Study On The Value Of Dividend Based On Agency Theory

As a result of the agency problem of debt,the increase in firm value arising from an increase of cash holdings is shared by the debt and equity holders,which makes an extra dollar of cash holdings is less valuable for shareholders in highly levered firms than in firms with low leverage(Faulkender and Wang,2006).Considering that the payment of dividends will reduce the amount of cash holdings,the marginal value of the two may be somewhat complementary at different levels of leverage.Besides,the increase in dividends reduces creditors' residual claim,as well as brings part of the private benefits to shareholders,which means that shareholders have a higher preference in over-leveraged firms' dividend payment.In addition,the agency problem of managers and the agency problem of controlling shareholders are both important factors influencing the value of dividend.Opinions are divided on whether the dividend acts as a mechanism of governance or serves as a way of tunneling.Developing the value of cash model in Faulkender and Wang(2006)into value of dividend model,this paper examines the variation in the marginal value of corporate dividend that arises from differences in capital structure.The results reveal that the marginal value of dividend is stronger in over-leveraged firms rather than under-leveraged firms.Besides,over-leveraged firms tend to experience an increase in value of dividend during the adjustment to target capital structure,whereas under-leveraged firms tend not to.From a perspective of dual agency problems,we further explore the discrepancy of the value of dividend between firms suffered different types of agency problems.We argue that dividend distribution affect the two types of agency problems in a different way.The value of dividend is larger in firms with Agency Problem ? than firms with Agency Problem ?,as dividend payment help reduce the free cash flow under manager's control while acting as a tunnel for the controlling shareholder's expropriation.Although CSRC forces listed companies to pay dividends according to the company's growth stage,the goal is still focused on how to improve the company's payment of dividends.The discussion on the value of dividend in this paper provides a broader view for dividend regulation.Policy development should not be rigidly adhering to dividend increase or dividend decrease,but can be viewed from a more profound perspective which taking dividends and capital gains both into account.In addition,based on the conclusion of the relationship between dividend decision and capital structure decision,regulators can introduce debt indicator with the existing growth indicator and adopt higher dividend ratio for over-leveraged:firms.For firms with a more serious agency problem of managers,it can consider to build a mechanism linking managerial compensation with payment of dividend,or accelerate the managers stock ownership plan,etc.And for dividend tunneling of the controlling shareholder,regulators may establish a threshold ceiling,or increase the dividend income tax of the controlling shareholder.This paper has important theoretical and practical significance for perfecting the governance mechanism of listed companies and improving the protection of minority shareholders.