Are Risk-takers Dividend Payers? CEO Compensation and its Impact on Dividend Decision

Abstract

Both dividend policy and CEO risk aversion have been subjects of tremendous research over the past 30 years. The current gap is how both topics are sporadically considered in tandem. We provide a solution to this by analyzing dividend changes in the context of CEO risk-taking incentives. Our findings suggest that risk-taking propensity, often overlooked in comparison to pay-performance incentives, negatively explains dividend increases. When we account for a firm’s cash flow volatility, we see that risk-taking sensitivities carry a positive relationship with payout. These findings themselves speak to the belief that much of our current understanding regarding dividends must be refocused to encapsulate the effects that CEO characteristics have on payout policy.