Dividend payout and executive compensation: theory and evidence
Dividend payout and executive compensation:
theory and evidence
Nalinaksha Bhattacharyya, Amin Mawani, Cameron Morrill
College of Business and Public Policy, University of Alaska Anchorage, Anchorage, 99507, USA
Schulich School of Business, York University, Toronto, M3J 1P3, Canada
Asper School of Business, University of Manitoba, Winnipeg, CR3T5V4, Canada
Abstracttheory and evidence
Nalinaksha Bhattacharyya, Amin Mawani, Cameron Morrill
College of Business and Public Policy, University of Alaska Anchorage, Anchorage, 99507, USA
Schulich School of Business, York University, Toronto, M3J 1P3, Canada
Asper School of Business, University of Manitoba, Winnipeg, CR3T5V4, Canada
Bhattacharyya (2007) develops a model in which compensation contracts motivate high-quality managers to retain and invest firm earnings, while low-quality managers are motivated to distribute income to shareholders. In equilibrium, the model shows that there is a positive (negative) relationship between the earnings retention ratio (dividend payout ratio) and managerial compensation. Results of tests of US data show that executive compensation is positively (negatively) associated with earnings retention (dividend payout). Our results
indicate that corporate dividend policy is perhaps best understood by considering the payout ratio (dividends divided by earnings), rather than the level of cash dividends alone.
Key words : Dividend payout; Executive compensation; Earnings retention
JEL classification : G35, J38
1. Introduction
Why do corporations pay dividends? Despite decades of study, we have yet to understand completely the factors that influence dividend policy and the manner in which these factors interact. A quarter of a century ago, Black (1976) wrote that ‘. . . the harder we look at the dividend picture, the more it seems
The authors acknowledge funding from the Social Sciences and Humanities Research Council of Canada and the Centre for Accounting Research at the University of Manitoba. Ron Giammarino, Heather Wier, Gady Jacoby, Kai Li, Vikas Mehrotra, Usha Mittoo, Ranjini Sivakumar and Steven Zheng provided helpful comments on earlier versions of the paper.
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