Inside Debt and Firm Dividend Policy

Abstract:     
This paper examines how inside debt and executive compensation affect firm dividend policy. We argue that managers with high pension holdings will be more reluctant to commit to high dividend policy that can risk their future pension payouts. Using a hand-collected actuarial pension data of top executives at the largest US firms, we find support to our argument. Dividend yield and dividend payout ratio are significantly lower when manager compensation relies more on pension payouts. We also find that stock repurchases are lower when managers are compensated with higher amounts of pensions. Pre-funding pensions in a rabbi trust moderately reduces these risks. These findings provides support to the manager-owner agency theory, where executive pensions can act as ‘counter options’, and therefore aligning executive interests away from shareholders towards bondholders.

Number of Pages in PDF File: 43

Keywords: Inside Debt, Executive Compensation, Capital Structure, Agency Costs, Investment Policy

JEL Classification: J33, M52

working papers series