Independent directors and the propensity to pay dividends
AbstractUsing data from 944 public companies in 2006, I examine how a firm's propensity to pay dividends is related to (i) board independence and (ii) independent directors' tenure, number of board seats (busy) and equity incentive compensation. After controlling for the effects of traditional economic, CEO entrenchment and ownership determinants of the propensity to pay dividends, I find evidence of a positive association between the propensity to pay and (i) board independence and (ii) director tenure, and a negative association between the propensity to pay and (i) busy directors and (ii) greater equity incentive compensation in the director pay structure. I find consistent results when the decision is to pay cash dividends or repurchase shares. In further tests, I find that equity incentive compensation in the independent director pay structure is the most pervasive determinant across other dividend measures such as dividend payout, total payout and repurchases. Overall, the findings suggest that the characteristics of independent directors are important determinants of the payout policy. The results also suggest that future corporate governance research could benefit from incorporating characteristics of independent directors rather than limiting governance measures to board independence especially when recent empirical evidence (Linck et al., 2008, 2009) shows convergence, and therefore, narrowing variation in the proportion of outsiders and insiders on a board.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Elsevier in its journal Journal of Corporate Finance.
Volume (Year): 17 (2011)
Issue (Month): 4 (September)
Contact details of provider:
Web page: http://www.elsevier.com/locate/jcorpfin
Payout policy Independent director Corporate governance Equity incentive Busy director Director tenure;
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Hu, Aidong & Kumar, Praveen, 2004. "Managerial Entrenchment and Payout Policy," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 39(04), pages 759-790, December.
- White, Lourdes Ferreira, 1996. "Executive compensation and dividend policy," Journal of Corporate Finance, Elsevier, vol. 2(4), pages 335-358, July.
- Stephen P. Ferris & Murali Jagannathan & A. C. Pritchard, 2003. "Too Busy to Mind the Business? Monitoring by Directors with Multiple Board Appointments," Journal of Finance, American Finance Association, vol. 58(3), pages 1087-1112, 06.
- Kaplan, Steven N. & Reishus, David, 1990. "Outside directorships and corporate performance," Journal of Financial Economics, Elsevier, vol. 27(2), pages 389-410, October.
- DeAngelo, Harry & DeAngelo, Linda & Stulz, Rene M., 2004.
"Dividend Policy, Agency Costs, and Earned Equity,"
Working Paper Series
2004-10, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
- Jie Cai & Jacqueline L. Garner & Ralph A. Walkling, 2009. "Electing Directors," Journal of Finance, American Finance Association, vol. 64(5), pages 2389-2421, October.
- James S. Linck & Jeffry M. Netter & Tina Yang, 2009. "The Effects and Unintended Consequences of the Sarbanes-Oxley Act on the Supply and Demand for Directors," Review of Financial Studies, Society for Financial Studies, vol. 22(8), pages 3287-3328, August.
- Fama, Eugene F. & French, Kenneth R., 2001.
"Disappearing dividends: changing firm characteristics or lower propensity to pay?,"
Journal of Financial Economics,
Elsevier, vol. 60(1), pages 3-43, April.
- Eugene F. Fama & Kenneth R. French, 2001. "Disappearing Dividends: Changing Firm Characteristics Or Lower Propensity To Pay?," Journal of Applied Corporate Finance, Morgan Stanley, vol. 14(1), pages 67-79.
- Eugene F. Fama & Kenneth R. French, . "Disappearing Dividends: Changing Firm Characteristics or Lower Propensity to Pay?."," CRSP working papers 509, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
- Wintoki, M. Babajide, 2007. "Corporate boards and regulation: The effect of the Sarbanes-Oxley Act and the exchange listing requirements on firm value," Journal of Corporate Finance, Elsevier, vol. 13(2-3), pages 229-250, June.
- Farrell, Kathleen A. & Friesen, Geoffrey C. & Hersch, Philip L., 2008. "How do firms adjust director compensation?," Journal of Corporate Finance, Elsevier, vol. 14(2), pages 153-162, April.
- Weisbach, Michael S., 1988. "Outside directors and CEO turnover," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 431-460, January.
- Lucian Arye Bebchuk & Jesse M. Fried, 2003.
"Executive Compensation as an Agency Problem,"
Journal of Economic Perspectives,
American Economic Association, vol. 17(3), pages 71-92, Summer.
