Corporate Governance and Dividend Payout Policy: A Test Using Antitakeover Legislation


  • We thank Bill Chrisite (Editor), two anonymous referees, and seminar participants at Rensselaer Polytechnic Institute and the 2007 FMA annual conference in Orlando, FL for valuable comments.


Managers strongly prefer not to pay dividends as dividend payouts reduce the amount of cash subject to managerial discretion (Easterbrook, 1984; Jensen, 1986). Previous empirical tests of the relationship between corporate governance and dividend payout policy employ endogenous measures of this agency problem. Using a relatively exogenous measure that incorporates state antitakeover laws and the differences-in-differences approach, our analysis indicates that dividend payout ratios and propensities fall when managers are insulated from takeovers. The impact of antitakeover laws on dividend payouts is more pronounced for firms with poor corporate governance and small firms.