The payment of dividends may indirectly result in closer monitoring of management's investment activities,thus increasing shareholder value by
A) reducing agency costs.
B) increasing information asymmetry.
C) increasing a company's amount of free cash flow.
D) reducing auditing fees.

Question

Quizplus · Accepted Answer

The payment of dividends introduces a direct and tangible return to shareholders, which may create a stronger incentive for them to monitor management's investment activities. This increase in monitoring reduces the risk of agency costs, which are costs that arise from the divergence of interests between shareholders and managers. Therefore, the payment of dividends indirectly increases shareholder value by reducing agency costs. The other choices do not have a clear relationship with the payment of dividends increasing shareholder value.

The Payment of Dividends May Indirectly Result in Closer Monitoring