Mandatory Dividend, Agency Problems, and Corporate Investment

In this paper we try to better understand the adverse consequences of mandatory dividend rules. We identify two main reasons why firms may pay only the mandatory minimum dividend: financial constraints and private benefits. We also argue that the consequences of these rules for firms should depend on the reasons behind their choice to pay only the minimum dividend. Using a sample of publicly traded Brazilian companies and multivariate regressions, we found evidences that firms that pay only the minimum dividend are motivated by financial constraints and private benefits. Further, and consistent with our expectations, firms that pay only the mandatory minimum dividend due to financial constraint considerations tend to have a higher value attached to their cash holdings and tend to reduce investments more intensely in response to a shock that increases the cost of external finance. Thus, we concluded that mandatory dividend rules adversely affect some firms and that more flexible rules should be considered