Premium Essay

Agency Problem

In: Business and Management

Submitted By alexchin91
Words 11836
Pages 48
Agency Problems and Dividend Policies Around the World
Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer and Robert W. Vishny* January 1999

Abstract This paper outlines and tests two agency models of dividends. According to the “outcome” model, dividends are the result of effective pressure by minority shareholders to force corporate insiders to disgorge cash. According to the “substitute” model, insiders interested in issuing equity in the future choose to pay dividends to establish a reputation for decent treatment of minority shareholders. The first model predicts that stronger minority shareholder rights should be associated with higher dividend payouts; the second model predicts the opposite. Tests on a cross-section of 4,000 companies from 33 countries with different levels of minority shareholder rights support the outcome agency model of dividends.

The authors are from Harvard University, Harvard University, Harvard University and University of Chicago, respectively. They are grateful to Alexander Aganin for excellent research assistance, and to Lucian Bebchuk, Mihir Desai, Edward Glaeser, Denis Gromb, Oliver Hart, James Hines, Kose John, James Poterba, Roberta Romano, Raghu Rajan, Lemma Senbet, René Stulz, Daniel Wolfenzohn, Luigi Zingales, and two anonymous referees for helpful comments.

2 The so-called dividend puzzle (Black 1976) has preoccupied the attention of financial economists at least since Modigliani and Miller’s (1958, 1961) seminal work. This work established that, in a frictionless world, when the investment policy of a firm is held constant, its dividend payout policy has no consequences for shareholder wealth. Higher dividend payouts lead to lower retained earnings and capital gains, and vice versa, leaving total wealth of the shareholders unchanged. Contrary to this prediction, however, corporations follow extremely...

Similar Documents

Premium Essay

Agency Problem

... Definition of 'Agency Problem' A conflict of interest inherent in any relationship where one party is expected to act in another's best interests. The problem is that the agent who is supposed to make the decisions that would best serve the principal is naturally motivated by self-interest, and the agent's own best interests may differ from the principal's best interests. The agency problem is also known as the "principal–agent problem." In kfc Outlets of international fast food chains KFC, Pizza Hut and Cream Bell resumed operation on September 17, 2012 after a three point agreement between the workers and the management. KFC, the biggest fast food chain in Nepal, had remained closed for over a month. On August 14, 2012 Devyani International, a subsidiary of Varun Beverages which operates outlets of KFC and Pizza Hut in Nepal had written a letter to authorities with announcement of immediate closure of all the four KFC and Pizza Hut restaurants running in the capital. “In order to disrupt our operations, some staff have physically attacked and threatened to kill the senior managers,” the letter read.  The settlement of dispute took nearly a month’s time because the management was seeking action against those law breakers who threatened to kill the managers....

Words: 708 - Pages: 3

Free Essay

Agency Problem

...McDonald’s Corporate Company Profile |About McDonald's: [pic] | |McDonald's is the leading global foodservice retailer with more than 30,000 local restaurants serving 52 million people in more than 100 countries each | |day. More than 70% of McDonald's restaurants worldwide are owned and operated by independent local men and women. | |McDonald's is one of the world's most well-known and valuable brands and holds a leading share in the globally branded quick service restaurant segment of | |the informal eating-out market in virtually every country in which we do business. | | | |Serves the world some of its favorite foods - World Famous French Fries, Big Mac, Quarter Pounder, Chicken McNuggets and Egg McMuffin. | | | |[pic] [pic] [pic] | |...

Words: 2203 - Pages: 9

Premium Essay

Agency Problem

...Emerging Markets Review 13 (2012) 516–547 Contents lists available at SciVerse ScienceDirect Emerging Markets Review journal homepage: Corporate governance, agency problems and international cross-listings: A defense of the bonding hypothesis☆ G. Andrew Karolyi ⁎ Johnson Graduate School of Management, Cornell University, 348 Sage Hall, Ithaca, NY 14853, USA a r t i c l e i n f o Article history: Received 30 June 2011 Received in revised form 6 August 2012 Accepted 7 August 2012 Available online 17 August 2012 JEL classification: F30 G15 G32 G38 Keywords: Cross-listing Stocks Bonding International financial markets a b s t r a c t Why firms from around the world seek to cross-list their shares on overseas exchanges has intrigued scholars during the past two decades. A general dissatisfaction with the conventional wisdom about investment barriers segmenting global investors and how cross-listings overcome those barriers cleared the way for newer wisdom about informational problems and agency conflicts, and how firms could overcome weaknesses in corporate governance by listing on, and thus “bonding” to, overseas markets with stronger regulatory oversight, stringent reporting and disclosure requirements and investor protections. Critics have challenged the viability of the bonding hypothesis, which I answer in this review. © 2012 Elsevier B.V. All rights reserved. 1....

