The cost of equity to earnings yield differential and dividend policy

Purpose The authors measure the cost of equity to earnings yield differential for a sample 2,035 non-financial firms. In series Logit and Tobit regressions, examine if is related dividend policy in manner predicted by agency theory. Design/methodology/approach Agency theory says firm's optimal partially determined relationship between capital. When higher (lower) than yield, firms are motivated (not) pay dividends as this reduces capital holding other things constant, increases corporate valuations. test whether managers set policies maximize value firm. Findings study’s findings show that when more (less) likely be payers payouts (lower). results robust inclusion share repurchases an alternative cash distributions. support hypothesis consistent with theories. Originality/value To authors’ knowledge, first paper testing hypothesis.