Farrer, Jonathan --- "Australia's Dividend Laws: The Case for Mandatory Disclosure of the Dividend Decision" [1998] SydLawRw 2; (1998) 20 (1) Sydney Law Review 42
[*] BCom (Hons), LLB (Hons), University of Melbourne; Arthur Robinson & Hedderwicks, Melbourne. An earlier draft of this article was submitted as part of the coursework for a Bachelor of Laws degree in the Faculty of Law at the University of Melbourne. I am indebted to Professor Ian Ramsay and Dr Geof Stapledon of the Faculty of Law for their assistance and thoughtful comments on earlier drafts of this article.
[1] Australian Stock Exchange (ASX) data indicates that domestic market capitalisation was $392.8 billion on 31 December 1996, and the average dividend yield was 3.7 per cent: ASX Fact Book (1997). This suggests that total dividend payments by Australian listed companies are in the vicinity of $14 billion.
[2] Throughout this article references to “managers” may be taken to include directors and executive officers of the company.
[3] Re Spanish Prospecting [1910] UKLawRpCh 125; [1911] 1 Ch 92 at 98 per Fletcher Moulton LJ; confirmed in QBE Insurance Group Ltd v ASC (1992) 8 ACSR 631 at 645 per Lockhart J.
[4] In relation to dividends leading to the company being unable to pay debts, see Hilton International Ltd v Hilton [1988] NZHC 605; [1989] 1 NZLR 442. Various provisions of the Corporations Law, such as ss588G and 588M, may also be contravened. Section 201(2) Corporations Law states that a breach of section 201(1) may lead to civil or criminal penalties for directors or executive officers, and Re City Equitable Fire Insurance Co Ltd [1925] 1 Ch 407 suggests that the dividend may need to be repaid to the company in such a case. Section 232(4), which requires directors to act with care and diligence in discharging their duties, may also be contravened.
[5] Industrial Equity Ltd v Blackburn [1977] HCA 59; (1977) 137 CLR 567 at 572.
[6] Brookton Co-operative v FCT [1981] HCA 28; (1979) 147 CLR 441 at 455 per Mason J.
[7] Arjunan, K and Low, CK, “Dividends: A Comparative Analysis of the Provisions in Hong Kong and Australia” (1995) 5 Australian J of Corp L 455 at 457, say that given the importance of dividends in finance and corporate law, it is an anomaly that they are only marginally regulated. The importance of dividend policy is discussed in Section 3.
[8] An example is the introduction of continuous disclosure provisions in the Corporations Law.
[9] Ford, H, Austin, RP and Ramsay, IM, Principles of Corporations Law (8th ed, 1997) at 749–50. This issue usually arises in the context of shareholders attempting to force higher dividends on the ground that management has retained more profits than it needs to run the business. For example, the courts in Re G. Jeffrey (Mens Store) Pty Ltd (1984) 9 ACLR 193 and Thomas v HW Thomas (1984) 2 ACLC 610, both refused to find the declaration of low dividends oppressive.
[10] See Section 4 below.
[11] See above n9 and accompanying text.
[12] See Section 3C below.
[13] See Section 4 below.
[14] Perfect capital markets are a theoretical economic concept and assume zero transaction costs, no taxes and equal and costless access to information: see Miller, M and Modigliani, F, “Dividend Policy, Growth, and the Valuation of Shares” (1961) 4 J of Business 411.
[15] Black, F, “The Dividend Puzzle” (1976) 2 J of Portfolio Management 5, states that cutting dividends is the lowest cost source of funds available to a company.
[16] Agency costs refer to divergences between the interests of various stakeholders in a company which result in a reduction of the company’s total value. See Jensen, M and Meckling, W, “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure” (1976) 3 J of Financial Econ 305 at 308.
[17] Easterbrook, F, “Two Agency-Cost Explanations of Dividends” (1984) 74 Am Econ R 650. Empirical support for this agency argument comes from Dempsey, S and Laber, G, “Effects of Agency and Transaction Costs on Dividend Payout Ratios: Further Evidence of the Agency- Transaction Cost Hypothesis” (1992) 15 J of Financial Research 317.
