In this study we examine dividends and chief executive officer (CEO) stock ownership as interrelated mechanisms that may be used to reduce agency costs. We find a significant nonmonotonic relation between dividend yield and CEO stock ownership. Our evidence shows that until the CEO becomes entrenched, increased executive stock ownership reduces agency costs and decreases dividend yield. Beyond that point, increased stock ownership increases dividend yield. Whether additional stock ownership can reduce agency costs depends upon the CEO's degree of control in the firm.

This paper is concerned. with the effects of a change in an exogenous parameter on a control problem's optimal performance. function. A dynamic envelope theorem is obtained• which generalizes and relates results from earlier studies. The theorem. derived is applied to a problem of dynamic lifetime consumption theory, giving rise to an intertemporal analogue of the Slutsky. equation.

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