Why do firms with more-diverse shareholder bases typically pay higher dividends than private firms or public firms with more concentrated ownership structures? How are fixed dividends used as a bonding (commitment) mechanism by managers of firms with dispersed ownership structures and large amounts of free cash flow? An agency cost is an economic concept that relates to the cost incurred by an entity (such as organizations) associated with problems such as divergent management-shareholder objectives and information asymmetry. The agency cost/contracting model assumes that dividend payments arise as an attempt to overcome the agency problems that result when there is a separation of corporate ownership and control. In privately held companies with tight ownership coalitions, there is little or no separation between ownership and control. Because agency problems in these firms are minimal, dividends are unnecessary. Even after a company goes public, it rarely commences dividend payments immediately because ownership tends to remain quite concentrated for a number of years
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Dividend, Privately held company, Agency cost, Principal-agent problem