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.