Dividends, Executive Compensation, and Agency Costs: Empirical Evidence from Germany

While researchers have found that dividend payout ratios are negatively related to executive compensation in North America, a relevant question remains as to whether such relationships hold in other institutional environments. Evidence from this study suggests that, as in North America, there is a negative relationship between dividend payout ratios and executive compensations in Germany. This study shows, that the role of dividends in resolving agency issues, is relevant not only in market based systems like that in North America but also in bank based systems like Germany. Agency issues also appear to be partially mitigated by the influence of banks. Bank influence is also found to be positively related to dividend payout ratio and thus consistent with the Free Cash Flow Hypothesis of Jensen (1986) and Easterbrook (1984).