Managerial Entrenchment and Payout Policy: A Catering Effect

Posted: 23 Nov 2020

See all articles by Daniel Gyimah

Daniel Gyimah

University of Aberdeen

Ernest Gyapong

Zayed University - College of Business

Date Written: October 8, 2020


Agency theory suggests that entrenched managers are less likely to pay dividends. However, according to the catering theory, external pressures from investors can force managers to increase dividend payments. Hence, we test whether entrenched managers respond to investor demand for dividends and share repurchases. Using a large sample of 9,677 US firms over the period 1990-2016 (i.e. a total of 80,478 firm-year observations), we test and find evidence that managerial entrenchment negatively impacts dividend payments. Our findings suggest that catering effects weaken the negative impact of managerial entrenchment on payout policy and that in firms with entrenched managers an increase in the propensity to pay dividends is conspicuous only when there is external investor demand for dividends. Our results indicate that while insiders and institutional owners might not necessarily favour dividend payments, firms respond to catering incentives when dominated by insiders but not institutional owners. Overall, our findings are consistent with the view that dividend payments are a result of external pressures to reduce agency problems associated with firms run by entrenched managers.

Keywords: Catering theory, managerial entrenchment, dividends, share repurchases, payout policy.

JEL Classification: G30, G34, G35

Suggested Citation

Gyimah, Daniel and Gyapong, Ernest, Managerial Entrenchment and Payout Policy: A Catering Effect (October 8, 2020). International Review of Financial Analysis, Forthcoming, Available at SSRN:

Daniel Gyimah

University of Aberdeen ( email )

Dunbar Street
Aberdeen, AB24 3QY
United Kingdom

Ernest Gyapong (Contact Author)

Zayed University - College of Business ( email )

P.O. Box 4783
Abu Dhabi
United Arab Emirates

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