Skip to main content
SpringerLink
Log in

Does firm payout policy affect shareholders’ dissatisfaction with directors?

  • Original Research
  • Published:
Review of Quantitative Finance and Accounting Aims and scope Submit manuscript

Abstract

In this study we investigate the information content of firm payout policy to shareholders. We focus on the association between a firm’s payout policy and shareholders’ satisfaction with board directors, as expressed by the percentage of negative or withheld votes for directors during annual elections (shareholders’ dissent voting). We fill a gap in the literature by using shareholders’ voting results in the election of board members at annual meeting as a setting to examine shareholder perception of firms’ payout policies. We find that higher share repurchase and/or higher dividend payout are associated with lower shareholders’ dissenting votes. We also find that such relationship is conditional on the level of free cash flow, firm future performance, the degree of management entrenchment, and the type of institutional investors. Our study contributes to the payout literature by providing empirical evidence that shows the outcome of shareholders’ votes in director elections may be influenced by the board of directors’ payout decisions.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1

Similar content being viewed by others

Notes

  1. https://www.concernedshareholders.com/CCS_ShareholderQuestions.pdf.

  2. According to Lynn Stout of Cornell Law School, the use of shareholders’ dissent voting in the annual meeting to replace the board of directors is a way to change a publicly traded company's dividend policy. https://smallbusiness.chron.com/can-shareholder-force-corporation-pay-dividend-61506.html.

  3. Chen and Guay (2020) validate shareholder voting in annual director elections as a measure of shareholders’ satisfaction.

  4. https://www.corning.com/media/worldwide/global/documents/Finance_Committee_Charter.pdf; http://delcode.delaware.gov/title8/c001/sc05/index.shtml.

  5. We measure the magnitude of payouts using the size of dividend/share repurchase payouts relative to total stockholder’s equity, given that shareholders’ satisfaction may arise from the payout to equity ratio.

  6. Companies will report shareholder votes as either “against” or “withheld” but not both. For companies that report “against” votes, we identify “withheld” as zero and vice versa.

  7. 2003 is the first year here since we obtain the lagged values of the COMPUSTAT variables.

  8. The MSCI USA index is a market capitalization weighted index that tracks the returns of equity securities in the top 85% by market capitalization in the United States.

  9. Our unreported statistics in Pearson correlation analysis show that our measures for peer payout are not significantly correlated with Votes Againstt.

  10. We acknowledge that due to data limitation, we cannot separate regular share repurchases from special share repurchases.

  11. A potential countervailing factor that may increase shareholders’ satisfaction when firms with lower future free cash flow pay dividends is found in Easterbrook (1984). Easterbrook (1984) argues that the potential future need for cash that will force the firm to go to the external capital market for new funds, will also force the firm to accept an increase in effective monitoring from the external capital market. This increase in monitoring may be viewed by shareholders as beneficial.

  12. Several studies in the corporate governance literature have used Bebchuk et al. (2009) entrenchment index (e.g., Brown and Caylor 2006; Cai et al. 2009; Harris and Glegg 2009; Baranchuk et al. 2014). Bebchuk et al. (2009) identifies six provisions that are likely indicators of the strength of shareholder rights, and potentially exacerbating managerial entrenchment. The Bebchuk et al. (2009) entrenchment index values range from 0 to 6, with the value 6 representing the highest levels of managerial entrenchment.

  13. To generate variables for institutional ownership, we merge the SEC Form 13F data with Bushee’s categorization of institutional investors (http://acct.wharton.upenn.edu/faculty/bushee/IIvars.html#is).

References

  • Adams R, Ferreira D (2009) Women in the boardroom and their impact on governance and performance. J Financ Econ 94(2):291–309

    Google Scholar 

  • Adams RB, Hermalin BE, Weisbach MS (2010) The role of boards of directors in corporate governance: a conceptual framework and survey. J Econ Lit 48(1):58–107

    Google Scholar 

  • Adjaoud F, Ben-Amar W (2010) Corporate governance and dividend policy: shareholders’ protection or expropriation? J Bus Finance Account 37(5–6):648–667

    Google Scholar 

  • Alli KL, Khan AQ, Ramirez GG (1993) Determinants of corporate dividend policy: a factorial analysis. Financ Rev 28(4):523–547

