Do Corporate Managers Skimp on Shareholders' Dividends to Protect their Own Retirement Funds?
47 Pages Posted: 8 May 2012 Last revised: 20 Jun 2013
Date Written: May 8, 2012
This study is the first to show that the extent of executive pensions directly affects firm dividend policy. We argue and find that managers with high pension holdings are less likely to adapt a high dividend policy that can risk the managers’ future pension payouts. Using a hand-collected actuarial pension dataset of top executives at the largest US firms, we show that (i) dividend yield and dividend payout ratio are significantly lower when manager compensation relies more heavily on pension payouts; (ii) given a desirable payout policy, managers with large pension plans prefer the form of stock repurchases over cash dividend distributions; and (iii) the negative effect of pension on dividend is significantly weaker when pensions are protected in a prefunding rabbi trust. We show further that this agency behavior reduces firm performance.
Keywords: Inside Debt, Executive Compensation, Capital Structure, Agency Costs, Investment Policy
JEL Classification: J33, M52
Suggested Citation: Suggested Citation