The Impact Of Outside Director Equity Compensation On Dividend Policy

Abstract

This study investigates the impact outside director equity compensation has on dividend policy. The analysis, conducted over a 4 year period from 1997-2000, is based on a sample of 89 first time adopters of equity compensation. The use of first time adopters attempts to control for the fact that many of the variables in the study are endogenously determined over time. The results indicate that as the percentage of equity compensation increases a firm’s propensity to pay dividends decreases as does the level of dividends. These results also indicate that firms with higher profitability pay a lower level of dividends. Taken together these result indicate that as managers send signals about positive performance, outside directors with a financial stake in the company decrease the level of monitoring by paying fewer dividends.