[18] Empirical studies show that dividends are indeed one mechanism for reducing agency costs and excess “free cash flow”, see n30 below. For example, Rozeff, M, “How Companies Set Their Dividend-Payout Ratios”, in Stern, J and Chew, D, The Revolution in Corp Finance (1986) 320 at 325, found that dividends are 5 per cent higher for companies where there is virtually no inside ownership, and therefore relatively great potential for agency conflicts, relative to companies with 50 per cent inside ownership.
[19] Moh’d, M, Perry, L and Rimbey, J, “An Investigation of the Dynamic Relationship Between Agency Theory and Dividend Policy” (1995) 30 Financial R 367.
[20] Some shareholders may still favour retention of earnings, particularly those in the top marginal tax rate who purchased their shares prior to the introduction of capital gains tax in 1985.
[21] Nicol, R, “The Dividend Puzzle: An Australian Solution?” (1992) 1:4 Australian Accounting R 42.
[22] These type of liquidity problems can be largely overcome if the company operates a dividend reinvestment plan: see below n112.
[23] The asymmetric information argument assumes that managers are more likely to know what the company’s future prospects are likely to be than the external market. See Miller, M and Rock, K, “Dividend Policy Under Asymmetric Information” (1985) 40 J of Finance 1031.
[24] Barclay, M, Smith, C and Watts, R, “The Determinants of Corporate Leverage and Dividend Policies” (1995) 7:4 J of Applied Corp Finance 4 at 11.
[25] Woolridge, R and Ghosh, C, “Dividend Cuts: Do They Always Signal Bad News?”, in Stern and Chew, above n18, 327 at 336.
[26] Barclay, Smith and Watts, above n24, 12.
[27] Ibid.
[28] For Australian evidence see Easton, S, “Earnings and Dividends: Is There an Interaction Effect?” (1991) 18 J of Business Finance and Accounting 255. For evidence from the United States see Kane, A, Lee, Y K and Marcus, A, “Earnings and Dividend Announcements: Is There a Corroboration Effect?” (1984) 39 J of Finance 1091. Other US studies have found that dividends do not convey a signal, or convey only a small signal, about future earnings: eg, Leftwich, R and Zmijewski, M, “Contemporaneous Announcements of Dividends and Earnings” (1994) 9 J of Accounting, Auditing and Finance 725.
[29] Carroll, T, “The Information Content of Quarterly Dividend Changes” (1995) 10 J of Accounting, Auditing and Finance 293.
[30] Jensen, M, “Agency Costs of Free Cash Flow, Corporate Finance and Takeovers” (1986) Am Econ R 323, defines “free cash flow” as the excess of that cash required to fund all positive net present value (NPV) projects when discounted at the relevant cost of capital. In other words, the company has too much cash on hand to fully invest that cash in profitable projects.
[31] See Woolridge and Ghosh, above n25 at 328. Mougoué, M and Mukherjee, T, “An Investigation into the Causality Among Firms’ Dividend, Investment, and Financing Decisions” (1994) 17 J of Financial Research 517, found evidence of interdependencies between investment, dividend and financing decisions. The authors argue that information asymmetries and the resultant signalling implications make a company’s investment decision dependent on its dividend decision. This link between the investment and dividend decisions provides support for the investment opportunities signal.
[32] Empirical findings showing that dividend reductions tend to be followed by significant increases in corporate earnings support this view: Jensen, G and Johnson, J, “The Dynamics of Corporate Dividend Reductions” (1995) 24:4 Financial Management 31.
[33] Myers, S, “The Capital Structure Puzzle” (1984) 39 J of Finance 575.
[34] Ibid. Empirical support for this type of signalling comes from Ofer, A and Siegel, D, “Corporate Financial Policy, Information, and Market Expectations: An Empirical Investigation of Dividends” (1987) 42(4) J of Finance 889.
