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Dividend policy and investor pressure
journal contribution
posted on 2019-12-05, 11:22 authored by Ciaran Driver, Anna GrosmanAnna Grosman, Pasquale ScaramozzinoThe 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.
History
School
- Loughborough University London
Published in
Economic ModellingVolume
89Issue
July 2020Pages
559 - 576Publisher
Elsevier BVVersion
- VoR (Version of Record)
Rights holder
© The AuthorsPublisher statement
This is an open access article under the CC BY license (http://creativecommons.org/licenses/by/4.0/).Acceptance date
2019-11-12Publication date
2019-11-16Copyright date
2019ISSN
0264-9993Publisher version
Language
- en
Depositor
Dr Anna Grosman Deposit date: 4 December 2019Usage metrics
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