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How Talented Managers Make Dividend Decision: Evidence from U.S. Market

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  • Veeranuch Leelalai

    (National Institute of Development Administration)

Abstract

Wealth maximization is the main objective of a business firm. One of the instruments to achieve that goal is dividend policy. However, dividend policy is also considered to be timelessly complicated as managers have to alternate between new investment decisions and wealth distribution to shareholders. In addition, firms should have stable income level in order to payout the dividend. Subsequently, it is controversial about how much a firm, led by a group of professional managements, should pay the dividend. This paper approached the question by investigating the relationship between managerial talent and dividend decision. The hypothesis was that talented managers choose to pay more dividends, because manager with greater ability supposedly make better corporate decisions, which in turns, can improve company?s earning quality. Managerial ability measure (hereafter ?MA-score?) used herein is motivated by the work of Demerjian et al. (2012), which gauged genuine managerial ability rather than firm efficiency. The results supported the earning quality hypothesis as dividend policy was positively associated with managerial ability. Specifically, managers with higher ability was associated with higher possibility to approve dividend payment to shareholder and tended to pay at a higher rate than less talented managers. Using industry mean MA-score as instrumental variable, this paper employed the two-stage least square method to address possible endogeneity and still obtained the consistent results. The implication was that managerial talent has substantial impact on critical corporate decisions such as dividend policy. More talented managers can improve corporate earning quality (or sustainability), which encourage to pay more dividend.

Suggested Citation

  • Veeranuch Leelalai, 2015. "How Talented Managers Make Dividend Decision: Evidence from U.S. Market," Proceedings of International Academic Conferences 1003573, International Institute of Social and Economic Sciences.
    • Handle: RePEc:sek:iacpro:1003573
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    References listed on IDEAS

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    1. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    2. Peter Demerjian & Baruch Lev & Sarah McVay, 2012. "Quantifying Managerial Ability: A New Measure and Validity Tests," Management Science, INFORMS, vol. 58(7), pages 1229-1248, July.
    3. Deshmukh, Sanjay & Goel, Anand M. & Howe, Keith M., 2013. "CEO overconfidence and dividend policy," Journal of Financial Intermediation, Elsevier, vol. 22(3), pages 440-463.
    4. Libby, Robert & Luft, Joan, 1993. "Determinants of judgment performance in accounting settings: Ability, knowledge, motivation, and environment," Accounting, Organizations and Society, Elsevier, vol. 18(5), pages 425-450, July.
    5. Merton H. Miller & Franco Modigliani, 1961. "Dividend Policy, Growth, and the Valuation of Shares," The Journal of Business, University of Chicago Press, vol. 34, pages 411-411.
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    More about this item

    Keywords

    Dividend policy; Managerial ability; Managerial talent;
    All these keywords.

    JEL classification:

    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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