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Dividend policy and investor pressure

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journal contribution
posted on 05.12.2019, 11:22 by Ciaran Driver, Anna Grosman, Pasquale Scaramozzino
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.

History

School

  • Loughborough University London

Published in

Economic Modelling

Volume

89

Issue

July 2020

Pages

559 - 576

Publisher

Elsevier BV

Version

VoR (Version of Record)

Rights holder

© The Authors

Publisher statement

This is an open access article under the CC BY license (http://creativecommons.org/licenses/by/4.0/).

Acceptance date

12/11/2019

Publication date

2019-11-16

Copyright date

2019

ISSN

0264-9993

Language

en

Depositor

Dr Anna Grosman Deposit date: 4 December 2019

Licence

Exports