1. business and industrial
2. company
3. earnings

Applied mathematics in Engineering, Management and Technology 2 (2) 2014:100-106
www.amiemt-journal.com
The Effect of Agency Costs on Dividend Policy: Evidence from
Tehran Stock Exchange
Ali Esmaeilzadeh Moghri
Department of Accounting, Eslamshahr Branch, Islamic Azad University, Eslamshahr, Iran
Corresponding Author Email: ali35091@yahoo.com
Abstract
Agency costs arise from issues such as conflict of interest between shareholders and
management. Shareholders want managers to direct the company so that increase
shareholder value, but managers may want to increase their personal power and
wealth, so increase this probability that managers adopt dividend policy less than
investors’ expectation. This may not be the best interests for shareholders. Therefore,
the main purpose of this study is to investigate the effect of agency costs on the
dividend policy of listed companies in Tehran Stock Exchange. For this purpose, a
sample of 140 companies during the 2006-2011 time spans was selected for this
study. The fixed effects method was selected using F-Limer and Hausman tests
among the common effects, fixed effects and random effects methods for model
estimation and hypothesis testing. The results have shown that there is significant and negative relationship between agency
costs and the company's dividend policy.
Keywords: agency costs, conflicts of interest, dividend policy.
1.Introduction
With growth and development of corporations over the last years and emergence and increase in some investors
who had no direct involvement in corporate governance, guided the company’s affairs and supervised them
through the board selection caused to the separation of ownership from management in corporations. So
between the owners (shareholders) and management created conflict of interest. Existence the conflicts of
interest between managers and shareholders could lead to the agency problems and issues that have costs based
on agency theory (Mojtahedzade, 2011). Usually, to reduce conflicts of interest and moral hazard problem,
shareholders should pay the costs of managers or representatives. Due to the increase in business relationships
and consequently forming agency relations, investors are skeptical that managers make decisions that will have
the best interest for them. Agency theory describes a condition in which management objectives is different
from the shareholders' objectives and also corporate governance mechanisms has not necessary efficiency,
managers do actions in achieving their goals that is not necessarily aligned with shareholders' objectives and
conflict of interest between managers and owners increases the risk of providing unreliable information.
While determining the main policy of company and monitor to its implementation is at the disposal of the board,
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but converting this policy to the administrative program of firm activity is in the range of managing director or
CEO options that eventually it is expected that all are aligned with the interests of owners. Thus, in addition to
lack of coordination between the interests of different shareholders that can affect on the macro-policies of
company, conflict of interest of executives and owners can also lead to the heterogeneity of the optimal policies
of owners and managers.
Therefore, dividend policy is considered one of the most important options and decisions facing managers.
Manager must decide under what conditions, how much profit is divided and how much is reinvested in the
form of retained earnings in the company (Baker and Powell, 2005).
Dividend is discussable from two very important aspects: in one side, dividend is effective factor on the
investments facing companies. Whatever more profit is divided, the company's internal resources will be less in
order to implement investment projects and need to outside financial resources of companies will increase
which this factor could have influence on company's stock price in the future. On the other hand, many
shareholders are demanding cash dividend. Therefore managers always (with the goal of maximizing
shareholder wealth) balance between different interests of shareholders so that do not loss the profitable
investment opportunities and also pay cash dividends required by some shareholders. So dividend decisions
which are made by corporate managers are very sensitive and important (Hashemi and Resaeian, 2009).
Thus according to the conflict of interest which exists between managers and shareholders and on the other hand
responsibility of making decisions about interest payment is for managers. This issue, what affect this conflict of
interest has on the making decisions about how and the amount of dividends paid to shareholders, cause to
present this research. Therefore, the main objective of this study is to investigate whether agency costs are
effective on dividend policy of listed companies in Tehran Stock Exchange?
2.Research Literature
Ghassan (2012) tested the effect of agency costs level on leverage policy and dividend of Oman companies. The
statistical sample is composed of 60 companies in the period 2011-2007. Free cash flow is considered as one of
the indicators of agency costs in this study. The results have shown that there is negative and significant
relationship between free cash flow with companies’ tendency to pay cash dividend.
Utami et al. (2011) in their study, studied the effect of agency costs arising from free cash flow, dividend policy
and leverage in Indonesia companies during the years 1994-2007. They also evaluated the difference between
the agency costs of the companies which pay dividends to shareholders and companies which do not pay
dividend regularly. The research findings showed that there is significant and negative relationship between free
cash flow, which is considered as one of the criteria of agency cost, with dividend policy. But there is positive
and significant relationship between financial leverage and dividend policy. While significant relationship was
not observed between the profitability, risk and firm size.
Berzins et al. (2013) investigated tax relations and agency relations in the dividend policy of the holding
companies. This research was studied during the time span 2006-2010. The results showed that there is
significant and positive relationship between free cash flow and firm size with dividend payment policy.
