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Managerial Entrenchment and Payout Policy

Published online by Cambridge University Press:  06 April 2009

Aidong Hu  and
Praveen Kumar
Aidong Hu
Affiliation:
hua@sonoma.edu, School of Business and Economics, Sonoma State University, Rohnert Park, CA 94928
Praveen Kumar
Affiliation:
pkumar@uh.edu, Department of Finance, C. T. Bauer College of Business, University of Houston, Houston, TX 77204
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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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 39 , Issue 4 , December 2004 , pp. 759 - 790
Copyright
Copyright © School of Business Administration, University of Washington 2004

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