Corporate Governance and Payout Commitments

Abstract

This paper examines corporate payout and debt policies from an agency perspective. We argue that corporate governance and precommitment to cash distributions are alternative methods of addressing manager-shareholder conflicts. We find that total cash distributions, total payouts to shareholders, cash dividends, share repurchases, and interest payments to debtholders are decreasing in corporate governance. Corporate governance also affects the structure of cash distributions. Among different forms of payout to shareholders, irregular payouts such as repurchases or special dividends have the weakest precommitment effect, whereas regular quarterly cash dividends have the strongest effect. Firms with weak governance combine debt and dividends, set high interest and dividend payments, and include short-term debt. Firms affected by the passage of state antitakeover laws increase cash dividends, total payouts to shareholders, and total distributions committed to shareholders and debtholders (dividends and interest).