Governance and Payout Precommitment

Abstract

We examine how firms structure payout and debt commitments to address governance weaknesses. Firms with severe agency conflicts precommit through a combination of dividends and debt or through dividends rather than debt alone. Such firms also shift their shareholder payouts towards regular quarterly dividends – a stronger commitment than special dividends or repurchases. Although dividend commitments are implicit, event study evidence supports their credibility and value-relevance for firms with weak governance. Despite harsher penalties, debt alone cannot replace shareholder payouts as a means of addressing managerial agency conflicts.

Keywords: precommitment, payout, debt–dividend tradeoff, corporate governance

JEL Classification: G30, G35, G32, G34