[35] Denis, D, Denis, D and Sarin, A, “The Information Content of Dividend Changes: Cash Flow Signaling, Overinvestment, and Dividend Clienteles” (1994) 29(4) J of Financial and Quantitative Analysis 567; Yoon, P S and Starks, L, “Signaling, Investment Opportunities, and Dividend Announcements” (1995) 8 R of Financial Studies 995. Cf Lang, L and Litzenberger, R, “Dividend Announcements: Cash Flow Signalling Versus Free Cash Flow Hypothesis?” (1989) 24 J of Financial Econ 181.
[36] Woolridge and Ghosh, above n25 at 336. Also see Jensen and Johnson, above n32.
[37] Ibid. Woolridge and Ghosh explain this result on the basis that the announcement of a dividend cut creates enormous uncertainty among investors, and the market responds initially by assuming the worst.
[38] Evidence on the market’s ability to differentiate between these signals is presented in Section 3C(d) below.
[39] Woolridge and Ghosh, above n25 at 337.
[40] These were the 119 companies contained in Australia’s Top 100 Listed Companies, Australian Stock Exchange Limited (1996). This ASX publication contains a description of each of the three indices used.
[41] Carroll, above n29.
[42] See n112 for a discussion of dividend reinvestment plans.
[43] The sample period covered four years (1992–1995) and there were 119 companies in the sample. Therefore, if each company had changed its dividend in each of the four years, there would have been 476 observations in the sample. There were 140 observations in the sample, so in 336 cases dividends remained unchanged (or there was less than a 0.2 cent per share change).
[44] A 1 per cent level of significance implies that there is less than a 1 per cent chance in erroneously assuming there is a positive relationship between these variables.
[45] For example, the return on the announcement date, Do, would be ln (Do / D-1), where: ln = the natural logarithm; Do = the last sale share price for the company on the announcement date; and D-1 = the last sale share price for the company one day prior to the announcement date.
[46] “Correct” signals were defined earlier in this section.
[47] For an outline of the t-tests and z-tests used, see Hamburg, M, Statistical Analysis for Decision Making (5th edn, 1991) at 339–56.
[48] Id at 312–3. The null hypothesis represents the status quo, and assumes there is no relationship between variables (in this case between correct signals and incorrect signals) unless convincing evidence to the contrary is proved, namely a statistically significant relationship between the variables.
[49] Support for the possibility of (wrongly founded) information leakage comes from Table 1, which showed a 2.27 per cent return for D–2 where dividends were cut and the signal was correct.
[50] Table 1 shows that there were 21 dividend reductions in the sample.
[51] Section 5D tests whether Australian companies make voluntary disclosure in relation to the dividend decision. However, the finding that the Australian market cannot distinguish between the two alternative dividend signals in itself suggests that companies are not voluntarily disclosing sufficient information, because voluntary disclosure should reduce signalling ambiguity.
[52] The payout rate refers to total dividends divided by total earnings.
[53] Note that an efficient market will not be duped by cosmetic changes to dividends per share (DPS), but will instead be concerned with changes in the total dividend paid by the company.
[54] See below n78 and accompanying text.
[55] Jensen and Meckling, above n16 at 312–313.
[56] Finance theory suggests that the acceptance of positive NPV projects always improves shareholder wealth and the acceptance of negative NPV projects will always reduce shareholder wealth: Bishop, S, Crapp, H, Faff, R and Twite, G, Corp Finance (3rd edn, 1993) at 221.
[57] Myers, above, n33.
[58] Note that empire building in the form of internal growth will be subject to few regulations. Contrast this with the active role taken by the Australian Competition and Consumer Commission in assessing external growth via takeovers. For this reason, managers may prefer to expand by internal growth.
