Do Corporate General Counsels Mitigate Agency Problems? Evidence from Dividend Payout Decisions

Abstract

Firms with corporate general counsels in top management (TMCs) are less likely to pay dividends, and when they pay dividends, the dividend payouts are lower. Our results hold addressing endogeneity concerns and selection biases. TMCs exacerbate underpayment of dividends where external monitoring is weaker. However, when firms with TMCs experience serious agency problems, we find support for the monitoring hypothesis even when external monitoring is weaker. Further, we find that longer tenures and higher compensations enhance TMCs’ roles as facilitators. However, when firms experience serious agency problems, longer tenures and higher compensations are associated with dividend payments and larger dividend payouts, thus weakening the facilitator role and supporting the monitoring hypothesis. Overall, TMCs play facilitator roles supporting the strategic alignment hypothesis in general; however, they ensure that such roles would not be in violation of the requisite legal requirements and TMCs perform monitoring roles when serious agency problems occur.

Keywords: Corporate General Counsel; Decision to pay Dividend; Dividend Payout; Agency Costs; Facilitator, Monitoring; Strategic Alignment; Corporate Governance

JEL Classification: G14, G32, K00