Insurance company dividend policy decisions: Evidence on the role of corporate governance and regulation

Abstract

Purpose

The purpose of this paper is to explore the relationship between good corporate governance and dividend payment in the regulated insurance industry.

Design/methodology/approach

A modification of Rozeff's transaction cost/agency cost trade‐off model was estimated on a sample of 55 firms in the insurance industry. Data cover a five‐year period ending in 2006.

Findings

Consistent with an agency view of dividends functioning to reduce the need for firm monitoring, it was found that there is no relationship between good corporate governance and dividend policy in a regulated industry. In other words, regulation appears to supplant the need for most corporate governance mechanisms and dividend distribution to provide information.

Research limitations/implications

One data point used in this study, the corporate governance quotient (CGQ), is a relatively new metric created in 2001. Therefore limited use of this variable has appeared in previous research. Additional work is needed to fully evaluate the effectiveness of CGQ as a true measure of corporate governance.

Practical implications

Regulated firms in the insurance industry do not need to be subjected to the external monitoring forced by high dividend payments. Regulators perform that function instead.

Originality/value

This study is the first to evaluate the impact of good corporate governance on regulated firms’ dividend policy.

Citation

Puleo, V.A., Smith, F.S. and Casey, K.M. (2009), "Insurance company dividend policy decisions: Evidence on the role of corporate governance and regulation", Managerial Finance, Vol. 35 No. 6, pp. 493-500. https://doi.org/10.1108/03074350910956954