Managerial Entrenchment and the Value of Dividends
Seoul National University
December 1, 2009
Review of Quantitative Finance and Accounting, 2011, 36 (2), pp. 297-322.
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.
Number of Pages in PDF File: 41
Keywords: Managerial entrenchment, Takeover defenses, Agency costs, Dividend payout, Firm value
Date posted: April 21, 2010 ; Last revised: December 5, 2014