Empirical evidence from previous studies has indicated that a firm’s dividend policy is affected by such factors as a changing market environment and various characteristics of the firm. But the author’s analysis indicates that there are factors related to CEO leadership attributes, such as marital status, age, education, and other personality traits, that also influence a firm’s dividend policy.
What’s Inside?
Although a lot of research has been done on the relationship between a firm’s financial/corporate decisions and its CEO’s characteristics, the relationship between a CEO’s demographic attributes and a firm’s dividend policy is unclear. The author finds that companies led by CEOs who are married, are affiliated with the US Republican political party, profess to be Christians, and have children maintain higher dividend yields. They are also more likely to significantly increase dividends and experience deteriorating performance in the years following the increase. Companies led by older, long-term employees who became the CEO were also likely to significantly increase dividends but were not associated with significant variation in subsequent firm operating and stock price performance.
How Is This Research Useful to Practitioners?
Empirical research has indicated that CEOs may be susceptible to having optimistic outlooks. Overly optimistic managers expect improved firm performance from dividends and tend to substantially increase dividend payouts. Previous research has noted a positive relationship between marriage and over-optimism. Another factor that may increase overconfidence is religiosity; and those who belong to fundamentalist faiths have more optimistic outlooks than those belonging to more liberal faiths. CEOs with “traditional” personal lives, which the author defines in Profile 1 as those who are married, affiliated with the Republican political party, and profess to be Christian as well as have children, exhibit an increased propensity to issue callable debt, which reflects their overly optimistic outlook about the future performance of a firm.
The relationship between dividend payment and personality attributes of CEOs could be a proxy for the relationship between dividend payment and firm maturity. Empirical results suggest that higher dividend payouts and investment opportunities have an inverse relationship. Firms in the mature phase of a business cycle with dwindling investment opportunities may prefer to increase dividends and to hire CEOs with traditional personal lives.
Firms led by traditional CEOs tend to maintain higher dividend yields and are more likely to significantly increase dividend payouts. These firms also exhibit deteriorating operating and stock performance after the dividend is increased. One explanation offered by the author is that these CEOs tend to have overly optimistic tendencies, so when their overestimated forecasts regarding future firm performance prove not to be realistic, they react by increasing dividend payouts.
How Did the Author Conduct This Research?
A growing subset of the corporate finance literature reveals that managerial traits affect workplace decisions. The author constructs six different CEO profiles from 17 observable demographic characteristics, such as marital status, political affiliation, religious preference, education, gender, longevity with the firm, and nationality. She then considers the relationship between the various profiles and their firms’ dividend policy.
Using the CRSP database, she gathers data for quarterly ordinary cash dividends on common stock of nonfinancial and nonutility firms that subsequently increased dividends in the range of 12.5% to 500%. The same firms must also have nonmissing and nonproblematic CRSP returns in the 252 trading days prior to and subsequent to the event.
The final sample spans 1980 to 2008 and includes 2,386 CEOs at 1,528 firms for a total of 16,185 firm years during which 2,325 qualifying dividend increases of 12.5% to 500% occur. Using logistic regressions, the author finds that traditional CEOs (Profile 1) and older, long-term employees who become CEOs (Profile 4) are more likely to substantially increase dividends in a given fiscal year. CEOs who are highly educated and have legal training as well as Asian CEOs with technical training are less likely to substantially increase dividends.
Abstractor’s Viewpoint
The article could have discussed and analyzed other important factors that influence the increase in dividends, such as shareholder composition and a founder CEO.