The impact of board composition on the dividend policy of US firms

• DOI: https://doi.org/10.1108/CG-05-2020-0182
• Published date: 20 January 2021
• Date: 20 January 2021
• Pages: 737-753
• Subject Matter: Strategy,Corporate governance
• Author: Ephraim Kwashie Thompson,Sylvester Adasi Manu

The impact of board composition on the

dividend policy of US f‌irms

Ephraim Kwashie Thompson and Sylvester Adasi Manu

Abstract

Purpose –This paper aims to examine whether the characteristics of boards are more important in

determining dividend policy than management characteristics. The authors show that as the final

declarersof dividend policy is a firm’s board, thecomposition of a firm’s board significantlysubsumes the

effect ofmanagement characteristics that mayalso influence dividend policy.

Design/methodology/approach –Using the dividend declaration dummy variable, the authors run a

fixed effect logistic regression of the dividend indicator on board characteristics, and managerial

characteristics withfirm level controls, year effects and industry effectswhile clustering standard errors

at the firm level. For dividend yield variable which is censored at zero, they use a fixed effect Tobit

regression.

Findings –The results of the study show that board characteristics such as average age, female

presence andsize have a strong positive significant effect,whereas board independent chairand voting

right of directorshave a negative significant effect on the likelihoodof dividend declaration. For dividend

yields, the results suggestthat the presence of directors with financial expertiseand the board size are

the main influencers of dividend policy. Managerial characteristics are subsumed by director

characteristics for determining dividend policy. The results overall support the evidence on the

monitoringrole of boards on management.

Originality/value –The originality and value of this study lies in the approach of including a

comprehensive number of board characteristics unlike previous studies which makes the study of the

influenceof board composition on dividends more encompassing.

Keywords Board composition, Dividend, Management composition

Paper type Research paper

1. Introduction

Traditionally, shareholders invest in stocks because of future returns they expect to receive

in the form of dividends and/or capital gains.Research on dividend policy is intriguing given

the tendency of shareholders to continue to expect the payment of dividends at a certain

level once dividend initiation or dividend increments are declared, a phenomenon referred

to as the stickiness of dividends in literature (Guttman et al.,2010). Dividends yet remain a

very important part of investor’s expectation when investing in shares despite the growth of

repurchases (Floyd et al.,2015;Brawn and S

ˇevi

c, 2018).

More specifically, previous research on firm dividend policy has focused on what

characteristics of a firm influencesthe return of benefits to investors in the form of dividends

or repurchases. The studies that focus on firm characteristics include the free cash flow

theories (Jagannathan et al., 2000;Jensen, 1986;Lie, 2000), signaling of future profitability

(Benartzi et al., 1997), future growth/investment opportunities of the firm (Gugler, 2003) and

the clientele hypothesis in terms of taxes (Dahlquist et al.,2014;Colombo and Caldeira,

2018). Some other researchers have focused on how managerial characteristics influence

dividend policy. These papers usually tackle the issue of dividends from the agency

perspective in which conflicting interests of managers may result in the expropriation of

Ephraim Kwashie Thompson

is based at the Department of

Finance, Korea University,

Seoul, Republic of Korea.

Sylvester Adasi Manu is

based at the College of

Business, City University of

Hong Kong, Kowloon Tong,

Hong Kong.

JEL classif‌ication –G34, G35

Received 10 May 2020

Revised 29 September 2020

5 November 2020

5 December 2020

Accepted 22 December 2020

The authors express their

gratitude to the editor and are

grateful to the anonymous

reviewers for their comments in

improving this article. There is

no funding to report for this

research and the authors

declare no conflict of interest.

DOI 10.1108/CG-05-2020-0182 VOL. 21 NO. 5 2021, pp. 737-753, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 737

shareholders by management (Easterbrook, 1984). Additionally, somestudies have studied

the behavioral aspects of dividend policy in terms of investor sentiments (Baker and

Wurgler, 2004;Trabelsiet al.,2019).

However, even though the research on dividends has widelybeen conducted, studies on a

very important connection –the one between board of directors and dividend policy –are

few. The board of directors of a company influences a wide range of decisions concerning

the running of a company and exercise broad monitoring and decision-making powers as

such. The role of boards on companies has increasingly become more important given the

background of certain scandals in the UnitedStates, which mandated the promulgation and

obliged enforcement of the provisions of the Sarbanes-Oxley Act (SOX) [1]. The Act has

increased the strength of boards and have placed greater responsibilities on the

management and boards of corporations(Clark, 2005;Dah et al.,2014).

Further, the classical textbook definition and provisions in the Company Acts of firms

stipulate the mandate of the board of directors as having the right to decide on and declare

dividends to shareholders. Actually, the payment of dividends is not mandatory and

directors decide on dividend policy based on their discretion [2]. Thus, the ideologically

expected pass for dividend payment is that,managers in consideration of the firm’s internal

and external conditions propose the payment, level of or nonpayment of dividends but it is

the board of directors that finallydeclare and adopt such policy (Hamilton and Freer, 2010).

Some papers that have attempted to investigate the effect of boards do this by adopting some

measures of board quality indexes such as the Globe and Mail governance rating and the GIM

governance index, etc. (Adjaoud and Ben-Amar, 2010;Brown and Caylor, 2006;Gompers et al.,

2003;Jiraporn and Ning, 2006;Hwang et al., 2013). However, these indexes are not a pure

measure of a board’s composition. In addition, most of these papers focus on firm performance

rather than dividend policy. Recent papers have investigated the effect of board gender and

gender diversity on dividend payout (Chen et al., 2017;Tahir et al., 2020;Sanan, 2019). From

our search, the only paper that comes close to this study examined how the ownership structure

and board composition (board size, dual role and board independence) affected payout policy

in 50 Egyptian firms in which they found no significant results (Abdelsalam et al.,2008). The

authors consider only three board characteristics, use very few control variables as well as

depended on a largely limited sample size. Even further, Egypt is an emerging market and the

general empirical evidence is that underdeveloped and emerging markets have weaker boards

such that the true role boards play in dividend policy is likely to be confounded in such a setting

(Klapper and Love, 2004;Wong and Barton, 2006). Thus, the gap in the literature is the lack of a

study which employs a comprehensive set of board composition characteristics to study their

impact on dividend policy in a developed market characterized by both strong boards and

management level dynamics, rather than the use of a governance index.

Motivated by this gap in the literature, the objective of this paper is in two-folds. First, we

aim to conduct an empirical test to examine the effect of a comprehensive set of board

composition characteristics for dividend policy and second, we aim to ascertain which of

the class of characteristics –the board or management –is more relevant and important for

dividend policy. Put differently,we ask whether board composition is a better determinant of

dividend initiation and dividend level than managerial characteristics? We investigate this

question employing the setting of a highlydeveloped financial market characterized by both

strong boards and strong executive management.

We find that board characteristics such as average age, female presence, and size have a

strong positive significant effect while board independent ch air, and voting right of directors

have a negative significant effect on the likelihood of dividend declar ation. For dividend yields,

the results suggest that the presence of directors with financial e xpertise and the board size

are the main influencers of dividend policy. Interestingly, we document that man agerial

characteristics are subsumed by director characteristics for determin ing dividend policy.

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