Get 20M+ Full-Text Papers For Less Than $1.50/day. Start a 14-Day Trial for You or Your Team.

Learn More →

Dividend payout and executive compensation: theory and Canadian evidence

Dividend payout and executive compensation: theory and Canadian evidence Purpose – This paper seeks to present and test a model of the association between dividend payout and executive compensation. Design/methodology/approach – The authors develop a model based on Bhattacharyya whereby managerial quality is unobservable to shareholders, and therefore first‐best contracts are not possible. In the second‐best world, compensation contracts motivate high quality managers to retain and invest firm earnings, while low quality managers are motivated to distribute income to shareholders. These hypotheses arising from the model are tested on data for Canadian firms' dividend payouts over the period 1993‐1995 using tobit regression analyses. Findings – Consistent with the predictions of the Bhattacharyya model, the results show that, ceteris paribus , earnings retention (dividend payout) is positively (negatively) associated with executive compensation. These results hold when payout is defined as common dividends plus common share repurchases. Research limitations/implications – The Canadian data provide only limited information on the components of executive compensation. A more useful test would be possible with more detailed information on, for example, salary, bonus, and benefits. Originality/value – Several recent papers have documented an association between dividends and executive compensation. This paper presents and tests a model that provides a potential explanation for this link. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Managerial Finance Emerald Publishing

Dividend payout and executive compensation: theory and Canadian evidence

Download PDF
17 pages

Loading next page...
 
/lp/emerald-publishing/dividend-payout-and-executive-compensation-theory-and-canadian-heiVTrQ86l
Publisher
Emerald Publishing
Copyright
Copyright © 2008 Emerald Group Publishing Limited. All rights reserved.
ISSN
0307-4358
DOI
10.1108/03074350810874091
Publisher site
See Article on Publisher Site

Abstract

Purpose – This paper seeks to present and test a model of the association between dividend payout and executive compensation. Design/methodology/approach – The authors develop a model based on Bhattacharyya whereby managerial quality is unobservable to shareholders, and therefore first‐best contracts are not possible. In the second‐best world, compensation contracts motivate high quality managers to retain and invest firm earnings, while low quality managers are motivated to distribute income to shareholders. These hypotheses arising from the model are tested on data for Canadian firms' dividend payouts over the period 1993‐1995 using tobit regression analyses. Findings – Consistent with the predictions of the Bhattacharyya model, the results show that, ceteris paribus , earnings retention (dividend payout) is positively (negatively) associated with executive compensation. These results hold when payout is defined as common dividends plus common share repurchases. Research limitations/implications – The Canadian data provide only limited information on the components of executive compensation. A more useful test would be possible with more detailed information on, for example, salary, bonus, and benefits. Originality/value – Several recent papers have documented an association between dividends and executive compensation. This paper presents and tests a model that provides a potential explanation for this link.

Journal

Managerial Finance – Emerald Publishing

Published: Jul 4, 2008

Keywords: Senior management; Earnings; Compensation; Dividends; Canada

References

  • Measuring executive compensation: methods and an application
    Antle, R.; A. Smith
  • Imperfect information, dividend policy, and the “bird in the hand” fallacy
    Bhattacharya, S.
  • Good managers work more and pay less dividends – a model of dividend policy
    Bhattacharyya, N.
  • The dividend puzzle
    Black, F.
  • Fundamentals of Corporate Finance
    Brealey, R.; Myers, S.
  • Incentive pay that doesn't work
    Crystal, G.
  • Two agency‐cost explanations of dividends
    Easterbrook, F.
  • Agency problems and the theory of the firm
    Fama, E.
  • Corporate payout policy and managerial stock incentives
    Fenn, G.; Liang, N.
  • Dividends, share repurchases, and the substitution hypothesis
    Grullon, G.; Michaely, R.
  • The effect of bonus schemes on accounting decisions
    Healy, P.
  • Bayesian analysis of the dividend behaviour
    Huang, H.
  • Agency costs of free cash flow, corporate finance, and takeovers
    Jensen, M.
  • Performance pay and top‐management incentives
    Jensen, M.; Murphy, K.
  • Dividends, dilution and taxes: a signalling equilibrium
    John, K.; Williams, J.
  • Stock repurchases and incentive compensation
    Jolls, C.
  • The Theory and Practice of Econometrics
    Judge, G.; Griffiths, W.E.; Hill, R.C.; Lutkepohl, H.; Lee, T.‐C.
  • When a buyback isn't a buyback: open market repurchases and employee options
    Kahle, K.
  • Executive stock options and corporate dividend policy
    Lambert, R.; Lanen, W.; Larcker, D.
  • The Association between Performance Plan Adoption and Corporate Capital Investment
    Larcker, D.
  • Free cash flow and stockholder gains in going private transactions
    Lehn, K.; Poulsen, A.
  • Executive compensation and executive incentive problems: an empirical analysis
    Lewellen, W.G.; Loderer, C.; Martin, K.
  • Dividend policy, growth and the valuation of shares
    Miller, M.; Modigliani, F.
  • Dividend policy under asymmetric information
    Miller, M.; Rock, K.
  • Executive compensation and the modern industrial revolution
    Murphy, K.J.
  • Executive compensation: issues and research
    Pavlik, E.L.; Scott, T.W.; Tiessen, P.
  • Institutional sources of change in the formal structure of organizations: the diffusion of civil service reform, 1880‐1935
    Tolbert, P.S.; Zucker, L.G.
  • Corporate share repurchases in the 1990s: what role do stock options play?
    Weisbenner, S.
  • Executive compensation and dividend policy
    White, L.F.