Corruption, agency costs and dividend policy: International evidence

In this paper, we argue that corruption is likely to increase agency costs of equity, hence shareholders have higher incentives to control managers. When corruption is higher, firm managers need to use firm resources to make unofficial payments and they tend to take this opportunity to expropriate shareholders. Consequently, shareholders recognizing this risk need to force managers to pay more dividends in order to mitigate the agency problem. This paper examines the effects of corruption on dividend decisions in the light of agency theory. With a sample of 205,316 observations from 47 countries, we find that corruption is positively related to both the decision to pay dividends and payout ratio. Moreover, this relationship is stronger under strong creditor protection.