CEO Involvement in Director Selection: Implications
for REIT Dividend Policy
C. F. Sirmans
Published online: 4 July 2007
Springer Science + Business Media, LLC 2007
Abstract This paper examines the relationship between CEO entrenchment and
dividend policy of real estate investment trusts (REITs). We develop an index for CEO
entrenchment using CEO tenure and duality and find that this index has significant
impact on dividend policy. We further separate our sample into two sub-groups: REITs
with and without nomination committees. Our analyses show a strong positive
relationship between CEO entrenchment level and dividend payout for REITs without
a nomination committee. In REITs with nomination committees, CEO entrenchment has
less influence on dividend policy. We conclude that dividend policy serves as a sub-
stitution for other governance mechanisms. Further, our results are consistent with the
evidence for other US firms—CEO that are more entrenched pay higher dividends to
avoid shareholder sanctions and the threat of takeover.
Keywords CEO involvement
The separation of ownership and control in modern corporations affords managers
wide latitude over use of free cash flow. Self-serving managers prefer to use excess
cash to boost personal benefits and compensation, grow through acquisitions, and
deter hostile takeovers.
To prevent wealth expropriation by managers, and investment
J Real Estate Finan Econ (2007) 35:385–410
Faleye (2004) discusses how cash can be used to deter or foil takeover attempts. Harford (1999)and
Pinkowitz (2002) find that holding of excess cash reduces the probability of a hostile bid. Hartzell et al.
(2005) find that REIT CEOs often follow their own agenda which includes pursuing negative NPV projects
to enhance private benefits, greater prestige and compensation.
Z. Feng (*)
School of Management, Union Graduate College,
Schenectady, NY 12308, USA
C. F. Sirmans
Center for Real Estate and Urban Economic Studies, School of Business,
University of Connecticut, Storrs, CT 06268, USA