- Bebchuk, Lucian Arye & Fried, Jesse, 2003. "Executive Compensation as an Agency Problem," CEPR Discussion Papers 3961, C.E.P.R. Discussion Papers.
- Lucian Arye Bebchuk & Jesse M. Fried, 2003. "Executive Compensation as an Agency Problem," NBER Working Papers 9813, National Bureau of Economic Research, Inc.
- Shivdasani, Anil, 1993. "Board composition, ownership structure, and hostile takeovers," Journal of Accounting and Economics, Elsevier, vol. 16(1-3), pages 167-198, April.
- Shleifer, Andrei & Vishny, Robert W, 1986.
"Large Shareholders and Corporate Control,"
Journal of Political Economy,
University of Chicago Press, vol. 94(3), pages 461-88, June.
- Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
- Lucian A. Bebchuk & Yaniv Grinstein & Urs Peyer, 2006. "Lucky Directors," NBER Working Papers 12811, National Bureau of Economic Research, Inc.
- Linck, James S. & Netter, Jeffry M. & Yang, Tina, 2008. "The determinants of board structure," Journal of Financial Economics, Elsevier, vol. 87(2), pages 308-328, February.
- Franklin Allen & Roni Michaely, 2002.
Center for Financial Institutions Working Papers
01-21, Wharton School Center for Financial Institutions, University of Pennsylvania.
- Eliezer M. Fich, 2005. "Are Some Outside Directors Better than Others? Evidence from Director Appointments by Fortune 1000 Firms," The Journal of Business, University of Chicago Press, vol. 78(5), pages 1943-1972, September.
- Fama, Eugene F & Jensen, Michael C, 1983. "Separation of Ownership and Control," Journal of Law and Economics, University of Chicago Press, vol. 26(2), pages 301-25, June.
- David Yermack, 2004. "Remuneration, Retention, and Reputation Incentives for Outside Directors," Journal of Finance, American Finance Association, vol. 59(5), pages 2281-2308, October.
- Fischer, Paul E. & Gramlich, Jeffrey D. & Miller, Brian P. & White, Hal D., 2009. "Investor perceptions of board performance: Evidence from uncontested director elections," Journal of Accounting and Economics, Elsevier, vol. 48(2-3), pages 172-189, December.
- Brick, Ivan E. & Palmon, Oded & Wald, John K., 2006. "CEO compensation, director compensation, and firm performance: Evidence of cronyism?," Journal of Corporate Finance, Elsevier, vol. 12(3), pages 403-423, June.
- Raheja, Charu G., 2005. "Determinants of Board Size and Composition: A Theory of Corporate Boards," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 40(02), pages 283-306, June.
- Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
- Ertimur, Yonca & Ferri, Fabrizio & Stubben, Stephen R., 2010. "Board of directors' responsiveness to shareholders: Evidence from shareholder proposals," Journal of Corporate Finance, Elsevier, vol. 16(1), pages 53-72, February.
- Ira C. Harris & Katsuhiko Shimizu, 2004. "Too Busy To Serve? An Examination of the Influence of Overboarded Directors," Journal of Management Studies, Wiley Blackwell, vol. 41(5), pages 775-798, 07.
- Lambert, Richard A. & Lanen, William N. & Larcker, David F., 1989. "Executive Stock Option Plans and Corporate Dividend Policy," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(04), pages 409-425, December.
- Nikos Vafeas, 2003. "Length of Board Tenure and Outside Director Independence," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 30, pages 1043-1064.
- Cuny, Charles J. & Martin, Gerald S. & Puthenpurackal, John J., 2009. "Stock Options and Total Payout," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(02), pages 391-410, April.
- Nikos Vafeas, 2003. "Further Evidence on Compensation Committee Composition as a Determinant of CEO Compensation," Financial Management, Financial Management Association, vol. 32(2), Summer.
- Bebchuk, Lucian A. & Fried, Jesse M., 2003. "Executive Compensation as an Agency Problem," Berkeley Olin Program in Law & Economics, Working Paper Series qt81q3136r, Berkeley Olin Program in Law & Economics.
- Jorge Farinha, 2003. "Dividend Policy, Corporate Governance and the Managerial Entrenchment Hypothesis: An Empirical Analysis," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 30(9-10), pages 1173-1209.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wendy Shamier).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.