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Why are Firms With Entrenched Managers More Likely to Pay Dividends?

59 Pages Posted: 2 Jun 2006  

Carrie H. Pan

Santa Clara University - Department of Finance

Date Written: March 13, 2007

Abstract

I find that firms with entrenched managers, as measured by strong managerial power resulting from takeover protections, are more likely to pay dividends. Their high propensity to pay persists over time. My results support the view that firms choose a combination of governance provisions and dividend policy to maximize value. A large cash reserve can be used to deter hostile takeovers. Paying dividends reduces cash holdings, leaving the firm more vulnerable to hostile takeovers. In equilibrium, value-maximizing firms with weak investment opportunities provide managers against takeovers to induce them to distribute cash rather than build a warchest against unwanted takeovers.

Keywords: Dividends, managerial entrenchment, mergers, acquisitions

JEL Classification: G34, G35

Suggested Citation

Pan, Carrie H., Why are Firms With Entrenched Managers More Likely to Pay Dividends? (March 13, 2007). Available at SSRN: https://ssrn.com/abstract=905816 or http://dx.doi.org/10.2139/ssrn.905816

Carrie H. Pan (Contact Author)

Santa Clara University - Department of Finance ( email )

Santa Clara, CA 95053
United States
(408)5517188 (Phone)

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