Abstract Using the data of A-share listed companies from 2011 to 2016 in Shanghai and Shenzhen,we establish a panel threshold model which the threshold variable is internal control, and analyse the nonlinearity relationship between dividend and agency cost. The result shows: There exist threshold effects between dividend and agency cost based on internal control. Cash dividend can reduce agency cost when internal control quality is higher than the threshold, otherwise, cash dividend will no longer have any effect. That means, a valid internal control is the foundation of dividend governance function. Furthermore, the descriptive statistics result implies that, companies with higher internal control quality than threshold are popular. This paper proofs that agency theory is effective in Chinese market, and higher internal control quality higher propensity to pay. So we disagree with the previous hypothesis of “result” and “substitution” between internal control and dividend.
Keywords dividend; agency cost; internal control; threshold effects