اثر واسطه گر پرداخت سود سهام بر رابطه بین حکومت داخلی و جریان نقدی آزاد The mediating effect of dividend payout on the relationship between internal governance and free cash flow

1. Introduction How firms limit their free cash flow (FCF) in the face of low investment opportunities is one of the most important research topics in financial economics. This is the case because low investment opportunities can distort the efficient allocation of internal funds and destroy firm value. When firms have limited investment opportunities, cash holdings are largely at risk of being diverted by managers in projects that benefit them personally, thereby damaging the interests of shareholders (Easterbrook, 1984; Jensen, 1986; Dittmar et al., 2003). The FCF hypothesis of agency theory suggests that excess cash reserves increase managerial discretion and provides managers with the incentive to pursue their own interests. The problem stems from self-serving managers who divert cash flow to benefit themselves at the expense of shareholders. Myers and Rajan (1998) suggest that managers tend to retain more private benefits from liquid assets, and Byrd (2010) argues that FCF is available to managers for discretionary purpose. Opler et al. (1999) highlight managers’ preference for the control that comes with holding high levels of cash reserves. Apart from using FCF to invest in projects with negative net present value (NPV), Kadioglu and Yilmaz (2017) suggest that managers tend to make unnecessary expenditures that benefit themselves at the expense of shareholders’ interests. According to Labhane and Mahakud (2016), the excess amount of FCF in the hands of managers increases the agency cost, as they are free to use these financial reserves for their own interests. To avoid any wasteful expenditure, shareholders of such firms monitor the activities of managers. These monitoring activities increase the firm cost of monitoring and hence increase the agency cost. One of the ways to reduce the FCF problem is to pay out more of these substantial cash flows as dividends (Fairchild, 2010). Agency theory suggests that outside shareholders prefer dividends to retained earnings because insiders might squander cash retained within the firm (Easterbrook, 1984; Jensen, 1986; Myers, 2000). Distributing cash to shareholders reduces the chance that the managers may use the available resources inappropriately (Jensen, 1986; Lang and Litzenberger, 1989). Kadioglu and Yilmaz (2017) argue that dividends help check managers and create a discipline mechanism without the direct intervention of shareholders. In parallel, studies in finance suggest that payouts lower retained earnings and hence increase the need of managers to go to financial markets to raise funds, where monitoring is offered at lower costs. (Easterbrook, 1984; Jensen, 1986; La Porta et al., 2000; DeAngelo et al., 2006; Denis and Osobov, 2008; Guizani, 2014). To the extent that external financial markets play a monitoring role, they presumably reduce managers’ incentives to engage in wasteful consumptions.