The payment of cash dividend may help to minimize possible conflicts of interest between managers and shareholders, and between managers and holders of the firm’s debt

In general, the managers may pursue selfish strategies if the firm has plenty of cash flow. So, dividends can reduce agency costs by reducing cash flows and serving as a discipline mechanism on management.With large dividends, the firm may fall short of cash to invest in profitable new project. Then another way to make fund is debt, so holders of the firm’s debt might also want large ??dividends?? to make the managers to be disciplined.This is so called ‘free-cash flow’ hypothesis. Empirical study by Lang & Litzenberger (1989) said that ‘the larger effect of dividend changes on firms with lower Q is consistent with the free-cash flow hypothesis’ (Allen, Michaely, 1995) UnclearFirms which pay large dividend will continuously go to capital markets to raise funds, then the firms are under regular scrutiny and monitor by financial markets and outside supplier of capital. These processes reduce agency costs How?, in other words, conflict of interest between shareholder and manager. Eventually large dividend increase investor’s wealth.But the survey of executives (Brav A et al, 2004) said that ‘Most executives are adamant that discipline is not imposed by payout policy’. And this argument was supported empirically by the survey evidence.If the firm’s ownership is concentrated monitoring cost is relatively low, otherwise the ownership is dispersed the agency cost is relatively high. So, the firms with lower concentrations of ownership, or a relatively larger number of shareholders, will have higher dividend payouts as a monitoring method. This hypothesis is supported by empirical evidence.A basic discussion of the shareholder- manager conflict and the role of dividend policy, However, the discussion of the manager or shareholder versus bondholder conflict and the role dividend policy can play to mitigate its effects have been completely omitted from the essay. A good use of La Porta et al. (2000) in the discussion of the shareholder- manager conflict and the role of dividend policy would also have improved upon the quality of the essay.