Abstract
Motivated by agency theory, we explore the potential impact of managerial entrenchment through staggered boards on dividend policy. The evidence suggests that firms with staggered boards are more likely to pay dividends. Among firms that pay dividends, those with staggered boards pay larger dividends. We also show that the impact of staggered boards on dividend payouts is substantially stronger (as much as two to three times larger) than the effect of all other corporate governance provisions combined. Overall, the evidence is consistent with the notion that dividends help alleviate agency conflicts. Thus, firms more vulnerable to managerial entrenchment, i.e., firms with staggered boards, rely more on dividends to mitigate agency costs. Aware of potential endogeneity, we demonstrate that staggered boards likely bring about, and are not merely associated with, larger dividend payouts. Our results are important, as they show that certain governance provisions have considerably more influence than others on critical corporate activities such as dividend payout decisions.
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Notes
In a similar vein, Jiraporn and Liu (2008) show that firms with staggered boards are significantly less leveraged than those with unitary boards. Their result persists even after controlling for other corporate governance provisions. They also find that the effect of staggered boards on leverage is many times larger than the impact of other provisions put together. Staggered boards appear to have a critical impact on capital structure decisions.
A poison pill is a rights plan that permits shareholders to dilute the value of the position of a bidder that acquires a large block—a board can practically prevent a hostile bidder from proceeding to purchase such a block (Bebchuk and Cohen 2005).
The prominent role of staggered boards is noted in many recent important studies. For instance, Gompers et al. (2003) suggest that staggered boards are “one of the few provisions that clearly retains some deterrent value in modern takeover battles.” Daines and Klausner also reason that staggered boards have “no justification except to ward off challenges for control.”
GIM stands for Gompers et al. (2003).
Patrick McGurn, senior vice president of ISS, asserts that studies and empirical evidence show “pretty conclusively that unlike poison pills, there is no evidence that boards use a classified structure to enhance shareholder value. In fact, the opposite appears to be true” (see Wall Street 2005).
This hypothesis receives empirical support in Jiraporn and Ning (2006), who find that firms with weak shareholder rights tend to pay out more dividends.
The IRRC reports data only for 1990, 1993, 1995, 1998, 2000, 2002, and 2004. Like several prior studies, we assume that governance provisions do not change during the interim years. Staggered boards, once adopted, are rarely eliminated. Hence, this assumption should be reasonable.
The dividend dummy is equal to one for firms that pay dividends of any size and zero for firms that do not pay dividends at all.
Repurchase activity is measured as in Dittmar (2000) using COMPUSTAT item 115 adjusted for change in preferred stock.
In the U.S., the tax efficiency of dividends comes in three ways (Pan 2007). First, individual dividend incomes are taxed twice, once at the corporate level and one more time at the personal level. Second, investors can choose when to realize capital gains and are required to pay taxes only when they do so. They do not have such a choice for dividend payouts. Third, until the end of 2002, the tax rates on individual dividend income had been higher than that on capital gains. This disadvantage disappears with the enactment of the U.S. Jon and Growth Tax Relief Reconciliation Act of 2003, which was made retroactive since January 2003.
Essentially, we segregate the Governance Index into two components, namely, the staggered boards element and all the other provisions in the index. The Governance Index is created by adding one point for each management-favoring provision (among the set of 24 possible management-favoring provisions) that a firm has. Having a staggered board also adds one point to the index. We therefore define for each firm a parameter labeled the Other Provision Index, which is equal to the firm’s Governance Index minus the contribution of the firm’s staggered board if any, i.e., equal to the Governance Index minus one if the firm has a staggered board, and equal to the Governance Index otherwise (Bebchuk and Cohen 2005).
Bebchuk and Cohen (2005) discuss why board structure has remained stable since 1990. Since the beginning of the 1990s, shareholders have been generally unwilling to approve charter provisions establishing a staggered board. Recognizing the unwillingness of shareholders to approve such provisions, the management of existing companies without such provisions generally did not attempt to get such provisions adopted. In firms that already had staggered boards, shareholders did not have the power to dismantle staggered boards. While the shareholders of many firms with staggered boards passed and continue to pass shareholder resolutions in favor of destaggering the board, such resolutions are only precatory, and management commonly ignore them. As a result, over the period of their and our studies, there were only few firms adding staggered boards, but also few firms dropping them.
In non-linear regressions such as logistic regressions, interaction terms cannot be interpreted in the same way as they would be in linear regressions. We adjust for this non-linearity based on the approach suggested by Norton et al. (2004).
La Porta et al. (2000) and Dittmar et al. (2003) find that firms in countries with weaker shareholder rights tend to pay less out in dividends or hold more cash than similar firms in countries with strong shareholder rights. On the surface, our findings may appear contradictory to theirs. However, a more careful look reveals that our results are not directly comparable to them because we investigate variation in dividend payouts within the U.S. while those studies look at cross-country variations. In addition, our measures of shareholder rights and investor protection are different. Our studies, nevertheless, are similar in spirit in the sense that we all attempt to use agency theory to explain dividend policy.
Elizabeth Bumiller, “Bush Signs Bill aimed at Fraud in Corporations,” N.Y. Times, July 31, 2002.
Around the same time, the Securities Exchange Commission (SEC) collaborated with the major stock exchanges to develop a stricter set of exchange listing requirements for publicly traded firms.
For Model 4, we adjust the coefficient of the interaction term based on the approach suggested by Norton et al. (2004).
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Jiraporn, P., Chintrakarn, P. Staggered Boards, Managerial Entrenchment, and Dividend Policy. J Financ Serv Res 36, 1–19 (2009). https://doi.org/10.1007/s10693-009-0059-6
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DOI: https://doi.org/10.1007/s10693-009-0059-6