Dividend Policy and Investor Pressure

Posted: 9 Mar 2021

See all articles by Ciaran Driver

Ciaran Driver

SOAS University of London School of Finance and Management

Anna Grosman

Loughborough University London; Loughborough University - School of Business and Economics

Pasquale Scaramozzino

University of Rome II - Faculty of Economics; University of London - School of Oriental and African Studies (SOAS); University of London - Centre for Financial and Management Studies (CeFIMS)

Date Written: July 1, 2020

Abstract

The economics of dividend policy has focused on the single tight narrative that dividends keep managers honest, mitigating concerns that they over-invest. This article provides a critique of that agency narrative, arguing that pressure from short-term focused investors, executives and board members pushes the firm into preemptive actions of returning too much cash via dividends. We analyze three channels of influence for investor pressure through 1) threat of takeovers, 2) shareholder value oriented corporate governance, measured by director independence and board equity incentives, and 3) trading and institutional ownership patterns. We find that firms adopt a higher dividend payout to discourage takeover bids. Also, FTSE 100 firms, that are most focused on shareholder value governance in the form of equity-based compensation and a higher share of independent directors, display a higher dividend payout. Frequency of trading and ownership by transient investors seeking current profits also predict increased dividend payout. Traditional agency theory, focused on dividends as a tool for managerial discipline, is not strongly supported by the results, which rather support a narrative of short-term investor pressure on firms irrespective of investment opportunities.

Keywords: Corporate finance, Dividend policy, Investor pressure, Agency theory, Short-termism, Corporate governance

JEL Classification: B55, C23, D21, G11, G23, G32, G34, G35, O16

Suggested Citation

Driver, Ciaran and Grosman, Anna and Scaramozzino, Pasquale, Dividend Policy and Investor Pressure (July 1, 2020). Economic Modelling, Vol. 86, 2020, Available at SSRN: https://ssrn.com/abstract=3784902

Ciaran Driver

SOAS University of London School of Finance and Management ( email )

Thornhaugh St
London, WC1H 0XG
United Kingdom

Anna Grosman (Contact Author)

Loughborough University London ( email )

Glendonbrook Institute for Enterprise Development
The Broadcast Centre Queen Elizabeth Olympic Pa
London, E15 2GZ
United Kingdom

Loughborough University - School of Business and Economics ( email )

Epinal Way
Leics LE11 3TU
Leicestershire
United Kingdom

Pasquale Scaramozzino

University of Rome II - Faculty of Economics ( email )

Via Columbia n.2
Rome, 00100
Italy

University of London - School of Oriental and African Studies (SOAS) ( email )

Thornhaugh Street
Russell Square: College Buildings 541
London, WC1H 0XG
United Kingdom

University of London - Centre for Financial and Management Studies (CeFIMS)

Thornhaugh Street
London, WC1H 0XG
United Kingdom

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