Why are Firms With Entrenched Managers More Likely to Pay Dividends?

Abstract:     
I find that firms with entrenched managers, as measured by strong managerial power resulting from takeover protections, are more likely to pay dividends. Their high propensity to pay persists over time. My results support the view that firms choose a combination of governance provisions and dividend policy to maximize value. A large cash reserve can be used to deter hostile takeovers. Paying dividends reduces cash holdings, leaving the firm more vulnerable to hostile takeovers. In equilibrium, value-maximizing firms with weak investment opportunities provide managers against takeovers to induce them to distribute cash rather than build a warchest against unwanted takeovers.

Keywords: Dividends, managerial entrenchment, mergers, acquisitions

JEL Classifications: G34, G35

Working Paper Series