One potential rationale for paying dividends is that the payment of dividends indirectly results in a closer monitoring of management's investment activities,hence lowering agency costs.

Question

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Paying dividends can provide a signal to shareholders that the company is generating excess cash flow and not overinvesting in unprofitable projects. This can encourage shareholders to monitor management's investment decisions more closely, which can help to reduce agency costs (i.e. the conflict of interest between shareholders and management). Therefore, one potential rationale for paying dividends is to improve corporate governance and reduce the potential for agency problems.

One Potential Rationale for Paying Dividends Is That the Payment