Dividend Policy, Corporate Governance and the Managerial Entrenchment Hypothesis: An Empirical Analysis

Jorge Farinha

Journal of Business Finance & Accounting, 2003, vol. 30, issue 9‐10, 1173-1209

Abstract: This paper analyses the agency explanation for the cross‐sectional variation of corporate dividend policy in the UK by looking at the managerial entrenchment hypothesis drawn from the agency literature. Consistent with predictions, a significant U‐shaped relationship between dividend payout ratios and insider ownership is observed for a large (exceeding 600 firms) sample of UK companies and two distinct periods. These results strongly suggest the possibility of managerial entrenchment when insider ownership reaches a threshold of around 30%. Evidence is also presented that non‐beneficial holdings by insiders can lead to entrenchment in conjunction with shares held beneficially.

Date: 2003
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