2134/11320202.v1
Ciaran Driver
Ciaran
Driver
Anna Grosman
Anna
Grosman
Pasquale Scaramozzino
Pasquale
Scaramozzino
Dividend policy and investor pressure
Loughborough University
2019
Economics
Applied Economics
Econometrics
Banking, Finance and Investment
corporate finance
dividend policy
investor pressure
agency theory
shorttermism
corporate governance
2019-12-05 11:22:11
Journal contribution
https://repository.lboro.ac.uk/articles/journal_contribution/Dividend_policy_and_investor_pressure/11320202
The economics of dividend policy has focused on the single tight narrative that dividends keep
managers honest, mitigating concerns that they over-invest. This article provides a critique of
that agency narrative, arguing that pressure from short-term focused investors, executives and
board members pushes the firm into preemptive actions of returning too much cash via
dividends. We analyze three channels of influence for investor pressure through 1) threat of
takeovers, 2) shareholder value oriented corporate governance, measured by director
independence and board equity incentives, and 3) trading and institutional ownership patterns.
We find that firms adopt a higher dividend payout to discourage takeover bids. Also, FTSE
100 firms, that are most focused on shareholder value governance in the form of equity-based
compensation and a higher share of independent directors, display a higher dividend payout.
Frequency of trading and ownership by transient investors seeking current profits also predict
increased dividend payout. Traditional agency theory, focused on dividends as a tool for
managerial discipline, is not strongly supported by the results, which rather support a narrative
of short-term investor pressure on firms irrespective of investment opportunities.