[59] Dodd, P, “Merger Proposals, Management Discretion and Stockholder Wealth” (1980) 8 J of Financial Econ 105 at 134, found a significantly negative market reaction for acquirers on the announcement of the takeover. Jarrell, G and Poulson, A, The Returns to Acquiring Firms in Tender Offers” (1989) 18:3 Financial Management 12 at 13, found that in the 1980s there were negative returns to acquirers, although these were not significant. Cf Bishop, S, Dodd, P and Officer, R, Takeovers: The Australian Evidence (1987) CIS Policy Monograph 12, Centre for Independent Studies, St Leonards, who found that on average bidder returns were in fact positive after a takeover. However, Bishop, Dodd and Officer warn that this may be partly due to the fact that bidders typically performed well up to and during the takeover period.
[60] Fischel, D, “The Law and Economics of Dividend Policy” (1981) 67 Virginia LR 699 at 712.
[61] Ibid.
[62] Smith, C and Watts, R, “The Investment Opportunity Set and Corporate Financing, Dividend, and Compensation Policies” (1992) 32 J of Financial Econ 263 at 264; Defina, A, Harris, T and Ramsay, I, “What is Reasonable Remuneration for Corporate Officers? An Empirical Investigation Into the Relationship Between Pay and Performance in the Largest Australian Companies” (1994) 12 Company and Securities L J 341 at 351.
[63] See Holthausen, R, Larcker, D and Sloan, R, “Annual Bonus Schemes and the Manipulation of Earnings” (1995) 19 J of Accounting and Econ 29 at 37–40.
[64] Bishop, Dodd and Officer, above n59, found the average takeover premium for target shareholders to be 21 per cent. Anecdotal evidence suggests that this figure is still accurate, because recent takeover premiums have been between 10 per cent and 30 per cent: Murrill, M, “Takeovers to Top $5.9 Billion”, Age, 3 June 1996 at C10.
[65] This type of conflict will also apply to partly paid shares issued to executives as part of their remuneration package. Defina, Harris and Ramsay, above n62 at 350, discovered that in their sample of CEOs, 27 per cent held options and 12 per cent held partly paid shares in their company. On average, they found that CEOs received 13.8 per cent of their total remuneration in the form of share-related rewards or contingent compensation: 350, 353.
[66] In practice the share price will, on average, only fall by 0.8 cents for every additional cent of dividends paid: Brown, P and Clarke, A, “The Ex-Dividend Day Behaviour of Australian Share Prices Before and After Dividend Imputation” (1993) 18:1 Australian J of Management 1. This is predominantly caused by the inability of some investors to utilise tax credits under Australia’s dividend imputation system.
[67] Lambert, R, Lanen, W and Larcker, D, “Executive Stock Option Plans and Corporate Dividend Policy” (1989) 24 J of Financial and Quantitative Analysis 409 at 409; Smith and Watts, above, n62 at 264. Cf DeFusco, R, Zorn, T and Johnson, R, “The Association Between Executive Stock Option Plan Changes and Managerial Decision Making” (1991) 20:1 Financial Management 36 at 41, who found that the adoption of these plans led to increased dividend payout ratios. Note that this conflict of interest problem can be largely overcome by staggering the exercise dates of options over several years.
[68] Note that in the first two studies listed in n67, the long-term price suppression would have outweighed any short-term dividend increases which boost the share price, if they in fact existed. The effect dividends have on option prices has not been shown empirically using a model incorporating the impact of signalling.
[69] A recent Towers Perrin survey found that 63 per cent of companies have some form of longterm executive incentive plan which rewards executives with a combination of options, shares or cash: Lawson, M, “Half Our Share Schemes Not Linked to Performance”, Australian Financial R, 14 June 1996 at 17.
[70] Defina, Harris and Ramsay, above n62 at 350, show that increases in the value of CEO shareholdings often exceed their other remuneration. This suggests that CEOs personal wealth is highly sensitive to the company’s share price, so there are strong incentives for false signalling.
[71] Fischel, above n60 at 714.
[72] Ibid.
[73] See above n64.
[74] These contracts provide for generous termination payments for managers in the event of a takeover.
