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Management ownership

As Jensen (1986) points out, dividends are a means to put pressure on managers. When shareholders are committed to a generous dividend policy, managers who want to make profitable investments are then constrained either to issue new shares or to increase debt. Indeed, the use of debt leads managers to be more effective and to invest solely in profitable projects. In case of difficulty (distress) and when creditors are no longer confident, one may observe a dividend decrease.

If a dividend payment can solve these agency problems by means of increasing control and monitoring (Easterbrook, 1984) and by means of reducing FCF (Jensen, 1986), then one may see a relationship between ownership structure and dividend policy. By studying a sample of more than 600 English firms over two periods (1987-1991 and 1992-1996), Farinha (2002) found an U relationship between dividend payments and the number of shares held by managers. When managers held less than 30% of the total shares, the authors notice a negative relationship between the amount of shares held by insiders²⁰ and dividend payments, and a positive relationship when managers held more than 30%. The study of Schooley and Barney (1994) shows a similar result and also points out a non-monotic relationship between dividend payment and shares held by managers.

Nevertheless this relationship remains unclear. Eckbo and Verma (1994), for example, emphasize that managers are reluctant to pay dividends in order to increase the amount of money they may use to develop the firm’s business. For this reason, the authors think that one should observe a negative relationship between dividend payment and the percentage of shares held by managers.

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