Student Presentation of Agency Problems and Dividend Poiicies Around the World
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Transcript of Student Presentation of Agency Problems and Dividend Poiicies Around the World
Corporate finance
• SEC1. 宋泰青 summarize the theoretical arguments.
• SEC 2. 王宗正 discribe the data.
• SEC3. 林冠甫 empirical findings.
• SEC4. 楊政彥 conclusions.
Agency problems and dividend policies around the world
• compare two agency models:
1.outcome model:divd are paid by the minority outsiders pressure insider to disgorge cash.
2.substitute model:divd are paid for estabilsh reputation
Divd puzzle
• depend on MM theory,the divd policy is no relation to firm value,so in perfect world,no divd puzzle.
• In real world,we face a divd puzzle:how firm choose their divd policy?
explanations of divd puzzle
• predict firm’s growth: firm can convey the future profitability by paying divd, initially , empirically successful,because if the divd increases(decreases),the stock price will go up(down).But recent result,the divd can not help predict firm’s growth.
• agency problems :divd policy addresses agency problems between insiders and outsiders.the insiders may divert the cash to hurt outsiders.So the outsiders prefer for divd
eliminate two assumptions of MM
• the investment policy is dependent on divd policy
• The allocation of all profits of the firm to the shareholders on a pro rata basis can not be taken for granted.
address agency problem
• mainly use the law to explain the divd policy and agency problems.
• common law have better protection for investors,so the outsiders can get higher divd than civil law’s which has weaker protection.
• disscuss the relation between different growth opportunities and the divd policy.
Theoretical Issue
A. Agency problems and Legal RegimeBerle and Means(1932),Jensen&Meckling(1976):conflicts of interest between corporate insiders and outside investors.
Detriment:Divert corporate asset to insider.Dilution of outsider inverstor through share issue to insider.Asset sales to themselves or other corporations insider con
trol.Transfer pricing with other entities insider control.
Definition of Insider:
1.U.S. U.K. Canada Australia:Ownership in large corporation is relative dispersed.=>Manager control.2.Other countries:=>Founding families control.
Victims:Victims of insider control are minority shareholders.
Remedies:=>Law
Law protection:
1.The right to vote on important corporate matters.
(1)Election of director
(2)The right to sue the company for damages.
2.The right to receive the same per share dividend as the insiders.
Law protection => to become a minority shareholder is a
viable invest strategy.
LLSV(1998):
Legal protection of outside investor differs enormously across
countries.
Common law=>better legal protection of minority shareholder
Civil Law=> inferior legal protection of minority shareholder
Shareholder protection as a proxy for agency problem
B. Agency and Dividends: Two Views
• B1. The role of Dividends in an Agency Context
Pay dividend=>corporate return earning to investor and are
no longer capable of using these earning to
benefit themselves. Dividends(a bird in the
hand) are better than retained earnings(a bird
in the bush).
=>Expose company to come to capital market.
Easterbrook(1984)
• B2. Dividends as an outcome of Legal Protection
of shareholders (outcome model) Minority shareholders use their legal power to force companies to disgorge cash. (1)Voting for directors who offer better dividend. (2)Selling share to potential hostile raiders. (3)Suing company that benefit insider.
better protection=>higher dividend payout
under good protection=> G=(1-D)*ROE
Div/Earn
high protection
low protection
Investment Opportunities
• B3. Dividends as a substitute for Legal Protection
of Shareholders (Substitution Model)
1.External financing=>Pay dividend Weak legal protection=>High dividend payout
2.High growth prospects=>High dividend payout(?) Reason: high growth prospects company will have a better current use of fund.
Div/Earn
low protection
high protection
Investment Opportunities
B4. Summary of Prediction of Agency Models
Outcome model:
1.Good protection => High payout ratio
2.Bad protection => Low payout ratio
3.Under good protection:
high growth company =>low payout ratio
low growth company =>high payout ratio
Substitution model:
Predict opposite.
C.Tax IssuesTraditional view:Tax on dividend will be deterrent to paying out dividend.retain earning is better and dividendObjection:1.Investor have access to a variety of dividend tax avoidan
ce strategies that allow them to effectively escape dividend
tax. Miller and Scholes(1978)2.New view of dividends and taxes: Cash has to be paid out as dividends sooner or later,and
therefore paying it earlier in the form of current dividends imposed no greater a tax burden on shareholder.
King(1977) Auerbach(1979)
Tax preference of dividend:
1.The classical System:
(1-Tcorp)(1-Tdiv)/(1-Tcorp)(1-Cap)=(1-Tdiv)/(1-Tcap)
2.The Two-Rate System:
(1-Tdist)(1-Tdiv)/(1-Tret)(1-Tcap)
3.The Imputation System :
(1-Tdist+Timp)(1-Tdiv)/(1-Tret)(1-Tcap)
Ⅱ.Data
• The march 1996 edition of the WorldScope database.
• The database presents information on the largest listed firms in 46 counties.
