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

Abstract

We find that firms with a corporate general counsel in top management (CGCs) are less likely to pay dividends, and for such firms that do pay dividends, the dividend payouts are lower. Our results hold after controlling for selection bias using propensity score matching analysis. We also find that the presence of a CGC will reduce the potential for overinvestment and that firms with CGCs invest less in CAPEX than firms without CGCs when there is a tendency to overinvest. Further, we find that firms with CGCs have a higher propensity to pay a dividend or have a higher payout ratio than firms without CGCs where there is the highest likelihood of agency costs deriving from overinvestment problems. We find that the presence of a CGC in a firm will lead to a lower likelihood of share repurchases in an environment characterized by higher free cash problems. Overall, our findings support the important role of the CGC as an effective corporate governance mechanism in dividend decisions.

Keywords: Corporate General Counsel; Decision to pay Dividend; Dividend Payout; Agency Costs; Corporate Governance; Repurchases

JEL Classification: G14, G32, K00