The association between a firm’s operational efficiency and its payout policy has received little attention in literature despite their common linkage to agency costs. Our findings suggest a significant linkage between the three. First, operationally efficient firms are associated with significantly higher agency conflicts of free cash flows. Second, operationally efficient firms exhibit a significantly greater propensity to pay dividends, thereby substantially reducing the associated agency costs compared to their non-dividend paying counterparts. This mediating role of dividends remains robust when considering different measures of operational efficiency and in a matched data. Using Data Envelopment Analysis (DEA) to obtain operational efficiency and Nearest Neighbour Matching (NMM) to get a matched sample, the findings imply that a firm’s operational and managerial decisions are