Words: 26372 - Pages: 106

Premium Essay

Agency Problems of Mncs

...Questions and Applications * Agency Problems of MNCs a) Explain the Agency problem of MNCs R/: It refers to the conflict of interest between the manager and the subsidiary. The manager creates a subsidiary for the purpose of making decisions that increase the expectations of the shareholders, the subsidiary making the decisions for the purpose of increasing their own profits, they have forgotten the purpose of the manager who has to create incentives or compensation to guide the subsidiary and together achieve the goals. b) Why might agency cost be larger for a MNC than for a purely domestic firm? R/: For cost, monitoring, and size. The MNC is larger and incur many more monitoring costs with subsidiaries abroad, it is also more difficult for foreign subsidiaries to follow the same goals as the MNC, and the size generates chaos. * International opportunities Due to the internet. a) What factors cause some firms to become more international than others? R/: As companies take advantage of labor, they can produce their products in other countries at lower prices. The theory of comparative advantage; where countries use the specialization of a product and internationalize that product to meet the needs of other countries. The imperfect cycle theory and the product cycle theory. (a) Offer your opinion on why internet may result in more international business?...

Words: 400 - Pages: 2

Premium Essay

Market Solutions to the Agency Problems

...Market Solutions to the Agency Problem in Periodic Financial Reporting Edgar Carlos Duarte Aguilar “The statesman, who should attempt to direct private people in what manner they ought to employ their capitals, would not load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be as dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.” Adam Smith Introduction Enron’s bankruptcy in 2001 was a milestone in recent times as far as corporate governance regulations it is concerned. Besides the executives, the external auditors were accused and found guilty as accomplices in distorting the accounting information the Securities and Exchange Commission (SEC) required from them as a public company that traded its securities in the New York Stock Exchange (NYSE). US Government’s reaction was to increase the regulation on the activities performed by all public companies by issuing the Sarbanes-Oxley Act (SOA) and creating the Public Company Accounting Oversight Board (PCAOB)....

Words: 3726 - Pages: 15

Premium Essay

The Effect of Agency Problems in Value Maximization

...THE EFFECT OF AGENCY PROBLEMS IN VALUE MAXIMIZATION Siti Balkish Roslan ZP01796 Financial Management 2/2013 According to HBS Professor Michal C. Jensen, many managers are caught in between the desire to maximize the value of their companies and the demands of “stakeholder theory” to take into account the interests of all the stakeholders in a firm. It is already agency problems arise within a firm whenever managers incentives to pursue own interests at the shareholder expense. This is common knowledge in the business world. There have also been devises and mechanisms that have been created to reduce these problems such as managerial shareholdings, concentrated shareholdings by institutions or by block holders, which can increase managerial monitoring and with that improve performance. The use of debt financing can improve performance by inducing monitoring by lenders as well. The labor markets for managers are motivation for managers to attend to their reputations among prospective employers and in improving their performance. The threat of displacement imposed by the market for corporate control can create a powerful discipline on poor performing managers. (Anup Agrawal and Charles Knoeber, 2001) These are some of the known and common incentives. Professor Michael C. Jenson wrote that “The way out of the conflict, lies in a new way of measuring value.”...

Words: 645 - Pages: 3

Premium Essay

How Adverse Selection and Agency Problems Can Effect the Investors Reaction

...Agency problems and adverse selection problems can have a major impact on these situations. Normally agency problems occur when there is a conflict between the board of governance and investors. Adverse Selection problems may also have an impact on the investor’s reaction. In situation where adverse selection occurs there can be bad relation between the...

