How Talented Managers Make Dividend Decision: Evidence from U.S. Market

Wealth maximization is the main objective of a business firm. One of the instruments to achieve that goal is dividend policy. However, dividend policy is also considered to be timelessly complicated as managers have to alternate between new investment decisions and wealth distribution to shareholders. In addition, firms should have stable income level in order to payout the dividend. Subsequently, it is controversial about how much a firm, led by a group of professional managements, should pay the dividend. This paper approached the question by investigating the relationship between managerial talent and dividend decision. The hypothesis was that talented managers choose to pay more dividends, because manager with greater ability supposedly make better corporate decisions, which in turns, can improve company’s earning quality. Managerial ability measure (hereafter “MA-score”) used herein is motivated by the work of Demerjian et al. (2012), which gauged genuine managerial ability rather than firm efficiency. The results supported the earning quality hypothesis as dividend policy was positively associated with managerial ability. Specifically, managers with higher ability was associated with higher possibility to approve dividend payment to shareholder and tended to pay at a higher rate than less talented managers. Using industry mean MA-score as instrumental variable, this paper employed the two-stage least square method to address possible endogeneity and still obtained the consistent results. The implication was that managerial talent has substantial impact on critical corporate decisions such as dividend policy. More talented managers can improve corporate earning quality (or sustainability), which encourage to pay more dividend.