Good Managers Invest More and Pay Less Dividends: A Model Of Dividend Policy

Abstract

This model explains dividends as a component of a contract set up by an uninformed principal. I start from a well-documented empirical fact that there is a relation between dividends declared and executive compensation. I find that when hidden information is about the productivity of the agent then dividend – conditional on cash available – bears a negative relationship to managerial type. That is, for a given level of available cash, the lower type manager declares a higher dividend than that declared by a manager with higher productivity. The result is robust under different model extensions. I also discuss empirical implications of the model.

Citation

Bhattacharyya, N. (2007), "Good Managers Invest More and Pay Less Dividends: A Model Of Dividend Policy", Hirschey, M., John, K. and Makhija, A.K. (Ed.) Issues in Corporate Governance and Finance (Advances in Financial Economics, Vol. 12), Emerald Group Publishing Limited, Leeds, pp. 91-117. https://doi.org/10.1016/S1569-3732(07)12005-3