Measurement of Impact Agency Costs Level of Firms on Dividend and Leverage Policy: An Empirical Study

Abstract

Dividend policy is one of the most important areas in finance literature. This is known as ‘dividend puzzle’ in finance literature. One explanation is that dividends help address agency problems between managers and outside investors. The agency problem analysis arises from managers’ incentives to consume private benefits, e.g., building their empires by investing free cash flows in negative net present value projects or spending cash on perquisites. Thus, dividends alleviate this problem by reducing free cash flows available to managers. This paper examines dividend policy of industrial firms and chose sample 60 industrial firms listed Amman Stock Exchange from 2007 to 2011 in order to test the free cash flow hypotheses. Based on the regression analysis shows a negative and statistically significant effect of free cash flow on dividend, while for a positive and significant effect of free cash flow on leverage. when examine the effect of risk, leverage, growth opportunity, free cash flow, size, retained earnings to book value of equity and profit as the measurement level of agency costs present in firms for testing the impact of agency cost on dividend policy Specifically, the free cash flow has negative influences but leverage and profitability variables appear to have positive influences on dividend payouts of Jordan firms

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