Boolaky and Krishansing (2009) investigated the effect of four proxies of agency costs on dividend policy in the
small Icelandic companies. The results have shown that there is significant relationship between free cash flow
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with companies’ tendency to pay dividend. But there was no significant relationship between three other proxies
of agency costs (ownership concentration, institutional ownership and financial leverage) with dividend policy.
Mitton (2004) in his study investigated the effect of corporate governance on dividend policy of 365 companies
from 19 Asian countries. Using agency models, he showed that companies with higher rate of corporate
governance will have higher dividend payment.
Pourheydari et al. (2009) studied dividend policy of Tehran Stock Exchange for the period 2001-2005. Research
findings have shown that companies of Tehran Stock Exchange have not stable dividend policy and the main
factor in determining the distribution level of profit is the net profit for the year.
Fakhari and Yousefali Tabar (2010) in their study investigated the relationship between dividend policy and
corporate governance. In this study, 125 listed companies in Tehran Stock Exchange were studied during the
years 2004-2007. Also corporate governance indicators in this research is calculated based on check list which is
divided into eight classes, disclosure, business ethics, regulatory requirements training, auditing, ownership,
board structure, assets management and liquidity. The results show that there is significant and negative
relationship between corporate governance indexes and dividend.
3.Research Method
3.1.Research Hypotheses
To investigate the effect of agency costs on dividend policy, the main research hypothesis is formulated to test as
follows:
3.2.The main hypothesis: There is significant relationship between agency costs and dividend policy.
3.3.Statistical Population and Sample
Statistical population of this study includes all the listed companies in Tehran Stock Exchange. The time period
of this study is six years from 2006 to 2011. To select the statistical sample, the following conditions are
considered:
1. The end of their fiscal year lead up to December 31, therefore comparability between them increases.
2. These companies are listed in Tehran Stock Exchange before the year 2006.
3. Their financial period has not changed during the studied period.
4. Needed information is available.
5. In order to information homogeneity, companies should be manufacturing and are not investing and financing
companies.
6. Dividends are divided in all investigated years.
So with the above conditions, 140 companies were selected to test the main research hypothesis.
The data used in this study was the actual data which has been extracted from the site of the Tehran Stock
Exchange (Note 1) and CDs of financial information of listed companies in Tehran Stock Exchange.
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3.4.The Methods of Data Analysis and Main Hypothesis Testing
The present study is application based on the purpose and is descriptive based on the nature. The regression
model in this study is multivariate. To estimate the research model is used panel data model. In this method,
time series and cross-sectional data are combined with each other and are used for those problems that cannot be
investigated as a time series or cross-sectional. Integration of cross-sectional and time series data and the need to
use it more is due to the increase the number of observations, increase the degrees of freedom, reduce
heteroscedasticity and reduce multicollinearity between variables. To estimate the efficiency of a regression
model using panel data, it is necessary that using appropriate tests is selected one of the common effects, fixed
effects and random effects models. Therefore, first to select between the common effects and fixed effects
models are used F-Limer test. If a fixed effect model is selected, the Hausman test is performed to choose
between fixed effects and random-effects models. If F-Limer test results confirm using the common effects
method, Hausman test is not necessary anymore and the model is estimated using a common effect method.
3.5.Research Variables and How They Are Calculated
In this study, the dividend policy is used as the dependent variable, the agency costs as the independent variable
and the dividend policy in the last year, return on assets, return on equity, financial leverage and firm size are
used as control variables. How to calculate each of the variables is as follows:
1. Dividend Policy (Dividend Payout Ratio): It is obtained by dividing the cash dividend per share on the net
profit after tax per share.
2. Agency Costs: In the study, an agency cost is considered as a function of interaction between free cash flow
and Tobin Q index.
Tobin Q Ratio: It is measured by dividing the total market value of equity and book value of total liabilities on
the book value of the company's total assets.
For each year, using the median of Tobin Q index, the sample companies are divided into two groups of higher
and lower from the median, and then we give zero to the companies which their Tobin Q index is higher than
median and number one is assigned to the second group.
Free Cash Flows: It is measured by the following equation:
−
−
=
−
In the above formula:
FCFit = free cash flow of firm i in year t.
OCFit = operating cash flows of firm i in year t.
Taxit = total payable tax of firm i in year t.
IntExpit = interest expense of firm i in year t.
CSDivit = dividends paid to common shareholders of firm i in year t.
PSDivit = dividends paid to preferred shareholders of firm i in year t.
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Salesit = Net sales of firm i in year t.
Multiplying these two factors (indexes of free cash flows and Tobin Q) in each other, independent variable
(agency cost) of the equation is obtained, as a result, higher said multiple result indicates higher agancy cost for
the company.