• Since accounting data are often reported with a delay, our analysis uses data through 1994
Data(cont)
The
First
dummy
1 Civil law
0 Common law
The
Second
dummy
1 Low protection The index of antidirectors rights < the sample median
0 High protection
The index of antidirectors rights > the sample median
Data(cont)
Because accounting data in counties with different accounting standard
Different accounting conventions
Manipulated by accounting tricks
Diversion of resources
Dividend-to-cash-flow
Yes Yes Yes
Dividend-to-earnings
Yes Yes Yes
Dividend-to-sales
No No No
Data(cont)
• Our principal measure of such opportunities is the past growth in sale of each firm.
advantage Being roughly independent of accounting practices
disadvantage Relying on the past as a proxy for the future
Table 2The Variables
Common
Law
Equal one if the origin of the company law or commercial code of the country is the English Common Law
Civil law Equal one if the origin of the company law or commercial code of the country originates in Roman Law
Low protection
Equal one if the index of antidirectors rights is smaller or equal to three (the sample median)
High protection
Equal one if the index of antidirectors rights is greater than three
Table 2The Variables(cont)
Dividend-to-cash-flow
1.dividend as a percentage of (cash
flow,earning,sales) in fiscal year 1994.
2.total cash flow/(common shareholder +
preferred shareholder).Dividend-to-earnings
Dividend-to-sales
IA_dividend-to-cash-flow
1.find for each industry in each country the
median of the dividend-to-cash-flow
ratio(C_D/CF)
2.define the world median as the median of
(C_D/CF) across countries
3.calculate the difference between firm dividend-
to-cash-flow and the world median
IA_dividend-to-earnings
IA_dividend-to-sales
Table 2The Variables(cont)
GS Average annual percentage growth in real(net) sales over the period 1989-1994
GS_decile Rank decile for GS. It ranges from 1 to 10
IA_GS Average annual industry-adjusted growth in (net) sales over the period 1989-1994
IA_GS_decile Rank decile for IA_GS. It ranges from 1 to 10
Dividend tax advantage
US$1 distributed as a dividend income / US$1 received in the form of capital gains when kept inside the firm as retained earnings
Appendix A• Table A1 presents the raw data used to calculate the tax
preference of dividends for each country.Dividend tax preference parameter
The classical system
The two-rate system
The imputation system
)1(
)1(
cap
div
T
T
)1)(1(
)1)(1(
capret
divdist
TT
TT
)1)(1(
)1)(1(
capret
divimpdist
TT
TTT
A B C D E F G H
Corporate tax Personal tax
Undistributed profits
distributed profits
Capital
gains
dividends Imputation
rate
Value of US$1 in dividend
(1-B+E)(1-D)
Value of US$1 in dividend
(1-A)(1-C/4)
Dividend tax preference (G/H)
The data
• More than half of the firms in the sample come from the USA and UK.
• WorldScope coverage and the equity of the data of data are also better for richer countries.
• The difference between the tax treatment of dividends and retained earnings is small.
Ⅲ.ResultA.Simple Statistics
• Counties are required to have at least 5 firms with growth in sales below the world median and 5 firms above the world median.
• MOMs=medians of country medians • GS=growth in sales
24 counties
Table4 civil common
14 10
Table5 low high
11 13
Table 4
• We examine whether firms in civil and common law countries have different dividend payout policies.
• For all three ratios, common law countries have a higher dividend payout ratio than civil law countries do.
• For all three variables, these estimates are very close to those for the broader sample in table 3.
Table4
Table 4
• The additional results in table 4 address the relationship between dividend payout rates and sale growth rates across legal regimes
• These results are consistent with the predictions of the outcome agency model.
• Well-protected minority shareholders are willing to delay dividends in firms with good growth prospects.
Table5
Compare with table4 and table 5
dummy Dividend payout ratio
Significant?
Table 4 Civil
law
Growth>Mature no
Common
law
Growth<Mature yes
Table 5 Low
protection
Growth>Mature no
High
protection
Growth>Mature yes
Regression-Dependent Variable(1)
the dividend-to-cash-flow of ith firm
(Table 6 panel A) .
the dividend-to-earnings of ith firm
(Table 6 panel B) .
the dividend-to-sales of ith firm
(Table 6 panel C) .
:Y i
Regression-Dependent Variable(2)
the industry-adjusted dividend-to-cash-
flow of ith firm (Table 7 panel A) .
the industry-adjusted dividend-to-
earnings of ith firm (Table 7 panel B) .
the industry-adjusted dividend-to-sales
of ith firm (Table 7 panel C) .
:Y i
Regression-Independent Variable
civil law dummy variable of ith firm. low protection dummy variable of ith firm. the rank decile of the average annual percentage growth in real (net) sales of ith firm over 1989-1994 .(Table 6,Table 7 use the industry-adjusted data) the ratio of the value to outside investor of $1 distributed as dividend income to the value of $1 received in the form of capital gains when kept inside the firm as retained earnings .