Words: 2452 - Pages: 10

Premium Essay

Criminal Justice Lessons Learned Post 9/11

...In the wake of the events that followed the 9/11 attacks many problems were revealed within the criminal justice system, especially those affecting the law enforcement community. One of those problems was the lack of interaction between the police departments and other local/state law enforcement with the federal law enforcement agencies. Local law enforcement agencies are the primary responders to any incident of crime or terror, therefore developing a better interagency collaboration in order to share information is essential in order to prevent future attacks. Prior to the 9/11 attacks many of the agencies believed in keeping information within their own realm due to protocols and security clearances. These criminal justice agencies each had pieces to a puzzle, but because these agencies never worked together, those pieces would never be put together to reveal the bigger picture. The 9/11 events revealed the lack of interaction and set about a positive change that would impact the way the criminal justice system approached their problem solving. One of those changes was the reorganization of the federal law enforcement agencies, including the creation of the Department of Homeland Security and the Transportation Security Administration (Brown, 2007). Another positive change was the reorganization of federal, state, and local governments for the purpose of increased information intelligence and sharing....

Words: 3147 - Pages: 13

Premium Essay


...What is Agency Problems When a principal hires an agent to carry out specific tasks, the hiring is termed a "principal-agent relationship," or simply an "agency relationship." When a conflict of interest between the needs of the principal and those of the agent arises, the conflict is called an "agency problem." In financial markets, agency problems occur between the stockholders (principal) and corporate managers (agents). While the stockholders call on the managers to take care of the company, the managers may look to their own needs first. In finance, there are two primary agency relationships: * Managers and stockholders * Managers and creditors PROBLEMS BTW STOCKHOLDERS versus MANAGER and STOCKHOLDERS versus CREDITORS... 1. Stockholders versus Managers * If the manager owns less than 100% of the firm's common stock, a potential agency problem between mangers and stockholders exists. * Managers may make decisions that conflict with the best interests of the shareholders. For example, managers may grow their firms to escape a takeover attempt to increase their own job security. However, a takeover may be in the shareholders' best interest 2. Stockholders versus Creditors * Creditors decide to loan money to a corporation based on the riskiness of the company, its capital structure and its potential capital structure. All of these factors will affect the company's potential cash flow, which is a creditors' main concern....

Words: 566 - Pages: 3

Premium Essay


...International Journal of Business and Management; Vol. 10, No. 1; 2015 ISSN 1833-3850 E-ISSN 1833-8119 Published by Canadian Center of Science and Education The Agency Problem: Measures for Its Overcoming Meri Boshkoska1 1 Faculty Economics-Prilep, Republic of Macedonia Correspondence: Meri Boshkoska, Faculty of Economics-Prilep, Republic of Macedonia. E-mail: Received: September 19, 2014 Accepted: November 4, 2014 Online Published: December 20, 2014 doi:10.5539/ijbm.v10n1p204 URL: Abstract As the corporative company type emerged, the two functions of ownership and management are separated. In the companies with a large number of employees the managers are the ones that manage the capital in the best interest of the shareholders. In this type of companies, conflict of interest may occur between the managers and the shareholders. Having more information about the work of the company, managers may use it in making decisions for their own benefit, which on the other hand cannot be as beneficial for the shareholders. Conflict of interest between managers and shareholders leads to so-called agency problem. There are different ways by which shareholders can control the operations of management. Some of the measures that can be used to resolve and prevent this problem are subject of analysis in this paper....

Words: 3875 - Pages: 16

Free Essay


...False (1.3) Agency Answer: b Diff: E [vi]. An agency relationship exists when one or more persons hire another person to perform some service but withhold decision-making authority from that person. a. True b. False (1.3) Agency Answer: b Diff: E [vii]. If a firm's stock price falls during the year, this indicates that the firm's managers are not acting in shareholders' best interests. a. True b. False (1.3) Agency Answer: a Diff: E [viii]. An agency problem exists...

