Good Managers Invest More and Pay Less Dividends: A Model Of Dividend Policy

Nalinaksha Bhattacharyya

A chapter in Issues in Corporate Governance and Finance, 2007, pp 91-117 from Emerald Group Publishing Limited

Abstract: This model explains dividends as a component of a contract set up by an uninformed principal. I start from a well-documented empirical fact that there is a relation between dividends declared and executive compensation. I find that when hidden information is about the productivity of the agent then dividend – conditional on cash available – bears a negative relationship to managerial type. That is, for a given level of available cash, the lower type manager declares a higher dividend than that declared by a manager with higher productivity. The result is robust under different model extensions. I also discuss empirical implications of the model.

Date: 2007
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Persistent link: https://EconPapers.repec.org/RePEc:eme:afeczz:s1569-3732(07)12005-3

DOI: 10.1016/S1569-3732(07)12005-3

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