Governmental influences on dividend policy and merger activity: Accumulated earnings tax and antitrust challenges

Part one provides an explanation for why private firms pay dividends. Agency theory rationalizes a firm's incentives to initiate and maintain dividends by invoking monitoring cost reduction arguments. This explanation, although effective in providing a positive role for dividends for public firms, fails to explain why private firms pay dividends. It is shown that the disadvantage of personal taxes is offset by potential tax penalty costs. For private firms, it is shown that as potential tax penalty costs increase, dividend payouts also increase. As would have been expected, agency costs are not significant influences on dividend payouts. For public firms, on the other hand, the agency hypothesis is supported and tax penalty costs are not significant. Evidence to support Jensen's "debt is a substitute for dividends" hypothesis is also provided. For non-dividend paying firms, it is shown that long-term debt increases with increases in agency costs. This is particularly evident for low growth firms which do not have a wealth of investment projects waiting to be funded.;Part two studies a subset of mergers--those companies whose mergers have faced antitrust challenges. The announcement of an antitrust challenge is universally greeted as bad news by the market, and both bidder and target firms experience abnormal losses. For target firms, the literature has shown that firms whose mergers were cancelled posed negative abnormal returns. The study adds a grouping of firms not previously studied, target firms which won their cases. These firms had negative abnormal returns when the antitrust action was announced, and no excess returns at the time of the antitrust complaint settlement. Surprisingly, target firms which lost their cases had positive abnormal returns, a result in conflict with earlier findings. This is consistent with the hypothesis that the takeover attempt serves as a signal that the target firm is undervalued and is a good potential acquisition. This study finds that firm profitability does not affect the likelihood of antitrust challenges, while size and firm industry affiliation are factors. Antitrust actions are costly to challenged firms.