    Google Scholar 

  • Ashcraft AB (2008) Does the market discipline banks? New evidence from regulatory capital mix. J Financ Intermed 17(4):543–561

    Google Scholar 

  • Bajaj M, Vijh AM (1990) Dividend clienteles and the information content of dividend changes. J Financ Econ 26(2):193–219

    Google Scholar 

  • Baker HK, Powell GE, Veit ET (2003) Why companies use open-market repurchases: a managerial perspective. Q Rev Econ Finance 43:483–504

    Google Scholar 

  • Baker M, Mendel B, Wurgler J (2015) Dividends as reference points: a behavioral signaling approach. Rev Financ Stud 29(3):697–738

    Google Scholar 

  • Baranchuk N, Kieschnick R, Moussawi R (2014) Motivating innovation in newly public firms. J Financ Econ 111(3):578–588

    Google Scholar 

  • Bebchuk L, Cohen A, Ferrell A (2009) What matters in corporate governance? Rev Financ Econ 22:783–827

    Google Scholar 

  • Benartzi S, Michaely R, Thaler R (1997) Do changes in dividends signal the future or the past? J Finance 52(3):1007–1034

    Google Scholar 

  • Bernhardt D, Douglas A, Robertson F (2005) Testing dividend signaling models. J Empir Finance 12(1):77–98

    Google Scholar 

  • Bernheim BD, Wantz A (1995) A tax-based test of the dividend signaling hypothesis. Am Econ Rev 85(3):532–551

    Google Scholar 

  • Bethel J, Gillan SL (2002) The impact of the institutional and regulatory environment on shareholder voting. Financ Manag 31(4):29–54

    Google Scholar 

  • Bhattacharya S (1979) Imperfect information, dividend policy, and “the bird in the hand” fallacy. Bell J Econ 10(1):259–270

    Google Scholar 

  • Blouin JL, Ready JS, Shackelford DA (2011) Dividends, share repurchases, and tax clienteles: evidence from the 2003 reductions in shareholder taxes. Account Rev 86(3):887–914

    Google Scholar 

  • Brav A, Graham JR, Harvey CR, Michaely R (2005) Payout policy in the 21st century. J Financ Econ 77(3):483–527

    Google Scholar 

  • Brockman P, Chung DY (2001) Managerial timing and corporate liquidity: evidence from actual share repurchases. J Financ Econ 61(3):417–448

    Google Scholar 

  • Brown LD, Caylor ML (2006) Corporate governance and firm valuation. J Account Public Policy 25(4):409–434

    Google Scholar 

  • Bushee BJ (2001) Do institutional investors prefer near-term earnings over long-run value? Contemp Account Res 18(2):207–246

    Google Scholar 

  • Byoun S, Xu Z (2013) Why do some firms go debt free? Asia-Pac J Financ Stud 42(1):1–38

    Google Scholar 

  • Cai J, Garner JL, Walkling RA (2009) Electing directors. J Finance 64(5):2389–2421

    Google Scholar 

  • Cai Y, Dhaliwal DS, Kim Y, Pan C (2014) Board interlocks and the diffusion of disclosure policy. Rev Account Stud 19(3):1086–1119

    Google Scholar 

  • Chay JB, Suh J (2009) Payout policy and cash-flow uncertainty. J Financ Econ 93(1):88–107

    Google Scholar 

  • Chen K, Guay W (2020) Busy directors and shareholder satisfaction. J Financ Quant Anal 55(7):2181–2210

    Google Scholar 

  • Chen G, Firth M, Gao N (2002) The information content of concurrently announced earnings, cash dividends, and stock dividends: an investigation of the Chinese stock market. J Int Financ Manag Account 13(2):101–124

    Google Scholar 

  • Comment R, Jarrell GA (1991) The relative signalling power of Dutch-auction and fixed-price self-tender offers and open-market share repurchases. J Finance 46(4):1243–1271

    Google Scholar 

  • Conroy RM, Eades KM, Harris RS (2000) A test of the relative pricing effects of dividends and earnings: evidence from simultaneous announcements in Japan. J Finance 55(3):1199–1227

    Google Scholar 

  • Dann LY (1981) Common stock repurchases. J Financ Econ 9(2):113–138

    Google Scholar 

  • DeAngelo H, DeAngelo L, Stulz RM (2006) Dividend policy and the earned/contributed capital mix: a test of the life-cycle theory. J Financ Econ 81(2):227–254

