Managerial entrenchment and the value of dividends

Lee, Woo‐Jong

doi:10.1007/s11156-010-0179-y

Cited by 20 publications

(6 citation statements)

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“…The main agency issue between managers and shareholders is associated with free cash flow potentially used by self‐serving managers for their own interests at the expense of shareholders, such as in empire‐building or for personal benefit (Jensen, 1986; Stulz, 1990). Alignment theory indicates that managerial ownership may serve as a governance mechanism and its increase helps align interests between managers and shareholders, since mangers holding more firm equity will be incentivized to act as owners and make decisions more clearly in shareholders' interests (Jensen et al, 1992; Jensen & Meckling, 1976; Lee, 2011). Florackis et al (2015) find that, in line with the alignment effect of managerial ownership, the relationship between dividend payout and managerial ownership is negative when managerial ownership is below a certain threshold.…”

Section: Related Literature and Hypothesis Developmentmentioning

confidence: 99%

The role of managerial ownership in dividend tunneling: Evidence from China

Bian

Kuo

Pan

et al. 2022

Corporate Governance

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Research Question/Issue: We examine the role of corporate executives in dividend tunneling activity by controlling shareholders and whether the correlation between executive ownership and dividend tunneling is influenced by internal and external governance mechanisms.Research Findings/Insights: We find increased executive ownership may lead to a higher level of dividend tunneling. This is further strengthened by our finding that the positive effect of executive ownership on dividend tunneling is more pronounced for firms with weaker minority shareholder protection. In addition, our results show that higher degrees of state ownership may further intensify this positive association.Finally, we find that analyst coverage has a moderating effect and constrains the collusion between controlling shareholders and executives in dividend tunneling activity.Theoretical/Academic Implications: Our study contributes to the literature on the role of managerial ownership in controlling shareholders' dividend tunneling activity.We fill a gap in the literature on the corporate agency problem by providing evidence that dividends have been employed by controlling shareholders as a means of tunneling and that executives with higher ownership are more likely to collude with controlling shareholders in dividend tunneling activities.Practitioner/Policy Implications: This study contributes to the debates around the promotion of the cash dividend policy in China, as our findings show that cash dividends are used as a tunneling vehicle. Providing important evidence to regulators, our findings support the argument that external monitoring by financial analysts can effectively constrain dividend tunneling by dominant shareholders, especially in the context of emerging stock markets with high ownership concentration, weak minority shareholder protection, and an underdeveloped legal system.

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Section: Related Literature and Hypothesis Developmentmentioning

confidence: 99%

The role of managerial ownership in dividend tunneling: Evidence from China

Bian

Kuo

Pan

et al. 2022

Corporate Governance

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show abstract

“…Lopez-Iturriaga and Lima (2014) argue that the dividend policy plays an important role as a disciplining mechanism in the management of companies with low growth opportunities, given that the payment of dividends reduces the FCF that managers can use at their own discretion. Numerous scholars argue that dividends and managerial ownership may be substitutes in reducing the agency costs of FCF (Rozeff, 1982;Jensen et al, 1992;Lee, 2011). Firms with high percentage of insider stock ownership tend to pay small dividends, while those with low insider stock ownership pay high dividends.…”

Section: Governance Mechanisms and Free Cash Flow: The Mediation Effect Of Dividend Payoutmentioning

confidence: 99%

The mediating effect of dividend payout on the relationship between internal governance and free cash flow

Guizani

2018

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Purpose This paper aims to examine the mediating effect of dividend payout on the relationship between internal governance mechanisms (board of directors and ownership structure) and the free cash flow level. Design/methodology/approach Linear regression models are used to investigate such relationships applying data from a sample of 207 non-financial firms listed on the Gulf Cooperation Council countries’ stock markets between 2009 and 2016. To test the significance of mediating effect, the author uses the Sobel test. Findings The author finds a partial mediation effect of dividend on the relationship between both board independence and managerial ownership and the level of free cash flow. The results confirm the major role of outside directors in corporate governance. This governance mechanism contributes to the protection of shareholders’ interests through a generous dividend policy. However, the author finds that large managerial shareholdings increase the level of free cash flow through lower dividend payouts. This result suggests that powerful managers follow their preference of retaining excess cash to their own interests. Practical implications This paper offers insights to policy-makers of emerging economies interested in the development of the corporate governance. This study provides guidance for firms in the construction and implementation of their own corporate governance policies. Originality/value The main contribution of the present paper is to examine the dividend payout as a potential mediating variable between internal governance mechanisms and free cash flow. Moreover, it highlights the issue of efficient management of substantial funds in Sharia-compliant and non-Sharia-compliant firms.

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“…As previous literature has shown, managerial entrenchment is generally perceived as negative by investors (e.g. Salas, 2010;Lee, 2011). Thus, the market reaction to managers expressing psychological ownership feelings might be negative.…”

Section: Market Reactionmentioning

confidence: 95%

More than just agents: the role of executives' psychological ownership in aligning interests of principals and agents

Renz

Vogel

2022

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PurposeAligning interests of principals and agents is the most efficient way to reduce the agency conflict. Yet, the literature on executive compensation reveals inefficiencies in providing executives with legal ownership. Thus, the authors go beyond legal ownership and posit that executives' psychological ownership further aligns the interests of executives as agents and shareholders as principals.Design/methodology/approachThe authors employ sophisticated methodology, including dynamic panel data regressions, static panel data regressions and propensity score matching. External validity is achieved through the large-scale sample of 22,179 firm-quarters spanning 24 quarters from 2013 to 2018 of the S&P 1500.FindingsPsychological ownership aligns the interests of executives and shareholders since this mindset makes executives perceive the company as “theirs”. Executives' psychological ownership decreases firms' fraud and financial performance. The decrease in financial performance is related to an observed increase in executives' risk-aversion. Investors recognize this ownership mindset in executives and reward it with a positive market reaction.Originality/valueThe study is the first to consider psychological ownership of executives in relation to firm outcomes such as financial performance or fraud. The findings are of interest to scholars and practitioners, as this study establishes both theoretically and empirically a way to align the interests of principals and agents beyond executive compensation.

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Managerial entrenchment and the value of dividends

Abstract: Managerial entrenchment, Takeover defenses, Agency costs, Dividend payout, Firm value, G34, G35,

Cited by 20 publications

References 50 publications

The role of managerial ownership in dividend tunneling: Evidence from China

The role of managerial ownership in dividend tunneling: Evidence from China

The mediating effect of dividend payout on the relationship between internal governance and free cash flow

More than just agents: the role of executives' psychological ownership in aligning interests of principals and agents

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