[75] Smith and Watts, above n62 at 264.
[76] Section 5G(a) recommends the use of statements about the company’s dividends in the annual report.
[77] See n16 above.
[78] The second reading speech to the Corporate Law Reform Bill (No 2) 1992 stated that “disclosure of relevant information about an investment and access to such information, either directly or through advisers, is necessary to ensure an equitable and efficient investment system”: Second Reading Speech, Corporate Law Reform Bill (No 2) 1992, 26 November 1992, cited in Blair, M and Ramsay, I, “Mandatory Corporate Disclosure Rules and Securities Regulation”, in Walker, G and Fisse, B (eds), Securities Regulation in Australia and New Zealand (1994) at 264. Also see The Role of the Australian Stock Exchange and its Listing Rules, ASX Discussion Paper, October 1990, which outlined similar objectives for the Australian Stock Exchange.
[79] Fischel, above n60 at 713.
[80] Id at 719.
[81] McCabe, B, “The Information Effects of Takeovers” (1992) 2 Australian J of Corp L 202 at 205; Fischel, above n60 at 719. Blair and Ramsay, above n78 at 265, state that there is already a significant amount of voluntary disclosure by managers.
[82] McCabe, above n81 at 205.
[83] Coffee, J, “Market Failure and the Economic Case for a Mandatory Disclosure System” (1984) 70 Virginia LR 717 at 722. There may, however, be incentives for individuals to undertake research themselves in order to trade on the information: Blair and Ramsay, above n78 at 273–4.
[84] Fischel, above n60 at 720.
[85] Dechow, P and Sloan, R, “Executive Incentives and the Horizon Problem: An Empirical Investigation” (1991) 14 J of Accounting and Econ 51, show this in relation to the level of research and development (R&D) investment.
[86] Lev, B, “Disclosure and Litigation” (1995) 37:3 California Management R 8 at 25.
[87] Id at 24.
[88] Brudney, V, “Dividends, Discretion and Disclosure” (1980) 66 Virginia LR 85 at 119.
[89] See Section 3C(d) above.
[90] Many studies have found that current earnings contains significant information about future earnings: see, for example, Ball, R and Brown, P, “An Empirical Evaluation of Accounting Income Numbers” (1968) 6 J of Accounting Research 159. Kane, Lee and Marcus, above n28, argue that investors may be interested in the consistency of these two signals.
[91] Australia’s Top 100 Listed Companies, Australian Stock Exchange Limited (1996) was used to obtain EPS and DPS data for these companies, above n40. Whilst the same companies were used, this testing involved a different sample of observations from the testing conducted in Section 3C(d) above.
[92] ERA Annual Report (1993) at 5.
[93] ERA Annual Report (1995) at 4.
[94] The data used in this study was based on ASX definitions of dividend per share (adjusted) and earnings per share (adjusted). Dividends per share (adjusted) was defined as the historical rate of dividends per share adjusted for capital changes. Earnings per share (adjusted) was calculated by adjusting the earned ordinary profit figure for additional profit due to any notional capital conversion, then dividing by weighted average capital. Historical values were diluted for share issues. See Australia’s Top 100 Listed Companies, Australian Stock Exchange Limited (1996) at 139.
[95] For example, AGL’s 1992 Annual Report showed DPS to be unchanged at 14 cents. However, elsewhere in the annual report it was suggested that total dividends increased from $30 million to $37 million due to a 1:5 rights issue. This meant that the adjusted DPS figure for 1992 should have been greater than 14 cents. The reform proposal outlined in Section 5G of this article suggests that EPS and DPS should be defined in legislation to ensure uniformity among companies.
[96] Fischel, above n60 at 721.
[97] This is supported by the empirical results of this study. Section 3C(d) showed that whilst there was a strong correlation between current earnings and dividends, there was also a correlation between current dividends and future earnings. This suggests that the dividend signal is not fully impounded into share prices immediately. Also see Carroll, above n29, who showed that dividends were useful predictors of earnings for the subsequent five quarters.
