Business Faculty Publications

Title

Why Do CEOs Agree To The Discipline Of Dividends?

Document Type

Article

Publication Date

7-2017

Publication Title

International Review of Financial Analysis

Keywords

Dividend policy, Corporate governance, Dividend initiation, CEO power, Agency theory, Free cash flow hypothesis, Outcome model, Substitute model, Dual CEOs, Institutional ownership, Board independence, Shareholders' rights

Disciplines

Business | Corporate Finance | Finance and Financial Management

Abstract

This study investigates dividend initiation as the product of the imbalance of power between shareholders and management in U.S. firms from 2003 to 2012. We find that dividend initiation is associated with a stronger governance structure (strong shareholders' rights and board independence), in accordance with the outcome model. We do not identify a single motivation for dividend initiation. Dividend-initiating firms tend to rely on various forms of governance balanced by the interests and ownership of CEOs and directors. Firms with institutional owners are more likely to initiate dividends concurrent with the turnover of the CEO. Dual CEOs initiate dividends when they own more shares, and boards of directors initiate dividends with a higher personal ownership stake when shareholders' rights are weak. We also find that when initiation is due to stronger governance, it is significantly related to the firm's investment opportunities, while for weak governance firms, that relationship is not observed. We interpret this as evidence that, under weaker governance, the decision to initiate dividends is motivated by agency conflicts rather than investment or capital structure considerations.

DOI

10.1016/j.irfa.2017.04.010

Version

Postprint

Volume

52

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