The effect of dividend policy on agency costs and the contribution to corporate governance

Developments around the world and in Turkey have created an increasingattention to the corporate governance. The basic problem corporate governance tries tosolve is the agency problem and agency costs caused by the separation of ownershipand control. Corporate governance is a system of mechanisms that determines therelationships, authorities and responsibilities among shareholders, management andboard of directors. Its goal is to minimize the agency costs created by the conflicts ofinterest between insiders and outsiders. Minimization of the agency costs, in turn,contributes to the fundamental objective of the firm, maximization of the shareholders?wealth.Turkey has been described as an insider system. Concentrated ownershipstructures, cross and pyramidal shareholdings are very common. The largestshareholders and families own more than half of the publicly traded corporations. Stockmarket is not well enough developed and few companies are listed.Different corporate governance mechanisms could be effective in differentsystems. In this study, after reviewing these mechanisms briefly, dividend policies havebeen evaluated in detail and its effectiveness has been discussed.Increases in dividend payments decrease the agency costs while increasing thetransaction costs. Firms determine their optimum dividend payment rates based onthese two cost structures, which move in the opposite directions. Optimum dividendpayment rate is the rate that minimizes the sum of the agency costs and the transactioncosts.In this study, dividend policies of listed corporations in Istanbul Stock Exchangehave been tried to be determined according to the cost minimization approach. Whetherrelationships between dividend payment rates and agency cost-transaction cost proxiesare in the expected directions has been tested by the multiple regression analysis.Results indicate that dividend policies are functions of agency costs andtransaction costs. Dividend payments are used to mitigate agency costs, but this causesan increase in the transaction costs. In general terms, dividend payments contribute tothe corporate governance by mitigating agency costs.