[98] Blair and Ramsay, above n78 at 277.
[99] See n9 and accompanying text.
[100] See Section 5G below.
[101] For definitions of “incorrect” and “ambiguous” dividend signals, see Sections 3C(d) and 5D respectively above.
[102] Brudney, above n88 at 119. Also see Section 3C(e) above.
[103] See, in particular, Section 5A for an overview of the benefits of disclosure.
[104] See s1001B Corporations Law.
[105] Mitra, D and Owers, J, “Dividend Initiation Announcement Effects and the Firm’s Information Environment” (1995) 22(4) J of Business Finance and Accounting 551.
[106] See ss283A–C Corporations Law.
[107] SEC v Texas Gulf Sulphur Co 401 F 2d 833 (2d Cir 1968); 394 US 976 (1969): see Fischel, above n60 at 721–2.
[108] Fischel, above n60 at 721–22.
[109] Huie, MC, “Antitrust and Corporate Dividend Policy: Revising Dividend Payment Policies to Empower Shareholders to Curb Mergers and Acquisitions” (1993) 25 St Mary’s L J 243 at 248.
[110] La Porta, R, Lopez-de-Silanes, F, Shleifer, A and Vishny, R, “Agency Problems and Dividend Policies Around the World” (unpublished manuscript, November 1997) at 11–12.
[111] Id at 12.
[112] Above n109 at 250. Huie’s argument that allowing retention of earnings will lead to cashed up companies and an M&A (takeover) frenzy may be true, but this is not necessarily detrimental; takeovers have created significant wealth in Australia and the United States: see Farrer, J, “Reforming Australia’s Takeover Defence Laws: What Role for Target Directors?” (1997) 8 Australian J of Corp L 1.
[113] Goshen, Z, “Shareholder Dividend Options” (1995) 104(4) Yale LJ 881 at 903.
[114] DRPs have become extremely popular for Australian listed companies over the past decade. DRPs allow shareholders to elect to receive all or part of their dividends in the form of additional shares in the company, rather than in cash. However, in contrast to Goshen’s 100 per cent payout proposal, Australian companies with DRPs generally have a payout rate close to 70 per cent: Nicol, above n21 at 48.
[115] See Section 3A above.
[116] Goshen, above n113 at 917.
[117] Ibid.
[118] See n30 for a definition of “free cash flow”. Given that DRP participation rates are usually about 45–50 per cent, and assuming that this rate would not change significantly under Goshen’s proposal, the “cash payout rate” under Goshen’s proposal is likely to be at least 50 per cent of earnings. This is higher than the effective payout rate for most Australian companies.
[119] Empirical support for this monitoring rationale of dividends comes from Hansen, R, Kumar, R and Shome, D, “Dividend Policy and Corporate Monitoring: Evidence from the Regulated Electric Utility Industry” (1994) 23:1 Financial Management 16 at 19–21.
[120] Goshen, above n113 at 930.
[121] Id at 906–8. Also see Goshen, Z, “Optimal Dividend Policy and Tax Distortions” (1994) 28 Israel LR 23 at 39–42.
[122] Nicol, above n21.
[123] See Section 3B above. However, imputation credits may sometimes be “wasted” at the shareholder level because not all investors (eg, foreign shareholders) can utilise the credits to reduce their personal tax exposure.
[124] Goshen, above n113 at 919. There are various accounting standards which define earnings, such as FASB Concept Statement No 5 para 34 in the United States. The relevant Australian accounting standard is AASB 1018. Also see the studies in n63, which demonstrate that the earnings figure is often manipulated.
[125] Goshen, above n113 at 919–20.
[126] Id at 919.
[127] See the problems associated with choosing thresholds outlined in Section 6C(d) below.
[128] Australian companies which have suspended their DRPs in the past several years include Amcor, Boral, Mayne Nickless, Westpac and WMC. See Farrer, J and Cusack, T, “Dividends, Shares and the Options: Alternatives to Suspension of DRPs” (1995) 3 JASSA 20.
