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Managerial stability and payout policy: Does state regulation matter?

In: Corporate Governance and Firm Performance

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  • Liang Song
  • Haizhi Wang

Abstract

In practice, it is increasingly common for companies to use NON-COMPETITION covenants in employment contracts that put restrictions on post-employment activities. Making use the variation of legal enforcement of NON-COMPETITION agreements in different states (NON-COMPETITION index) across the U.S., this chapter empirically examines whether and to what extent labor market concern will affect firm payout policy when managers are bound to their firms by NON-COMPETITION agreements. We find that the likelihood for a firm to pay DIVIDEND or conduct repurchasing is positively related to NON-COMPETITION index. We directly measure PAYOUT RATIO and find a significant positive relation between firm PAYOUT RATIO and NON-COMPETITION index. Our results indicate that managers with increased stability and reduced job opportunity in the external labor market are more likely use cash payout as a pre-commitment device and send a signal that they will not entrench themselves.

Suggested Citation

  • Liang Song & Haizhi Wang, 2009. "Managerial stability and payout policy: Does state regulation matter?," Advances in Financial Economics, in: Corporate Governance and Firm Performance, pages 243-259, Emerald Group Publishing Limited.
    • Handle: RePEc:eme:afeczz:s1569-3732(2009)0000013012
    DOI: 10.1108/S1569-3732(2009)0000013012
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