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Dividend Policy, Corporate Governance and the Managerial Entrenchment Hypothesis: An Empirical Analysis

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  • Jorge Farinha

Abstract

This paper analyses the agency explanation for the cross-sectional variation of corporate dividend policy in the UK by looking at the managerial entrenchment hypothesis drawn from the agency literature. Consistent with predictions, a significant U-shaped relationship between dividend payout ratios and insider ownership is observed for a large (exceeding 600 firms) sample of UK companies and two distinct periods. These results strongly suggest the possibility of managerial entrenchment when insider ownership reaches a threshold of around 30%. Evidence is also presented that non-beneficial holdings by insiders can lead to entrenchment in conjunction with shares held beneficially. Copyright Blackwell Publishers Ltd, 2003.

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  • 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.
  • Handle: RePEc:bla:jbfnac:v:30:y:2003-12:i:9-10:p:1173-1209
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