Title

Managerial entrenchment and payout policy: A catering effect

Document Type

Article

Source of Publication

International Review of Financial Analysis

Publication Date

1-1-2021

Abstract

© 2020 Elsevier Inc. Agency theory suggests that entrenched managers are less likely to pay dividends. However, according to the catering theory, external pressures from investors can force managers to increase dividend payments. Hence, we test whether entrenched managers respond to investor demand for dividends and share repurchases. Using a large sample of 9677 US firms over the period 1990–2016 (i.e. a total of 80,478 firm-year observations), we test and find evidence that managerial entrenchment negatively impacts dividend payments. Our findings suggest that catering effects weaken the negative impact of managerial entrenchment on payout policy and that in firms with entrenched managers an increase in the propensity to pay dividends is conspicuous only when there is external investor demand for dividends. Our results indicate that while insiders and institutional owners might not necessarily favour dividend payments, firms respond to catering incentives when dominated by insiders but not institutional owners. Overall, our findings are consistent with the view that dividend payments are a result of external pressures to reduce agency problems associated with firms run by entrenched managers.

ISSN

1057-5219

Publisher

Elsevier BV

Volume

73

First Page

101600

Disciplines

Business

Keywords

Catering theory, Dividends, Managerial entrenchment, Payout policy, Share repurchases

Scopus ID

85096548680

Indexed in Scopus

yes

Open Access

no

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