CFO co-option and dividend payments: the moderating role of CFO talent

• Date: 17 July 2024
• Pages: 803-827
• DOI: https://doi.org/10.1108/IJAIM-12-2023-0328
• Published date: 17 July 2024
• Subject Matter: Accounting & finance,Accounting/accountancy,Accounting methods/systems
• Author: Domenico Campa,Gianluca Ginesti

CFO co-option and dividend

payments: the moderating

role of CFO talent

Domenico Campa

Department of Economics and Finance, OMNES Education Research Center,

International University of Monaco, Monte Carlo, Monaco, and

Gianluca Ginesti

Department of Management, Economics, Institutions, University of Naples

Federico II, Naples, Italy

Abstract

Purpose –This study aims to investigatethe association between the co-option of the chief f‌inancial off‌icer

(CFO) and dividendpayments, assessing whether the talent of the CFO affects this association.

Design/methodology/approach –The empirical analyses were based on hand-collected data for 922 f‌irm-

year observations from 157 European listed f‌irms, during the period 2013–2019. Empirical models, based on a

two-step estimation procedure, involved the use of instrumental variables and the generalised moment method.

Findings –The results show that CFO co-option is negatively associated with the level of dividend

payments. It was also found that the degree of CFO talent moderatesthe negative association between CFO

co-optionand dividend payments.

Research limitations/implications –This investigation responds to the call for literature which

examines how chief executive off‌icer (CEO)–CFO relationships inf‌luence f‌irms’policies and outcomes. The

study offers novel evidence for the individual-level characteristics of CFOs which are likely to reduce the

effectivenessof CEO power and increase monitoring on corporatedecisions on dividends.

Practical implications –The study shedslight on the effect of the interactions betweenCEOs and CFOs,

which are importantfor investors’expectations. In this regard,investors may be interested in the CFO prof‌iles

which may reduce CEO power over dividendpolicies.

Originality/value –Unlike previous research, which focused on CEOs, the authors are the f‌irst to shed

light on the role of CFOs as key decisionmakers in inf‌luencing the dividend policies in modern corporations.

Keywords Chief f‌inancial off‌icer, Corporate governance, Co-opted directors, Dividend policy

Paper type Research paper

1. Introduction

Corporate dividend policies have attracted increasing interest among scholars. Using the

agency theory, several studies have framed the role of dividendswithin the potential conf‌licts

arising from the divergence of the interests of managers and shareholders (Easterbrook, 1984;

Jiraporn et al., 2016). This is because changes in dividend payments may hide opportunistic

JEL classif‌ication –C26, C33, G35

The authors would like to acknowledge the constant support and encouragement of the Editor,

Han Donker, and the suggestions and the insights of two anonymous Reviewers that have helped us

to shape and improve this research since the initial submission. Any remaining errors are our own.

CFO co-option

and dividend

payments

803

Received21 December 2023

Revised29 April 2024

4June2024

Accepted20 June 2024

InternationalJournal of

Accounting& Information

Management

Vol.32 No. 5, 2024

pp. 803-827

© Emerald Publishing Limited

1834-7649

DOI 10.1108/IJAIM-12-2023-0328

The current issue and full text archive of this journal is available on Emerald Insight at:

https://www.emerald.com/insight/1834-7649.htm

managers’intentions relating to the use of excess cash in projects that can be detrimental to

shareholders’wealth (DeAngelo et al., 2006;Onali et al.,2016). Moreover, increases in dividend

payments reduce the f‌inancial resources that can be invested in projectsa imedat sustaining a

f‌irm’s growth and manager compensation (Jensen, 1986). Dividend payments also affect the

debt–equity ratio, which is used by investors to monitor the changes in a f‌irm’scapital

structure (Easterbrook, 1984;Jensen, 1986).

Theoretical views and practical considerations suggest that dividend policies cannot be

observed in isolation (Erkan et al.,2016) because they are strongly intertwined with

corporate governance factors (Adjaoud and Ben-Amar, 2010;Chen et al.,2017;Elmagrhi

et al., 2017;Kilincarslan, 2021). Empirical evidence supports the view that the quality of

corporate governanceis positively associated with dividend paymentratios, suggesting that

better governance reducesthe opportunistic behaviour of managers using the freecash f‌low

(La Porta et al.,2000;Adjaoud and Ben-Amar,2010;Jiraporn et al., 2011). Within this strand

of research, Jiraporn and Lee (2018) found that f‌irms with larger co-opted boards are more

likely to pay lower dividends. They argued that a high number of co-opted directors

generates an ineffective corporate governance mechanism, which is not able to mitigate

agency conf‌licts. Similarly, Qiao et al. (2018)argued that companies use dividend payments

to signal their commitmentto further cash f‌low to reduce information asymmetry.

Previous studies, which examined dividend policies, mainly focused on the chief executive

off‌icers (CEOs) (Geiler and Renneboog, 2016;Onali et al., 2016). However, it should be noted that

CEOs rely on chief f‌inancial off‌icers (CFOs) to execute operating decisions and corporate

strategies (Bedard et al., 2014;Datta and Iskandar-Datta, 2014). In particular, CFOs have the

authority to determine capital investments and f‌inancial management policies (Hoitash et al.,

2016;Mobbs, 2018), including decisions on dividend distribution (Baker and Powell, 2000).

To the best of our knowledge, there is no empirical researchthat examines the impact of

the role of CFOs on dividend policies, althoughCFOs act as key decision makers in modern

organisations (Gupta et al.,2020) and have a f‌iduciary duty to the shareholders (Friedman,

2014). With the aim of f‌illing this gap, we empiricallyinvestigate whether co-opted CFOs are

associated with f‌irms’dividendpolicies and if a CFO’s talent moderates such an association.

This analysis is important becausescholars call for further inquiries on the implications of a

CEO’s power over CFO behaviour and how CFOs may overcome this type of pressure

(Friedman, 2014;Florackis and Sainani, 2021). Following Dikolli et al. (2021), we identif‌ied

co-opted CFOs as those who were hired into the role by the current CEO. We measuredthe

talent of a CFO by following the methodology used by Florackis and Sainani (2021) and

considering a series of CFO characteristics linked to their relative level of experience/

expertise, socialcapital and education.

Our empirical analyseswere based on hand-collected data for 922 f‌irm-year observations

from 157 European listed f‌irms, during the period 2013–2019. Our analysis focused on

Europe because it providesan interesting setting for exploring the role of CFOs on dividend

payments; investor protection differs across countries and agency problems may become

relevant compared to the other institutional environments already exploredin the literature,

such as the USA (La Porta et al.,2000;Burns et al.,2015).

We developed an empirical strategy by addressing the potential endogeneity related to

our analysis. Accordingly, we used a two-step estimation procedure that involved

instrumental variables (IVs) and the generalised moment method (Coles et al., 2012;

Florackis and Sainani, 2018). As a robustness test, we used an additional control for

endogeneity using the lead values for the dependent variables (Coleset al., 2008;McKnight

and Weir, 2009). Moreover, we controlledfor self-selection bias by using the Heckman (1979)

two-stage approachand, for omitted variables, using panel regression analyses.

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