Dividend Policy, Corporate Governance and the Managerial Entrenchment Hypothesis: An Empirical Analysis


  • Jorge Farinha

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    • The author is from CETE-Centro de Estudos de Economia Industrial, do Trabalho e da Empresa, Faculdade de Economia, Universidade do Porto, Portugal. This paper is based on part of his PhD dissertation at Lancaster University, UK. He is particularly grateful to his supervisors, Ken Peasnell and Peter Pope, and also to Sudi Sudarsanam, Steve Young, Sanjay Unni, Massoud Mussavian, Robin Limmack, Abe de Jong, participants at the 1998 EFA-European Finance Association Meeting, the 1998 BAA-ICAEW Doctoral Colloquium, the Accounting and Finance Seminar Series at Lancaster University, the 2002 PFN-Portuguese Finance Network Meeting, the 2002 EFMA-European Financial Management Association Conference, and the 2002 1st International Conference on Corporate Governance at the University of Birmingham, for all the helpful comments received. He is thankful to I/B/E/S International Inc. for allowing the usage of the I/B/E/S database and also gratefully acknowledges the generous financial support received from Fundação para a Ciência e Tecnologia/Praxis XXI Programme and from Faculdade de Economia, Universidade do Porto. (Paper received August 2002, revised and accepted September 2002)

Jorge Farinha, Faculdade de Economia da Universidade do Porto, Rua Roberto Frias, 4200 Porto, Portugal. e-mail: jfarinha@fep.up.pt


This paper analyses the agency explanation for the cross-sectional variation of corporate dividend policy in the UK by looking at the managerial entrenchment hypothesis drawn from the agency literature. Consistent with predictions, a significant U-shaped relationship between dividend payout ratios and insider ownership is observed for a large (exceeding 600 firms) sample of UK companies and two distinct periods. These results strongly suggest the possibility of managerial entrenchment when insider ownership reaches a threshold of around 30%. Evidence is also presented that non-beneficial holdings by insiders can lead to entrenchment in conjunction with shares held beneficially.