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Does CEO ownership affect payout policy? Evidence from using CEO scaled wealth-performance sensitivity

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  • James, Hui
  • Benson, Bradley W.
  • Wu, Chen (Ken)

Abstract

Higher CEO ownership and cash payouts have the potential to mitigate agency conflicts associated with overinvestment of free cash flows. But empirical evidence on the effect of CEO ownership on payout policy is mixed. Previous studies, however, use CEO ownership percentage as a proxy for delta (the sensitivity of CEO wealth to stock price). Ownership percentage is known to decrease in firm size, while the likelihood of cash payouts increases with firm size. This study uses scaled wealth-performance sensitivity (Edmans et al., 2009), a proxy for CEO delta uncorrelated with firm size, to examine the effect of CEO ownership on payout policy for a sample of 6656 firm-year observations from 1995 to 2008. Our results suggest that CEO ownership has significant influence on payout policy, but that the nature of the relation depends on the prior payout history of the firm, and the level of free cash flow in the firm.

Suggested Citation

  • James, Hui & Benson, Bradley W. & Wu, Chen (Ken), 2017. "Does CEO ownership affect payout policy? Evidence from using CEO scaled wealth-performance sensitivity," The Quarterly Review of Economics and Finance, Elsevier, vol. 65(C), pages 328-345.
    • Handle: RePEc:eee:quaeco:v:65:y:2017:i:c:p:328-345
    DOI: 10.1016/j.qref.2016.10.003
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    19. James, Hui Liang & Borah, Nilakshi & Lirely, Roger, 2022. "The effectiveness of board independence in high-discretion firms," The Quarterly Review of Economics and Finance, Elsevier, vol. 85(C), pages 103-117.
    20. Amitava Roy, 2014. "Corporate Governance and Firm Performance: An Exploratory Analysis of Indian Listed Companies," Jindal Journal of Business Research, , vol. 3(1-2), pages 93-120, June.

    More about this item

    Keywords

    CEO ownership; Dividends; Share repurchases; Stock options;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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