Journal of Financial and Quantitative Analysis

Research Article

Managerial Entrenchment and Payout Policy

Aidong Hua1 and Praveen Kumara2

a1 hua@sonoma.edu, School of Business and Economics, Sonoma State University, Rohnert Park, CA 94928

a2 pkumar@uh.edu, Department of Finance, C. T. Bauer College of Business, University of Houston, Houston, TX 77204

Abstract

Building on the managerial entrenchment literature, we develop and test a novel perspective on payout policy that integrates the influence of internal governance mechanisms, investment opportunities, management compensation, and monitoring by large shareholders. Our study incorporates both dividend payments and share repurchases, and examines the determinants of the likelihood and the level of payouts. Our model performs well in both in-sample and out-of-sample predictions on a sample of 2,081 firms during 1992–2000. We find that both the likelihood and the level of payouts are significantly and positively (negatively) related to factors that increase (decrease) executive entrenchment levels, even when controlling for size, leverage, and the proportion of tangible to total assets. We identify factors that significantly affect the likelihood but not the level of payouts (or vice versa), and show that entrenchment has an asymmetric influence on dividend vs. shares repurchase policy.

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