Knowledge that Transforms

This paper analyzes the joint impact of the interest rate volatility and debt on firm investment. We derive an investment model taking account of the risk attitude of the owners of the firm. Using a panel of Dutch listed firms in the period of 1984–1995, we find that the cross-effect of the interest rate volatility and debt on investment is positive. This effect is more important for highly indebted firms than for less-indebted firms. The results are robust to different measures for the interest rate volatility. We interpret this finding by the tradeoff between the effect of the interest burden and the effect of debt revaluation.

External agents are frequently characterized as necessary for efficiency in team production settings. At the same time, these agents must be constrained from opportunistically exercising their enforcement capabilities. I argue that collective action costs and formal institutions (e.g., golden parachute agreements) can act as substitute factors in producing this constraint. The incidence of golden parachutes in a sample of S&P 500 firms is consistent with this conjecture: golden parachutes are more likely in firms with concentrated ownership. Interpreted in this light, golden parachutes enhance efficiency by increasing the credibility with which owners can commit against opportunism.

This paper examines the relatively neglected link between dividend policy and institutional ownership. It is also the first example of using well-established dividend payout models to examine the potential association between ownership structures and dividend policy. Moreover, the paper presents the first results for the UK, where the institutional framework and ownership structures are different from those of the US. Using a UK panel data set, the role of institutional ownership in association to dividend payout ratios is analysed within the context of the dividend models of Lintner [American Economic Review, 46 (1956) 97], Waud [Journal of the American Statistical Association, 1996] and Fama and Babiak [Journal of the American Statistical Association, 63 (1968) 1132]. The results consistently produce strong support for the hypothesis that a positive association exists between dividend payout policy and institutional ownership. Furthermore, the results for an earnings trend model suggest a positive earnings trend component to the association between institutional ownership and the dividend payout ratio. In addition, there is some evidence in support of the hypothesis that a negative association exists between dividend payout policy and managerial ownership.