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Managerial Entrenchment and the Value of Dividends

Woo-Jong Lee

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

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Date posted: April 21, 2010 ; Last revised: December 5, 2014

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: https://ssrn.com/abstract=1593326 or http://dx.doi.org/10.2139/ssrn.1593326

Contact Information

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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