Understanding and managing corporate agency problems

This dissertation examines the relationships between agency problems and mechanisms that mitigate those problems. The first chapter examines both theoretically and empirically how the quality of firm information disclosure affects shareholders' use of dividend policies to mitigate agency problems. As a first step to induce the manager to behave in the interests of shareholders, managerial compensation is linked to the value of the firm. However, the manager and shareholders are asymmetrically informed. As a result, the manager can manipulate the firm's accounting information through earnings management to increase perceived firm value. This chapter shows how dividends can limit earnings management practices, by adding to the cost faced by a manager who inflates earnings. Dividend payers show less evidence of earnings management and show less evidence of a change in behavior after the Sarbanes-Oxley Act of 2002 (SOX), a law that increased financial disclosures. This suggests that dividends had indeed been useful in limiting earnings management. The second chapter analyzes how firms switch between monitoring tools. SOX and contemporaneous changes by NYSE and NASDAQ created minimum requirements on board composition. This chapter analyzes how treated and untreated firms changed other monitoring tools such as CEO ownership, CEO compensation, firm leverage, and dividend policy. The results suggest that independent board members are substitutes for monitoring that comes from CEO ownership and debt. Some evidence is also found that firms forced to create an independent audit committee increased leverage and decreased dividends. The third chapter examines bank dividend policy responses to SOX and the passage of the Jobs and Growth Tax Relief Act of 2003 (Tax Reform). Agency models predict that the monitoring from SOX induces firms to lower dividends and that a dividend tax rate decrease induces firms to adopt or increase dividends. I find no evidence of a change in dividend behavior in the banking sector after SOX or after the Tax Refor