    Google Scholar 

  • DeAngelo H, DeAngelo L, Skinner D (2008) Corporate payout policy. Found Trends Finance 3:95–287

    Google Scholar 

  • DeFond ML, Hann RN, Hu X (2005) Does the market value financial expertise on audit committees of boards of directors? J Account Res 43(2):153–193

    Google Scholar 

  • DeFond ML, Lim CY, Zang Y (2016) Client conservatism and auditor-client contracting. Account Rev 91(1):69–98

    Google Scholar 

  • Del Guercio D, Seery L, Woidtke T (2008) Do boards pay attention when institutional investor activists “just vote no? J Financ Econ 90(1):84–103

    Google Scholar 

  • Denis DJ, Osobov I (2008) Why do firms pay dividends? International evidence on the determinants of dividend policy. J Financ Econ 89(1):62–82

    Google Scholar 

  • Dittmar AK (2000) Why do firms repurchase stock? J Bus 73(3):331–355

    Google Scholar 

  • Dittmar A, Mahrt-Smith J (2007) Corporate governance and the value of cash holdings. J Financ Econ 83(3):599–634

    Google Scholar 

  • Dyl EA, Weigand RA (1998) The information content of dividend initiations: additional evidence. Financ Manage 27(3):27–35

    Google Scholar 

  • Easterbrook FH (1984) Two agency-cost explanations of dividends. Am Econ Rev 74:650–659

    Google Scholar 

  • Ertimur Y, Ferri F, Oesch D (2018) Understanding uncontested director elections. Manag Sci 64(7):3400–3420

    Google Scholar 

  • Fama E, French K (2001) Disappearing dividends: changing firm characteristics or lower propensity to pay? J Financ Econ 60(1):3–43

    Google Scholar 

  • Fama E, Jensen MC (1983) Separation of ownership and control. J Law Econ 26(2):301–325

    Google Scholar 

  • Farinha J (2003) Dividend policy, corporate governance and the managerial entrenchment hypothesis: an empirical analysis. J Bus Finance Account 30(9–10):1173–1209

    Google Scholar 

  • Farre-Mensa J, Michaely R, Schmalz M (2014) Payout policy. Annu Rev Financ Econ 6(1):75–134

    Google Scholar 

  • Finkelstein S, D’Aveni RA (1994) CEO duality as a double-edged sword: how boards of directors balance entrenchment avoidance and unity of command. Acad Manag J 37(5):1079–1108

    Google Scholar 

  • Fischer P, Gramlich J, Miller B, White H (2009) Investor perceptions of board performance: evidence from uncontested director elections. J Account Econ 48:172–189

    Google Scholar 

  • Floyd E, Li N, Skinner DJ (2015) Payout policy through the financial crisis: the growth of repurchases and the resilience of dividends. J Financ Econ 118(2):299–316

    Google Scholar 

  • Francis BB, Hasan I, John K, Song L (2011) Corporate governance and dividend payout policy: a test using antitakeover legislation. Financ Manag 40(1):83–112

    Google Scholar 

  • GMI Ratings (2012) The election of corporate directors: what happens when shareowners withhold a majority of votes from director nominees?. http://irrcinstitute.org/pdf/Final%20Election%20of%20Directors%20GMI%20Aug%202012.pdf

  • Graham JR, Harvey C (2001) The theory and practice of corporate finance: evidence from the field. J Financ Econ 60:187–243

    Google Scholar 

  • Grinstein Y, Michaely R (2005) Institutional holdings and payout policy. J Finance 60(3):1389–1426

    Google Scholar 

  • Grullon G, Michaely R (2002) Dividends, share repurchases, and the substitution hypothesis. J Finance 57(4):1649–1684

    Google Scholar 

  • Grullon G, Michaely R (2004) The information content of share repurchase programs. J Finance 59(2):651–680

    Google Scholar 

  • Gunasekarage A, Power DM (2002) The post-announcement performance of dividend-changing companies: the dividend-signaling hypothesis revisited. Account Finance 42(2):131–151

    Google Scholar 

  • Hancock GD, Mougoué M (1991) The impact of financial factors on proxy contest outcomes. J Bus Finance Account 18(4):541–555