[129] Huie, above n109 at 250, 285.
[130] Most Australian DRPs issue shares at a discount of between 2.5 per cent and 10 per cent to the market price. This discount feature could also be incorporated into Goshen’s proposal.
[131] Wills, A, “A Decade of Dividend Reinvestment” (1989) 59:7 Australian Accountant 65, showed empirically that there is a strong positive correlation between the discount rate offered and participation rates for Australian DRPs.
[132] Goshen, above n113 at 924, outlines a similar proposal.
[133] Id at 930.
[134] The primary market for securities is responsible the company’s dividend policy to the extent that new shares are issued under the dividend option proposal. Alternatively, consistent with DRP practice in the United States, the company itself could stand in the share market to purchase shares which are then “resold” to shareholders taking the share dividend alternative. In any case, it is still individual shareholders who decide how many shares will be issued.
[135] The view that most shareholders are uninformed is consistent with research into initial public offerings (IPOs) by Rock, K, “Why New Issues Are Underpriced” (1986) 15 J of Financial Econ 187. Rock asserted that there were two groups of potential investors in the market: informed investors and uninformed buyers. He said that IPO securities were issued at discounts in order to keep the uninformed investors in the IPO market. Rock’s argument has been confirmed with Australian data: How, J, Izan, H Y and Monroe, G, “Differential Information and the Underpricing of Initial Public Offerings: Australian Evidence” (1995) 35 Accounting and Finance: J of the Accounting Association of Australia and New Zealand 87. An analogy can be drawn between this IPO evidence and DRPs (or Goshen’s proposal), where uninformed average investors receive their dividends as shares to take advantage of the discount at which DRP shares are issued.
[136] The imposition of a threshold, as suggested in Section 6C(d), may be of assistance here, but imposing a threshold is not an ideal solution.
[137] See n129 and accompanying text.
[138] This ties in with the criticism in Section 6D(a) above.
[139] Goshen, above n113 at 928.
[140] Id at 926–7.
[141] Smith, C and Warner, J, “On Financial Contracting: An Analysis of Bond Covenants” (1979) 7 J of Financial Econ 117. However, Long, M, Malitz, I and Sefcik, S, “An Empirical Examination of Dividend Policy Following Debt Issues” (1994) 29 J of Financial and Quantitative Analysis 131, found that companies did not manipulate dividend policy to transfer wealth from debtholders to shareholders, particularly as companies wished to maintain their reputations.
[142] See n116.
[143] See Smith and Warner, above n141, for a discussion of the “claim dilution” problem.
[144] Myers, above n33.
[145] Goshen, above n113 at 885. Also see Parts II and III of Goshen’s article.
[146] Id at 905.
[147] Ibid. Several US legislatures have, in the past, compelled companies to distribute a predetermined ratio of dividends to earnings each year, but Goshen says they had little success: id at 930.
[148] Madden, B, “The SEER Mechanism: A Proposal for Shareholder Voting on Reinvestment of Corporate Cash Flow” (1992) 5(3) Continental Bank J of Applied Corp Finance 33. “SEER” refers to “Shareholder Election to Expand or Recycle”.
[149] Id at 44.
[150] Id at 33. The validity of this statement is somewhat questionable, particularly in light of the increased number of professional, independent directors serving on the boards of listed Australian companies.
[151] See Stapledon, G, “Disincentives to Activism by Institutional Investors in Listed Australian Companies” [1996] SydLawRw 8; (1996) 18 Syd LR 152, for an overview of the legal, economic and practical incentives for institutional investors to remain passive.
[152] Ngurli Limited v McCann [1953] HCA 39; (1953) 90 CLR 425.
[153] See Goshen, above n113 at 899–902, for a discussion of these alternatives.
[154] This is exemplified by the continuous disclosure provisions in the Corporations Law and ASX Listing Rules