Dividend Policy and Investor Pressure

The economics of dividend policy has focused on the single tight narrative that dividends keep managers honest, mitigating concerns that they over-invest. This article provides a critique of that agency narrative, arguing that pressure from short-term focused investors, executives and board members pushes the firm into preemptive actions of returning too much cash via dividends. We analyze three channels of influence for investor pressure through 1) threat of takeovers, 2) shareholder value oriented corporate governance, measured by director independence and board equity incentives, and 3) trading and institutional ownership patterns. We find that firms adopt a higher dividend payout to discourage takeover bids. Also, FTSE 100 firms, that are most focused on shareholder value governance in the form of equity-based compensation and a higher share of independent directors, display a higher dividend payout. Frequency of trading and ownership by transient investors seeking current profits also predict increased dividend payout. Traditional agency theory, focused on dividends as a tool for managerial discipline, is not strongly supported by the results, which rather support a narrative of short-term investor pressure on firms irrespective of investment opportunities

Institutional investors and corporate governance

We provide a comprehensive overview of the role of institutional investors in corporate governance with three main components. First, we establish new stylized facts documenting the evolution and importance of institutional ownership. Second, we provide a detailed characterization of key aspects of the legal and regulatory setting within which institutional investors govern portfolio firms. Third, we synthesize the evolving response of the recent theoretical and empirical academic literature in finance to the emergence of institutional investors in corporate governance. We highlight how the defining aspect of institutional investors – the fact that they are financial intermediaries – differentiates them in their governance role from standard principal blockholders. Further, not all institutional investors are identical, and we pay close attention to heterogeneity amongst institutional investors as blockholders