How Do Powerful CEOs View Dividends and Stock Repurchases? Evidence from the CEO Pay Slice (CPS)

Abstract

Agency theory suggests that CEOs view dividends unfavorably because dividend payouts deprive them of the free cash flow they could otherwise exploit. Using Bebchuk, Cremers, and Peyer’s (2011) CEO pay slice (CPS) to measure CEO power, we find that an increase in CEO power by one standard deviation decreases the probability of paying dividends by 17.48%. For dividend-paying firms, a rise in CEO power by one standard deviation reduces the size of dividend payouts by 5.91%. Share repurchases, however, are not influenced by CEO power, although they too take away the free cash flow from the CEO.

Keywords: dividends, dividend policy, CEO pay slice, CEO power, repurchases, buybacks, agency theory

JEL Classification: G30, G34