Managerial Entrenchment and the Value of Dividends

41 Pages Posted: 21 Apr 2010 Last revised: 5 Dec 2014

Date Written: December 1, 2009


This study examines the effects of takeover defenses on the value implication of dividends. Using the framework of Fama and French (1998), the paper shows that dividends paid by managers with strong managerial power resulting from takeover protection measures are more valued in the stock market. The results are consistent with the hypothesis of the agency costs of free cash flow built on by Jensen (1986) in the sense that dividends are important to determine firm value by reducing the free cash flow that would otherwise be deployed for private benefits by entrenched managers. This paper also examines whether the incremental value effect of dividends in entrenched firms is attributable to a numerator effect (changes in the future cash flow) or a denominator effect (changes in the discount rate). The empirical results show that the dividend payout of such firms is more positively related to future performance and more negatively related to information risk, which supports both numerator and denominator effects.

Keywords: Managerial entrenchment, Takeover defenses, Agency costs, Dividend payout, Firm value

Suggested Citation

Lee, Woo-Jong, Managerial Entrenchment and the Value of Dividends (December 1, 2009). Review of Quantitative Finance and Accounting, 2011, 36 (2), pp. 297-322. . Available at SSRN: or

Woo-Jong Lee (Contact Author)

Seoul National University ( email )

Gwanak-ro 1, Gwanak-gu
Seoul, 151-916
Korea, Republic of (South Korea)

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