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CEO Replacement and Compensation Around Dividend Omissions

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  • Richard Fosberg

Abstract

Agency theory suggests that to motivate a firm’s managers to act in the best interests of the firm’s shareholders, managerial compensation should be directly tied to firm performance. In this study, the measure of firm performance used to test this theory is the decision by a firm to omit its common stock dividend. A dividend omission is taken to indicate that the firm’s management and board of directors believe that the current and future earnings prospects (performance) of the firm are poor. In a sample of firms that omitted their dividend sometime during the years 1987 through 1992, we find that, on average, the CEOs (Chief Executive Officers) of these firms experienced significant decreases in total compensation (wealth) around the time of the dividend omission. Not surprisingly, the CEOs who experienced the greatest compensation loss were the 61.4% of CEOs who lost their jobs. The probability that a CEO would be replaced around the time of the dividend omission was found to be directly related to the CEO’s age and inversely related to the firm’s performance and CEO share ownership.

Suggested Citation

  • Richard Fosberg, 2001. "CEO Replacement and Compensation Around Dividend Omissions," Corporate Governance: An International Review, Wiley Blackwell, vol. 9(1), pages 25-35, January.
    • Handle: RePEc:bla:corgov:v:9:y:2001:i:1:p:25-35
    DOI: 10.1111/1467-8683.00223
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    Cited by:

    1. Lu, Yun & Ntim, Collins G. & Zhang, Qingjing & Li, Pingli, 2022. "Board of directors’ attributes and corporate outcomes: A systematic literature review and future research agenda," International Review of Financial Analysis, Elsevier, vol. 84(C).
    2. Shujun Ding & Zhenyu Wu & Yuanshun Li & Chunxin Jia, 2009. "Can the Chinese Two-Tier-Board system Control the Board Chair Pay?," Asian Journal of Finance & Accounting, Macrothink Institute, vol. 1(1), pages 122-122, December.
    3. Mao, Y., 2013. "Essays on leveraged buyouts," Other publications TiSEM 55806b61-eacb-4ba2-97c6-8, Tilburg University, School of Economics and Management.
    4. Erkan, Asligul & Fainshmidt, Stav & Judge, William Q., 2016. "Variance decomposition of the country, industry, firm, and firm-year effects on dividend policy," International Business Review, Elsevier, vol. 25(6), pages 1309-1320.

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