Independent director tenure and dividends

Hui Liang James and Hongxia Wang

Journal of Business Finance & Accounting, 2021, vol. 48, issue 5-6, 1057-1091

Abstract: We empirically test the Expertise vs. Management friendly hypotheses of independent director tenure through dividend policies. We find that the likelihood and the level of dividends increase with independent director tenure, and firms with long‐tenured directors are more likely to smooth dividends. This positive tenure–dividend relation is only evident in well‐governed and low‐free‐cash‐flow firms. The results suggest that managers use dividends as camouflage to divert public scrutiny from compromised monitoring of long‐tenured directors, but they are pushed to pre‐commit to dividends in well‐governed firms. We also document that investors value dividends with a premium in firms with long‐tenured directors, further corroborating the view that longer‐tenured directors are perceived as less effective monitors. The results are robust to various variable measures and model specifications, and support the Management friendly hypothesis.

Date: 2021
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