Document Type

Article

Publication Date

9-21-2021

Publication Title

Journal of Corporate Accounting & Finance

Keywords

agency theory, dividends, EIndex, EPS target, free cash flow hypothesis, governance, managerial overspending, outcome model, payout policy, share repurchases, sticky costs

Disciplines

Accounting | Business | Corporate Finance

Abstract

Background

Sticky SG&A costs provide a novel opportunity to investigate whether payout policy serves as a remedy for management overspending on perquisites that are embedded in SG&A expenses. Payout policy, especially under strong governance, may reduce overspending. Another possibility is that management may use sales declines opportunistically to repurchase shares when sales are expected to rebound.

Methods

Regression analysis is used to examine the effect of payout mechanisms (dividends, share repurchases, and combinations thereof) and shareholder rights (EIndex) to determine whether managerial overspending on perquisites is reduced through payout policy.

Results

The results indicate that dividends and share repurchases are associated with reduced SG&A cost stickiness. Payout policy reduces sticky SG&A costs under both strong and weak governance, where dividend payout is significant only for firms with strong governance, and share repurchases primarily significant for firms with weak governance.

Conclusion

Under strong governance, dividends are significantly associated with reduced SG&A cost stickiness, supporting agency theory. However, strongly governed dividend payers are only significant when they also repurchase shares. For the weak governance sample, dividends are not significant, but share repurchase is significantly associated with less sticky SG&A costs, consistent with weakly governed management repurchasing shares in times of lower sales to improve earnings per share, reduce SG&A expenses to improve net income, and fund the share repurchases.

Version

Postprint

Volume

32

Issue

4

Available for download on Sunday, October 01, 2023

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