    Google Scholar 

  • Harford J, Mansi SA, Maxwell WF (2008) Corporate governance and firm cash holdings in the US. J Financ Econ 87(3):535–555

    Google Scholar 

  • Harris O, Glegg C (2009) Governance quality and privately negotiated stock repurchases: evidence of agency conflict. J Bank Finance 33(2):317–325

    Google Scholar 

  • Healy PM, Palepu KG (1988) Earnings information conveyed by dividend initiations and omissions. J Financ Econ 21(2):149–175

    Google Scholar 

  • Heckman J (1979) The sample selection bias as a specification error. Econometrica 47(1):153–162

    Google Scholar 

  • Hermalin BE, Weisbach MS (1988) The determinants of board composition. Rand J Econ 19(4):589–606

    Google Scholar 

  • Holder ME, Langrehr FW, Hexter JL (1998) Dividend policy determinants: an investigation of the influences of stakeholder theory. Financ Manag 27(3):73–82

    Google Scholar 

  • Hu A, Kumar P (2004) Managerial entrenchment and payout policy. J Financ Quant Anal 39(4):759–790

    Google Scholar 

  • Ikenberry D, Lakonishok J, Vermaelen T (1995) Market underreaction to open market share repurchases. J Financ Econ 39(2–3):181–208

    Google Scholar 

  • Ikenberry D, Lakonishok J, Vermaelen T (2000) Stock repurchases in Canada: performance and strategic trading. J Finance 55(5):2373–2397

    Google Scholar 

  • Jagannathan M, Stephens C (2003) Motives for multiple open-market repurchase programs. Financ Manag 32(2):71–91

    Google Scholar 

  • Jagannathan M, Stephens C, Weisbach M (2000) Financial flexibility and the choice between dividends and stock repurchases. J Financ Econ 57(3):355–384

    Google Scholar 

  • Jensen MC (1986) Agency costs of free cash flow, corporate finance, and takeovers. Am Econ Rev 76(2):323–329

    Google Scholar 

  • Jensen MC, Meckling WH (1976) Theory of the firm: managerial behavior, agency costs and ownership structure. J Financ Econ 3(4):305–360

    Google Scholar 

  • Kao C, Wu C (1994) Tests of dividend signaling using the Marsh-Merton Model: a generalized friction approach. J Bus 67:45–68

    Google Scholar 

  • Kim K, Mauldin E, Patro S (2014) Outside directors and board advising and monitoring performance. J Account Econ 57(2):110–131

    Google Scholar 

  • Kimbro MB, Xu D (2016) Shareholders have a say in executive compensation: evidence from say-on-pay in the United States. J Account Public Policy 35(1):19–42

    Google Scholar 

  • Lang LHP, Litzenberger RH (1989) Dividend announcements: cash flow signaling vs. free cash flow hypothesis? J Financ Econ 24(1):181–191

    Google Scholar 

  • Leary M, Roberts M (2014) Do peer firms affect corporate financial policy? J Finance 69(1):139–178

    Google Scholar 

  • Lee WJ (2011) Managerial entrenchment and the value of dividends. Rev Quant Finance Account 36(2):297–322

    Google Scholar 

  • Lee B, Rui OM (2007) Time-series behavior of share repurchases and dividends. J Financ Quant Anal 42(1):119–142

    Google Scholar 

  • Mallette P, Fowler KL (1992) Effects of board composition and stock ownership on the adoption of “poison pills”. Acad Manag J 35(5):1010–1035

    Google Scholar 

  • Marshall R, Seretis P, Grunfeld A (2018) Taking stock. Share buybacks and shareholder value. MSCI Thematic Research. https://www.msci.com/documents/10199/ba01b4c4-683c-74ca-339e-f422df5d879e

  • Mikkelson WH, Partch MM (2003) Do persistent large cash reserves hinder performance? J Financ Quant Anal 38(2):275–294

    Google Scholar 

  • Miller MH, Modigliani F (1961) Dividend Policy, growth, and the valuation of shares. J Bus 34(4):411–433

    Google Scholar 

  • Miller MH, Rock K (1985) Dividend policy under asymmetric information. J Finance 40(4):1031–1051

    Google Scholar 

  • Mitton T (2004) Corporate governance and dividend policy in emerging markets. Emerg Mark Rev 5(4):409–426

