope of discretion over corporate financial policies, and that managers may undertake financial policies in ways not maximizing shareholder value. In view of this agency problem, in the first chapter, I construct an integrated theoretical model of payout and capital structure policies, in which managers distribute cash payout and issue debt in order to deter takeover threats. A straightforward implication of this theoretical model is that managers would be less likely to pay dividends, and would tend to pay smaller dividends if shielded from hostile takeovers. In the second chapter, I conduct an empirical study to directly test this hypotheses.; The main result in the theoretical model is that payout and debt serve distinct functions as self-disciplinary schemes. The function of payout is to distribute the past earnings from the asset-in-place; whereas the purpose of debt is to reduce the ex post divisible surplus that the manager is able to extract. Debt is effective only when its payments are paid against the future earnings from the new project.; Specifically, I assume that managers may be able to get a portion of the net surplus from each new project that they implement. This opportunism results in over investment, which further makes the firm an attractive target for a hostile takeover. In consequence, managers may face higher risk of being replaced. To stay in control, managers have incentives to pay dividends and issue debt, which they would otherwise avoid.; I characterize three regimes of the manager's financial decisions, depending on the extent of managerial self-interested tendencies and takeover activities: firms neither pay dividends nor issue debt; firms pay dividends only; firms pay dividends and issue debt simultaneously.; In the empirical study, I investigate the impact of the passage of “second generation” state anti-takeover laws. I find that the effect of state anti-takeover laws on the amount of payout is large. Firms protected by state anti-takeover laws tend to substantially reduce their cash payout. However, the effect on the number of firms who decide to pay dividends is insignificant. An implication is that decisions on whether or not to pay dividends and decisions on how much dividends to pay are distinct.