Staggered Boards, Managerial Entrenchment, and Dividend Policy

Abstract

Motivated by agency theory, we explore the potential impact of managerial entrenchment through staggered boards on dividend policy. The evidence suggests that firms with staggered boards are more likely to pay dividends and pay them more generously than do those with unitary boards. We also show that the impact of staggered boards on dividend payouts is substantially stronger (as much as two to three times larger) than the effect of all other corporate governance provisions combined. Overall, the evidence is consistent with the notion that dividends help alleviate agency conflicts. Thus, firms more vulnerable to managerial entrenchment, i.e. firms with staggered board, rely more on dividends to mitigate agency costs. Aware of potential endogeneity, we demonstrate that staggered boards likely bring about, and are not merely associated with, larger dividend payouts. Our results are important as they show that certain governance provisions have considerably more influence than others on critical corporate activities such as dividend payout decisions.

Keywords: dividends, classified boards, staggered boards, corporate governance

JEL Classification: G30, G32, G35