The Role of Managerial Demand and Ownership in the Determination of Divided and Debt Policies of Mature Corporations

Posted: 16 Sep 1999

See all articles by Shahid S. Hamid

Shahid S. Hamid

Florida International University (FIU) - Department of Finance

Arun J. Prakash

Florida International University (FIU) - Department of Finance; Florida International University

Abstract

In this study a theoretical and empirical investigation is undertaken to see how financial policies are set in a mature corporation with widely diffused ownership and risk averse management. Of particular interest is how differences in ownership structure, managerial compensation and investment policy influence dividends and leverage. A model is constructed in which risk averse managers, with HARA class utility functions, derive utility from pecuniary and non- pecuniary benefits and operate under constraints imposed by the sources and uses of funds identity, bankruptcy threat, and by exogenously specified compensation and shareholdings. The model in general predicts that both dividends and debt depend negatively on the proportion of insider equity and compensation and positively on investment income. The model is tested on a sample of 455 firms. Empirical results support all the basic predictions. Interestingly, the relationship of dividend, debt with both insider equity and compensation is convex as expected for nonlinear demand functions.

JEL Classification: G32

Suggested Citation

Hamid, Shahid and Prakash, Arun Jai, The Role of Managerial Demand and Ownership in the Determination of Divided and Debt Policies of Mature Corporations. Available at SSRN: https://ssrn.com/abstract=6408

Shahid Hamid (Contact Author)

Florida International University (FIU) - Department of Finance ( email )

University Park
11200 SW 8th Street College of Business
Miami, FL 33199
United States
305-348-2727 (Phone)

Arun Jai Prakash

Florida International University (FIU) - Department of Finance ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

Florida International University ( email )

Miami, FL 33199
United States

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