    Google Scholar 

  • Moin A, Guney Y, El Kalak I (2020) The effects of ownership structure, sub-optimal cash holdings and investment inefficiency on dividend policy: evidence from Indonesia. Rev Quant Finance Account. https://doi.org/10.1007/s11156-019-00862-z

    Article  Google Scholar 

  • Nissim D, Ziv A (2001) Dividend changes and future profitability. J Finance 56(6):2111–2133

    Google Scholar 

  • Ofer AR, Thakor AV (1987) A theory of stock price responses to alternative corporate cash disbursement methods: stock repurchases and dividends. J Finance 42(2):365–394

    Google Scholar 

  • Opler T, Titman S (1993) The determinants of leveraged buyout activity: free cash flow vs. financial distress costs. J Finance 48(5):1985–1999

    Google Scholar 

  • Opler T, Pinkowitz L, Stulz R, Williamson R (1999) The determinants and implications of corporate cash holdings. J Financ Econ 52(1):3–46

    Google Scholar 

  • Parrino R, Sias RW, Starks LT (2003) Voting with their feet: institutional ownership changes around forced CEO turnover. J Financ Econ 68(1):3–46

    Google Scholar 

  • Pettit RR (1972) Dividend announcements, security performance, and capital market efficiency. J Finance 27(5):993–1007

    Google Scholar 

  • Stephens CP, Weisbach MS (1998) Actual share reacquisitions in open-market repurchase programs. J Finance 53(1):313–333

    Google Scholar 

  • Stulz RM (1988) Managerial control of voting rights: financing policies and the market for corporate control. J Financ Econ 20:25–54

    Google Scholar 

  • Stulz RM (1990) Managerial discretion and optimal financing policies. J Financ Econ 26(1):3–27

    Google Scholar 

  • Thomas RS, Tricker PC (2017) Shareholder voting in proxy contests for corporate control, uncontested director elections and management proposals: a review of the empirical literature. Okla Law Rev 70(1):9

    Google Scholar 

  • Vafeas N (2003) Length of board tenure and outside director independence. J Bus Finance Account 30(7–8):1043–1064

    Google Scholar 

  • Vance SC (1983) Corporate leadership: boards, directors, and strategy. McGraw-Hill, New York

    Google Scholar 

  • Vermaelen T (1981) Common stock repurchases and market signaling: an empirical study. J Financ Econ 9(2):139–183

    Google Scholar 

  • Von Eije H, Megginson WL (2008) Dividends and share repurchases in the European Union. J Financ Econ 89(2):347–374

    Google Scholar 

  • Whetten LC (1959) Recent proxy contests: a study in management stockholder relations. Georgia State College of Business

  • Wommack WW (1979) The board’s most important function. Harvard Business Review. https://hbr.org/1979/09/the-boards-most-important-function

  • Woolridge JR (1982) The information content of dividend changes. J Financ Res 5(3):237–247

    Google Scholar 

  • Ye Z, Hermanson DR, Krishnan J (2013) Shareholder voting in director elections and initial SOX Section 404 reports. J Account Audit Finance 28(2):103–127

    Google Scholar 

  • Yermack D (1996) Higher market valuation of companies with a small board of directors. J Financ Econ 40(2):185–211

    Google Scholar 

Download references

Acknowledgements

We would like to thank Cheng-Few Lee (the Editor) and two anonymous referees for their helpful comments and suggestions.

Author information

Authors and Affiliations

  1. University of North Carolina-Charlotte, Charlotte, NC, 28223-0001, USA

    Paul Tanyi

  2. University of Nebraska-Lincoln, CBA 392, PO Box 880488, Lincoln, NE, 68588-0488, USA

    David B. Smith

  3. University of Nebraska-Omaha, Omaha, NE, 68182, USA

    Xiaoyan Cheng

Authors
  1. Paul Tanyi
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. David B. Smith
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Xiaoyan Cheng
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Xiaoyan Cheng.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Tanyi, P., Smith, D.B. & Cheng, X. Does firm payout policy affect shareholders’ dissatisfaction with directors?. Rev Quant Finan Acc 57, 279–320 (2021). https://doi.org/10.1007/s11156-020-00945-2

Download citation

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11156-020-00945-2

Keywords

JEL Classification

Search

Navigation