Dividend Payout and Executive Compensation: Theory and Evidence

21 Pages Posted: 3 Nov 2008

See all articles by Nalinaksha Bhattacharyya

Nalinaksha Bhattacharyya

University of Alaska Anchorage

Amin Mawani

York University - Department of Accounting

Cameron K.J. Morrill

University of Manitoba - Department of Accounting and Finance

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Abstract

Bhattacharyya (2007) develops a model in which compensation contracts motivate high-quality managers to retain and invest firm earnings, while low-quality managers are motivated to distribute income to shareholders. In equilibrium, the model shows that there is a positive (negative) relationship between the earnings retention ratio (dividend payout ratio) and managerial compensation. Results of tests of US data show that executive compensation is positively (negatively) associated with earnings retention (dividend payout). Our results indicate that corporate dividend policy is perhaps best understood by considering the payout ratio (dividends divided by earnings), rather than the level of cash dividends alone.

JEL Classification: G35, J33

Suggested Citation

Bhattacharyya, Nalinaksha and Mawani, Amin and Morrill, Cameron K.J., Dividend Payout and Executive Compensation: Theory and Evidence. Accounting & Finance, Vol. 48, No. 4, pp. 521-541, December 2008. Available at SSRN: https://ssrn.com/abstract=1291181 or http://dx.doi.org/10.1111/j.1467-629X.2007.00255.x

Nalinaksha Bhattacharyya (Contact Author)

University of Alaska Anchorage ( email )

3211 Providence Drive
Anchorage, AK 99508
United States
(907)786 1949 (Phone)
(907) 786 4115 (Fax)

Amin Mawani

York University - Department of Accounting ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

Cameron K.J. Morrill

University of Manitoba - Department of Accounting and Finance ( email )

Faculty of Management
Winnipeg, MB R3T 5V4
Canada
204-474-8435 (Phone)
204-474-7545 (Fax)

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