Dividend payout and corporate governance along the corporate life-cycle. Economics Finance & Accounting Working Paper Series N228-12

Manuscript Type: Empirical Research Question/Issue: This study seeks to test the outcome and substitution agency models of dividends at different stages of the corporate life-cycle. Research Findings/Insights: In a sample of 220 firms from 21 emerging market countries, I show that the outcome model of dividends, which predicts that dividend payout increases in the strength of shareholder rights, prevails all along the corporate life-cycle, but only where creditor rights are strong. Hence, the agency cost of equity and debt version of the outcome model of dividends holds. I find no evidence in support of the substitution model of dividends. Theoretical/Academic Implications: The findings in this paper serve to highlight the profound influence that creditors exert on corporate payout policy. When shareholders enjoy considerable legal rights, but not so creditors, creditors demand, and firms consent to lower dividends. Furthermore, I find no evidence to suggest that firms substitute (large) dividends for poor governance in emerging markets