Words: 3059 - Pages: 13

Premium Essay

Enron Case

...INTRODUCTION Enron was formed during 1985.   Enron was a very powerful company that was doing very well in the market. Enron had been a power supplier to utilities.  Its business began through the merger of Houston Natural Gas and Omaha-based Inter North.  In the following 20 years, Enron grew quickly and became the largest energy trader in the world.  By the end of the twenty century, Enron had many honorable titles, such as “one of the world’s leading electricity, natural gas, and communications companies”, “the world most admired corporations”, and so on.   In the following years, with the increase of competition, Enron decided to use diversification and international investment to keep its market position.  Actually, these activities brought Enron an unexpected large amount of losses rather than profits.   In 1999, after a foray into fiber optics and the broadband market, which was a wrong decision again, Enron suffered too many substantial losses and began bleeding quickly.  However, Enron had never declared any information about its losses until October 2001.  Instead, in these years, Enron achieved a phenomenal bottom-line through overstating revenues and hiding liabilities. Besides manipulated the financial statements, Enron never mentioned the risks which it should disclose to its investors.  On the contrary, the executives of Enron disclosed a great earnings forecast through the media and encouraged investors to purchase Enron’s stocks.  They also suggested......

Words: 3864 - Pages: 16

Premium Essay

Peace Domestic Violence

...They include an abstract, table of contents, specific aims/needs and problems assessment, target population, approaches and methods, long and short-term goals, process, outcome, and impact objectives, activity plans and scheduling, evaluation plan, agency capacity, and project management, and budget and budget justifications. By following the steps on writing a grant proposal, the writer is able to use that as a check off point to verify everything is written down pertaining to what funding agencies are looking for. The first part of a grant proposal is the abstract. This is a 45 line max summary of what the agency is about. The abstract section may be the shortest part of the proposal, but it is the most read, which makes it the most important of the whole proposal. With the abstract being the most important part of the whole proposal, it is vital that the writer be very vigilant and professional in writing out this portion. There are times that the person reading the proposal is not the main ones reviewing the proposal, so this part is mainly the only part that will been seen until it heads off to the final decision makers of the funding. Writing a Grant Proposal Pg. 3 The next step to grant proposal writing is the table of contents. This step should be no more than 2 pages max. This portion is considered a map for the funding agency to follow the structure of the proposal, and a checklist for the writer to follow....

Words: 1488 - Pages: 6

Premium Essay


...Coordination between the Military and Civilian Organisations: Issues and Solutions The work described in this document has been undertaken by the Human Factors Integration Defence Technology Centre, part funded by the Human Capability Domain of the U.K. Ministry of Defence Scientific Research Programme. © BAE Systems 2009 The authors of this report have asserted their moral rights under the Copyright, Designs and Patents act, 1988, to be identified as the authors of this work. Reference ...........................................HFIDTC/2/WP3.1.4/3 Version.................................................................................2 Date............................................................... 19th May 2009 © BAE Systems 2009. Issued by Aerosystems International Ltd on behalf of the HFI DTC consortium. The HFI DTC consortium consists of Aerosystems International Ltd, Cranfield University, Lockheed Martin, MBDA, SEA, Brunel University, Southampton University and the University of Birmingham HFIDTC/2/WP3.1.4/3 Version 2/ 19th May 2009 Authors Paul Salmon Daniel Jenkins Neville Stanton Guy Walker Brunel University Brunel University Brunel University Brunel University ii HFIDTC/2/WP3.1.4/3 Version 2/ 19th May 2009 Contents 1 1.1 1.2 1.3 1.4 1.5 1.6 Executive Summary ................................................................................... 1 Background and reasoning behind the work......

Words: 16056 - Pages: 65

Premium Essay

Cja W2

...Keishla M. Del Valle Marrero University of Phoenix CJA/394 - Contemporary Issues and Futures in Criminal Justice Week 2 December 22, 2014 Prof. Hector Garcia An organizational structure determines how the roles, power and responsibilities, controlled and coordinated, and how information flows between different levels of management are assigned. A structure depends on the objectives and strategy of the organization. In a centralized structure, the top layer of management has the most power of decision and has tight control over the departments and divisions, is where he takes the situation as a last resort for one last final word. In a decentralized structure, decision-making power is distributed and departments and divisions may have different degrees of independence. A company like Procter & Gamble sells multiple products can organize their structure so that the groups are divided according to each product and depending on the geographical area as well. Police organizations respond to the crime after it happens and in an organized manner starting with a routine patrol called in by radio where they visit the location reported for a possible intervention or arrest. In the division of tasks for the police first start with the patrol, then a call to action, intervention or arrest, investigation and then share the information which can all throw by one or more agents as simultaneously if it would be customer service outside the police offered by an agent according to...

Words: 1206 - Pages: 5