Dividend Policy and Investor Pressure

Driver, Ciaran; Grosman, Anna; Scaramozzino, Pasquale

Abstract

The economics of dividend policy has focused on the single tight narrative that dividends keep managers honest, mitigating concerns that they over-invest. This article provides a critique of that agency narrative, arguing that pressure from short-term focused investors, executives and board members pushes the firm into preemptive actions of returning too much cash via dividends. We analyze three channels of influence for investor pressure through 1) threat of takeovers, 2) shareholder value oriented corporate governance, measured by director independence and board equity incentives, and 3) trading and institutional ownership patterns. We find that firms adopt a higher dividend payout to discourage takeover bids. Also, FTSE 100 firms, that are most focused on shareholder value governance in the form of equity-based compensation and a higher share of independent directors, display a higher dividend payout. Frequency of trading and ownership by transient investors seeking current profits also predict increased dividend payout. Traditional agency theory, focused on dividends as a tool for managerial discipline, is not strongly supported by the results, which rather support a narrative of short-term investor pressure on firms irrespective of investment opportunities.

Citation

Driver, C., Grosman, A., & Scaramozzino, P. (2020). Dividend Policy and Investor Pressure. Economic Modelling, 89, 559-576. https://doi.org/10.1016/j.econmod.2019.11.016

• Journal Article Type: Article
• Acceptance Date: Nov 12, 2019
• Online Publication Date: Nov 16, 2019
• Publication Date: Jul 1, 2020
• Deposit Date: May 26, 2020
• Publicly Available Date: May 26, 2020
• Journal: Economic Modelling
• Print ISSN: 0264-9993
• Electronic ISSN: 1873-6122
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 89
• Pages: 559-576
• DOI: https://doi.org/10.1016/j.econmod.2019.11.016
• Keywords: Corporate finance, Dividend policy, Investor pressure, Agency theory, Short-termism, Corporate governance