Managerial Overconfidence and Dividend Policy

Abstract:     
Managerial overconfidence has been shown to significantly affect corporate investment, financing policy and merger appetite. We investigate whether it also impacts dividend policy. Overconfident managers believe their firms' securities are undervalued, either because they expect cash flows from current projects to be higher or because they foresee better future growth opportunities. As such, they are less inclined to pay anything out since they believe they can earn higher returns by investing in their firms' projects. This effect is amplified by their preference to using internally generated cash to finance these projects, in an attempt to avoid issuing undervalued securities. Using several proxies for managerial overconfidence and controlling for the determinants of dividend policy discussed in the literature, we provide empirical evidence that managerial overconfidence affects the magnitude of dividends and total distributions paid out to shareholders.

Keywords: Behavioral corporate finance, payout policy, dividends, behavioral finance, overconfidence

JEL Classification: D03, G35, H32

working papers series