Do boards of directors affect CEO behavior? Evidence from payout decisions
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Do boards of directors affect CEO behavior? Evidence from payout decisions Artem E. Anilov1 · Irina V. Ivashkovskaya2
© Springer Science+Business Media, LLC, part of Springer Nature 2019
Abstract In this article, we evaluate CEO behavior in terms of his or her preferences to risk, and how the actions of boards of directors interplay with these behaviors. Specifically, we set out to test whether the actions of boards of directors can overcome the negative impacts of CEO behavior on various aspects of payout policy. We set out to examine these tendencies in terms of the levels of payout, the propensity to pay, and the choice of payout channel utilized. We use several compensation-based proxies to measure CEO risk preferences on a sample of non-financial and non-utility companies from the US for 2007 to 2016 from the S&P 1500 Index. Our contribution is threefold. First, the findings fill the gaps in the research on the impact of CEO risk preferences on the decision to start paying dividends and on the decisions to switch between cash dividend and share repurchase. The results indicate that CEOs who are encouraged by the boards to take more risks paid out more through repurchases, while less risky CEOs are more likely to initiate paying dividends. Second, by means of quantile regression we demonstrate that the level of repurchases is more sensitive to the CEO’s risk preferences in the companies from top quartiles. Third, by introducing our index of corporate governance quality, we may document that corporate governance tools reduce or even eliminate the negative effects of CEO risk preferences. In companies with high corporate governance index, the risk preferences of the CEO do not affect payout decisions. Keywords Corporate governance · Payout policy · CEO risk preferences · Share repurchase JEL Classification G34 · G35 · G40 * Artem E. Anilov [email protected] Irina V. Ivashkovskaya [email protected] 1
Corporate Finance Research Center, National Research University Higher School of Economics, Moscow, Russia
2
School of Finance, National Research University Higher School of Economics, Moscow, Russia
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A. E. Anilov, I. V. Ivashkovskaya
1 Introduction Recent research has shown that the behavioral characteristics of chief executive officers (CEOs) may affect a company’s payout policy. The risk preferences of CEOs are among such behavioral characteristics. Given the significance of risk tolerance and a specific CEO’s appetite for risk, the board of directors set up a framework to determine the level of risk that the CEO should take. Within such a framework, the incentives component of executive pay packages could play an important role. Research shows that a CEO will pay out less to investors if his or her compensation plan is risk-oriented (Sundaram and Yermack 2007; Burns et al. 2015; Geiler and Renneboog 2016), and a CEO will pay out more if the compensation is less riskoriented (Minnick and Rosenthal 2014). Risk-averse CEOs also tend to pay higher dividends despite market t
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