:1X i
:2X i
:3X i
:4X i
Regression-Regression equations
iiiiiii XXXXXY 4631433110
iiiiiii XXXXXY 4632533220
iiiiiiiiii XXXXXXXXY 463253143322110
Table 6Cons. Civil law Low
Protection
GS_
Decile
Civil*
GS
Low*
GS
Div tax advanta
ge
N χ
Coefficient
Std . error
22.3730*
3.5145
-13.2591*
1.6602
-0.8457*
0.0832
0.9022*
0.1608
3.2262
3.9635
4103 137.79*
Coefficient
Std . Error
20.2817*
5.0539
-10.8156*
2.1943
-0.8133*
0.0813
0.8554*
0.1695
3.5303
5.7621
4103 109.52*
Coefficient
Std . error
22.6043*
3.8440
-13.2883*
3.0909
-0.1404
3.1446
-0.8502*
0.0832
0.8948*
0.3504
0.1112
0.3676
3.1591
4.3237
4103 134.29*
Coefficient
Std . error
44.1156*
8.4626
-16.4633*
3.9817
-2.1354*
0.1974
2.3925*
0.3816
9.5905
9.5425
4103 119.38*
Coefficient
Std . error
44.6786*
8.4796
-18.1518*
4.0195
-2.0613*
0.1927
2.4253*
0.4007
8.9278
9.7170
4103 118.13*
Coefficient
Std . error
44.9493*
8.9882
-8.1284
7.2780
-10.1918
7.3403
-2.1431*
0.1974
1.5135**
0.8308
1.0124*
0.8717
8.9453
10.1111
4103 121.61*
Coefficient
Std . error
1.8963*
0.4005
-2.0821*
0.2185
-0.0859*
0.0142
0.0962*
0.0273
1.8157*
0.4556
4103 157.59*
Coefficient
Std . error
1.4299*
0.7812
-1.6413*
0.3461
-0.0884*
0.0139
0.0926*
0.0288
2.1266**
0.8911
4103 61.76*
Coefficient
Std . error
1.8907*
0.4146
-2.3471*
0.4378
0.2979
0.4476
-0.0865*
0.0142
0.1189**
0.0595
-0.0248
0.0623
1.8457*
0.4708
4103 153.45*
Table 7Cons. Civil law Low
Protection
IA_GS_
Decile
Civil*
IA_GS
Low*
IA_GS
Div tax advantag
e
N χ
Coefficient
Std . error
10.0288*
3.6114
-12.7246*
1.6883
-0.8730*
0.0826
0.8869*
0.1598
3.7703
4.0724
4077 141.26*
Coefficient
Std . Error
8.1130***
4.8398
-10.5460*
2.1150
-0.8343*
0.0806
0.8295*
0.1688
4.0120
5.5198
4077 117.12*
Coefficient
Std . error
10.2997*
3.9021
-12.4283*
3.0636
-0.5290
3.0865
-0.8758*
0.0827
0.8946*
0.3413
-0.0102**
0.3592
3.6333
4.3890
4077 138.58*
Coefficient
Std . error
14.2369
9.7285
-15.9368*
4.4173
-2.2892*
0.1980
2.4323*
0.3835
7.7032
10.9624
4077 134.59*
Coefficient
Std . error
14.4038
9.7308
-16.8178*
4.2450
-2.1865*
0.1932
2.3746*
0.4041
7.2468
11.1096
4077 129.53*
Coefficient
Std . error
14.9785
10.2583
-10.8174
7.7188
-6.3909
7.7540
-2.2938*
0.1981
1.9432**
0.8191
0.5648
0.8622
7.1076
11.5312
4077 135.48*
Coefficient
Std . error
1.1042*
0.4248
-2.1146*
0.2238
-0.1087*
0.0139
0.1244*
0.0268
1.4371*
0.4819
4077 147.28*
Coefficient
Std . error
0.6490
0.8000
-1.6415*
0.3507
-0.1076*
0.0135
0.1165*
0.0283
1.6823***
0.9124
4077 77.82*
Coefficient
Std . error
1.1116*
0.4715
-2.5125*
0.4439
0.4255
0.4520
-0.1106*
0.0139
0.1557*
0.0571
-0.0332
0.0600
1.4931*
0.5329
4077 138.28*
Robustness-result
• From figure 3 , we find that there is a negative relationship between sales growth and dividend-to-earnings ratio in common law countries.
• From figure 4 , we find that the relationship between sales growth and dividend-to-earnings ratio is negative for 11of the 20 civil law countries , and positive relationship for 9 of 20 civil law countries.
• The relationship between sales growth and dividend-to-cash flow and the relationship between sales growth and dividend-to-sales are same as above .
Robustness-interpretation(high protection countries)
• One possible interpretation is that the measures of the investor protection is simply reflect the degree of the capital markets development.
• But it’s determined by legal origin and the quality of investor protection (LLSV(1997)) , and it does not to explain the relationship between investment opportunities and payouts .
Robustness-possibly important objection
• The lower payouts in civil law countries simply reflects greater reliance on debt finance in those countries.
• But according to the empirical ,even if firms in civil law countries rely on debt to a greater extent , they should not necessarily pay out less of their net-of-interest income .
Conclusion
• The result of this article is support the outcome agency model of dividends.
• Poorly protected shareholders seem to take whatever dividends they can get.
• The result of this article doesn’t find the effect of taxes on dividend policies.