Labor Skill and Dividend Policy

Abstract

We examine how firms’ labor skill heterogeneity affects dividend policy. Since it is more costly to hire, retain, and layoff skilled labor than unskilled labor, we hypothesize that firms relying more on skilled labor are more cautious in setting their dividend policy, which competes with funding for labor force. We find that firms with more skilled labor are less likely to distribute or increase dividends, and when they do so, the magnitudes are smaller. We further document that dividend increases by such firms are more strongly correlated with future earnings increases and are accompanied by stronger stock market reactions.

Keywords: Labor skill, Labor adjustment costs, Dividend policy

JEL Classification: G35, J3