What is the expected relationship between dividend payout levels and the growth rate and availability of positive-NPV projects, under the agency cost model of dividends?
What about the expected relationship between dividend payout and the diffuseness of firm shareholders? Free cash flow?
Consider a firm, such as Microsoft, awash in free cash flow, available positive-NPV projects, and a relatively diffuse shareholder base in an industry with increasing competition.
Does either the agency model or the signaling model adequately predict the dividend policy of Microsoft? Which does the better job?