Delivering on the Dividend Promise: Corporate Governance, Managerial Incentives, and Dynamic Dividend Behavior
U.S. Securities and Exchange Commission
This paper examines the effects of corporate governance on dynamic dividend behavior. In the absence of strong corporate governance, dividends can limit inefficient managerial investment. Weakly governed managers face more shareholder pressure to sustain the dividend commitment (and expand it when the cash flow increases). I find that weakly governed managers make fewer dividend cuts and engage in more dividend smoothing. They are more likely to raise dividends through regular small increases. Weak governance has a positive effect on dividend changes, mainly in response to large cash flow increases. Total payout adjustments made by weakly governed managers support the dividend commitment. Commitment to debt is a partial substitute for persistent dividends. The paper's empirical approach accounts for the potential endogeneity of corporate governance and dividend decisions.
Keywords: dynamic dividend behavior, dividend smoothing, incremental dividend decisions, corporate governance, managerial alignment, endogeneity
JEL Classification: G30, G34, G35
Date posted: January 30, 2007