It is widely accepted that paying cash dividend might mitigate agency problem between majority shareholder and minority shareholders. Some common law countries use mandatory cash dividend policy to protect minority shareholders. We provide opposite evidence in this paper. First, we find that in China’s stock market, firms with intermediate or high shareholding concentration have higher incentive to pay cash dividend. As controlling shareholders in China hold non-negotiable shares, we argue that this phenomenon is associated with non-negotiable shareholders’ incentive to retrieve cash from the firm. Second, non-negotiable shareholders generally give up subscription right in rights offering. Furthermore, firms with intermediate or high shareholding concentration increase dividend payment soon after rights offering. Giving up subscription right and using receipts from rights offering to pay cash dividend together mean that non-negotiable shareholders in firms with intermediate or high shareholding concentration sell a proportion of the shares they hold to negotiable shareholders by paying cash dividend. The average selling price is about 3 times higher than that in private negotiation. Market reacts negatively to cash dividend announcement of firms with intermediate or high shareholding concentration. Our findings show that dividend might be used as a vehicle of tunneling.

We propose a model of project selection and design of managerial compensation contract that features adverse selection and moral hazard. Our model generates the rather intuitive result that the ex ante probability of a specific project being selected (or, equivalently, its manager being hired) is increasing in the type of the project/manager. Ex post, however, the most capable manager (i.e., the one with the highest type) is not necessarily the one who will be hired to run a project. Basically, when the managers’ types are not identically distributed, picking the most capable manager or selecting the most promising project may actually be inconsistent with the provision of optimal incentives to alleviate the inherent agency problems. Therefore, our model offers a rational explanation to the phenomenon that apparently more capable candidates are occasionally passed over in recruitment and job promotion situations. Our analysis also holds obvious implications for firms’ capital budgeting decisions. If the severity of the principal-agent conflict is sufficiently great (say, between the headquater and the divisional manager) and if the verification of the true project type (the NPV value) by the headquarter is sufficiently costly, we may well see instances where corporate headquarters rationally allocate scarce resources to a lower-NPV project ahead of a higher-NPV project.