3. Return on Assets: It is acquired by net profit after taxe divided by total assets.
4. Return on Equity: It is measured by net profit after tax divided by total equity.
5. Financial Leverage: It is acquired by total debt divided by total assets.
6. Firm Size: It is measured natural logarithm of total assets of the company.
3.6.The Model used to Test the Main Hypothesis of Study
In this study, to test the main hypothesis of study is used the following model:
DPOit = b 0 + b1 AGENCY it + b 2 DPOit -1 + b 3 ROAit + b 4 ROE it + b 5 LEVit + b 6 SIZE it + e it
In this model:
DPOit = dividend policy of firm i in year t.
AGENCYit =agency costs of firm i in year t.
DPOit-1 = Dividend policy of firm i in year t-1.
ROAit = return on assets of firm i in year t.
ROEit = return on equity of firm i in year t.
LEVit = financial leverage of firm i in year t.
SIZE it = size of firm i in year t.
e it = residual component of model.
b 0 = Constant coefficient (the intercept) and b1 to b 6 = coefficients of the independent and control
(explanatory) variables.
4.Research Findings
4.1.Statistical Tests
As can be seen from the results of Table (1), p-value of F-limer statistic is equal to 0.000. As a result,
compilation data estimation method (common effect method) is rejected. Results obtained from the F-limer test
show that common effects methods is not suitable for estimating the regression models. Therefore Hausman test
is performed to select the right method for estimating. The p-value of Hausman test also indicates that fixed
effects method is more appropriate option to estimate the model.
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Table 1. Results of F-Limer test and Hausman test
Tests
Test Statistic
Degrees of freedom
P-value
Test result
F-Limer test
1.7357
139.528
0.0000
fixed effects method
Hausman test
155.3340
6
0.0000
fixed effects method
4.2.The Test Results of Main Research Hypothesis
The test results of the main research hypothesis for the entire investigated sample during the period 2006-2011
based on fixed effects estimation method are presented in Table (2).
One research hypothesis states that there is no significant relationship between agency costs and corporate
dividend policy. As can be seen from the results of Table 2, there is negative (-0.0658) and significant (0.0583)
relationship between agency costs (AGENCY) and corporate dividend policy (DPO) at error level less than 10%.
Therefore, the main research hypothesis is confirmed in border.
Among the research control variables, significant and positive relationship was observed between the variables
of previous year's dividend policy (DPOt-1), return on assets ratio (ROA) and return on equity ratio (ROE) with
dividend policy (DPO) at error level less than 1%. But there is significant and negative relationship between the
variables of financial leverage (LEV) and firm size (SIZE) with dividend percentage of companies (DPO) at
error level less than 1%.
Table 2. Test Results of the Main Research Hypothesis
Variables
Coefficient
t-statistics
Sign.
Constant
1.9786
11.8711
0.0000
AGENCY
DPOt-1
ROA
ROE
LEV
-0.0658
0.0803
0.3384
0.0239
-0.1824
-1.8972
2.7075
5.2552
4.4996
-4.4133
0.0583
0.0070
0.0000
0.0000
0.0000
-0.1051
-8.5758
0.0000
SIZE
Adjusted R
2
0.9120
F-statistics
48.9979
Prob(F-statistic)
0.0000
Durbin-Watson
2.1982
Given to the adjusted R2 value in Table (2) can be expressed that over 91% of changes in dividend policy of
companies (the dependent variable are explained by independent and control variables of study. P-value of
F-statistic for the research regression model is equal to 0.0000 and indicates that the regression model is
significant in general. Durbin-Watson statistic for the present study is equal to 2.1982 and since that this value is
between 1.5 and 2.5, we can express that the residual values of the model was accidental and hypothesis of
existence of autocorrelation between variables is rejected.
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5.Conclusions
Present study investigates the effect of agency costs on dividend policy of companies. The statistical universe of
this study is all companies which have been listed in Tehran Stock Exchange from the beginning of 2006.
Among the companies member of the universe, 140 companies that were eligible for the study randomly
selected as statistical sample to test the main hypothesis.
In the present study, variable of agency costs (AGENCY) is considered as the independent variable and
dividend policy as the dependent variable. To determine the appropriate method for estimating the regression
model and hypothesis testing was used F-limer test and Hausman test, that in both tests, the fixed effects method
was chosen to estimate the model.
The test result of research hypothesis indicates that there is significant and negative relationship between agency
costs and companies' dividend policy. That is, whatever the conflict of interest between managers and
shareholders is less, companies follow more dividend payment policy and vice versa. The obtained results is
consistent with the research results of Ghassan (2012) and Utami et al. (2011). But they are contrary to the
research result of Berzins et al. (2013).
References
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Notes
Note 1. www.irbourse.com.
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