Abstract:
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Dividends have long been acknowledged as profit-distributing mechanisms
in classical corporate policy and are important in key investment and financial
decision-making. Dividends have continued to be famously debated by scholars
for almost a century. On various perspectives, many scholars have debated back
and forth on their relevancy to firm performance and value.
Academic research on corporate policy and decision-making are associated
with managerial traits. The principal perception is that decisions vary in
accordance with different styles and abilities of managers. More able managers
tend to be risk takers. The ability of managers is found to be positively associated
with corporate performance since their decisions are reflected by organisational
success. This relationship also extends to demographic characteristics, educational
background, specific behaviour, tenure, and reputation.
Although there is rich literature on both dividends and managerial ability,
only a small amount attempts to explore the said relationship. Dividends are only
found to be negatively associated with managerial overconfidence. Therefore, this
study aims to make a valuable contribution to financial literature by examining
how managerial ability is related to dividend policy in order to shed light on how
corporate decisions vary in accordance with managerial ability. Specifically, the
research questions are: 1) Does managerial ability affect the propensity to pay
dividends? 2) For dividend-paying firms, does managerial ability affect the payout
ratio? 3) Are the results robust with different dividend measurements and managerial ability? Unlike other studies, this study applies the new measure
developed by Demerjian et al. (2012). The process is simply explained by
removing key firm-specific characteristics that might support or hinder managerial
ability for comparison within the industry.
The relationship direction could potentially be explained by three
contradictory postulations. Firstly, since it is sustainable, managerial ability is
believed to be an integral composition to promote quality earnings and encourage
firms to pay higher dividends. Secondly, on the contrary, more able managers can
opt to retain operational proceeds for expansion, rather than making a distribution
to shareholders. Lastly, more able and less able managers can use the dividend
policy to send signals to the market. It is not necessary for a firm with more able
managers to pay dividends.
An empirical study was conducted using 19,745 firm-year observations of
US listed firms reported by the annual Compustat/CRSP Merged Database from
1990 to 2011. The empirical results are in agreement with the earnings quality
hypothesis. Specifically, the results from logistic regression show a positive
association between managerial ability and the firm’s propensity to pay dividends.
Focusing on dividend-paying firms, those with more able managers tend to pay
higher dividend payouts. Since dividends are considered as long-term
commitments to shareholders, more able managers can manage resources more
wisely to sustainably boost firm performance. Eventually, firms are encouraged to
increase dividend payout. The results are also robust regarding alternative payouts,
the measurement of managerial ability, and possible reverse causality.
This study is beneficial in several meaningful ways. It is the first study to
investigate the association between managerial ability and dividend policy. In
addition it provides strong evidence regarding the effect of managerial ability on
other corporate decisions by showing that managerial ability matters in dividend
policy. Thus, the findings display important public policy implications. Finally,
this study is also useful for practitioners in different perspectives.
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