The corporate finance theories assume that agents

The majority of the
corporations pay dividends to their shareholders, but dividend payments across
firms vary depending on different factors. Since Miller and Modigliani’s (1961)
dividend irrelevance theorem, the dividend puzzle remains one of the significant
unresolved issues in corporate finance theory. Despite numerous studies
concerning dividend policy, the unanimous conclusion regarding corporate
dividend policy has not been achieved yet (Allen and Michaely, 2003; Brav et
al., 2005).

Traditional corporate finance
proposes different explanations to the dividend puzzle. Traditional corporate
finance theories assume that agents are entirely rational and self-interested.
One of the core theories explaining dividend policy is a signalling theory.
According to a signalling theory, managers use dividends to signal the market
about company’s future earnings (Bhattacharya, 1979; John and Williams; Miller
and Rock, 1985). Empirical studies examining this theory focus on stock prices
changes following dividend announcements and the relationship between dividend
changes and earnings (Aharony and Swary, 1980; Nissim and Ziv, 2001; Grullon et
al., 2005; Dasilas and Leventis, 2011, Aggarwal et al., 2012). Empirical
studies on the signalling theory provide mixed results, leaving much to be
explained and giving necessity to consider other theories.

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Another explanation to the
dividend puzzle is an agency costs theory. The main idea behind this theory is
that dividends may help to mitigate the agency problem between managers and
shareholders (Rozeff, 1982; Easterbook, 1984; Jensen et al. 1993; Alli et al.,
1993). The agency costs theory is supported by numerous studies (Rozeff, 1982;
Dempsey and Laber, 1992; Lloyd et al., 1985 Alli et al., 1993; Holder et al.,
1998), while some other authors believe that agency costs theory does not hold.

In addition to the agency
costs and signalling theories, researchers identified tax clientele (Brennan,
1970; Petitt, 1977; Litzenbrerg and Ramaswamy, 1979), life-cycle (Mueller,
1972) and catering theories (Baker and Wurgler, 2004) aiming to resolve the
dividend puzzle. Empirical studies on these theories provide mixed results and
give an opportunity to search for other explanations of the dividend policy.

Mace (1986), Adams and
Ferreira (2007) argue that board composition and size might influence corporate
decisions. According to Lipton and Lorsch (1992), board size is a significant
tool to overcome the problem of agency cost. The optimal board size can be a
crucial mechanism in determining the factors affecting corporate dividend
policy. Rozeff (1982); Easterbook (1984); and Jensen et al. (1992) assume that
board uses dividends to mitigate the agency cost problem. The literature
investigating this relationship provide mixed results. Following these studies
board size is expected to be a significant indicator of dividends.  Despite a significance of the theories
mentioned above, executive compensation factor (Lewellen et al., 1987) and
board size factor, this study focuses on examining behavioural factors as well
classical theories.