International Review of Economics and Finance

International Review of Economics and Finance xxx (2017) 1–16
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International Review of Economics and Finance

journal homepage: www.elsevier.com/locate/iref
How do powerful CEOs view dividends and stock repurchases?

Evidence from the CEO pay slice (CPS)
Pandej Chintrakarn a, Pattanaporn Chatjuthamard b, *, Shenghui Tong c,
Pornsit Jiraporn d
a
Mahidol University International College (MUIC), Nakhon Pathom, Thailand
b
SASIN Graduate Institute of Business Administration, Chulalongkorn University, Bangkok, Thailand
c
Siena College, Loudonville, NY 12211, United States
d
Pennsylvania State University, School of Graduate Professional Studies (SGPS), 30 E.Swedesford Road, Malvern, PA 19355, United States
A R T I C L E I N F O A B S T R A C T
JEL classification: Agency theory suggests that CEOs view dividends unfavorably because dividend payouts deprive
G30 them of the free cash flow they could otherwise exploit. Using Bebchuk, Cremers, and Peyer’s
G34 (2011) CEO pay slice (CPS) to measure CEO power, we find that an increase in CEO power by one
standard deviation decreases the probability of paying dividends by 17.48%. For dividend-paying
Keywords: firms, a rise in CEO power by one standard deviation reduces the size of dividend payouts by
Dividends 5.91%. Share repurchases, however, are not influenced by CEO power, although they too take
Dividend policy away the free cash flow from the CEO.
CEO pay slice
CEO power
Repurchases
Buybacks
Agency theory
1. Introduction
Since the seminal work by Miller and Modigliani (1961) on dividend irrelevance, researchers have attempted to relax the assumption
of perfect capital markets by introducing several market imperfections such as taxes, information asymmetry, and agency conflicts. A
number of theories have been advanced and tested empirically. One theory that has garnered strong empirical support, particularly in
several recent studies, is agency theory, which posits that dividend payouts are determined by agency costs arising from the divergence
of ownership and control.
Grounded in agency theory, this study examines the impact of CEO power among the top executive team on dividend policy. Strong
CEO power has been linked to a number of crucial corporate outcomes.1 For instance, firms with powerful CEOs exhibit lower firm
value, lower profitability, more negative market reactions to acquisition announcements, poorer credit ratings, and higher costs of debt.
(Bebchuk, Cremers, & Peyer, 2011; Liu and Jiraporn, 2010). It appears that strong CEO dominance promotes managerial entrenchment,
* Corresponding author. The National Institute of Development Administration (NIDA), SASIN Graduate Institute of Business Administration, Chulalongkorn Uni-
versity, and Mahidol University, College of Management (CMMU), Bangkok, Thailand.
E-mail addresses: pandej.chi@mahidol.ac.th (P. Chintrakarn), Pattanaporn.Chatjuthamard@sasin.edu (P. Chatjuthamard), tongshenghui@yahoo.com (S. Tong),
pjiraporn@psu.edu (P. Jiraporn).
1
The literature in this area uses several expressions to refer to CEO power. In this study, we use CEO power, CEO dominance, and CEO centrality interchangeably.
http://dx.doi.org/10.1016/j.iref.2018.02.023
Received 22 November 2016; Received in revised form 10 February 2018; Accepted 27 February 2018
Available online xxxx
1059-0560/© 2018 Elsevier Inc. All rights reserved.
Please cite this article in press as: Chintrakarn, P., et al., How do powerful CEOs view dividends and stock repurchases? Evidence from
the CEO pay slice (CPS), International Review of Economics and Finance (2017), http://dx.doi.org/10.1016/j.iref.2018.02.023
P. Chintrakarn et al. International Review of Economics and Finance xxx (2017) 1–16
exacerbates agency conflicts, and ultimately jeopardizes firm value.

Extending prior research on the role of CEO power on corporate outcomes, our study explores how powerful CEOs view dividend
payouts and stock repurchases. Powerful CEOs may be motivated to adopt a sub-optimal dividend policy for, at least, two reasons. First,
regular dividend payments place serious constrains on the CEO's actions by depriving him of the free cash flow (Easterbrook, 1984;
Grossman & Hart, 1980; Jensen, 1986). Furthermore, dividends also subject the CEO to more frequent and rigorous monitoring from the
external capital markets as paying dividends increases the probability that the firm has to raise equity more often (Easterbrook, 1984).
Obviously, the more frequent oversight from the capital markets imposes more constraints on the CEO, keeping him from pursuing
personal objectives that may not be in the best interest of the shareholders. For these reasons, CEOs may exhibit a preference for lower
dividends. More powerful CEOs are able to influence their firms' dividend policy to a larger extent than less powerful CEOs. This view
thus predicts that firms with more powerful CEOs are less likely to pay dividends and that, among dividend-paying firms, those with
more powerful CEOs pay lower dividends. In other words, an inverse association should exist between dividend payouts and CEO power.
On the contrary, it can be argued that CEO power does not influence dividend policy. Firms show a tendency to smooth dividends.
Dividends are largely determined by the existing payout ratio. Only significant and sustainable changes in earnings lead to gradual
changes in dividends. In other words, dividend policy is “sticky” (Allen & Michaely, 2003; Brav, Graham, Harvey, & Michaely, 2005;
Lintner, 1956). Lintner (1956) observes that firms are extremely reluctant to terminate or lower dividends, a fact that still holds true
today. Because dividend policy is sticky, the CEO may be able to exercise very little discretion over his firm's dividend payouts and
simply have to follow the dividend policy that has been established over the years. If this is the case, then, CEO power is irrelevant to
dividend payouts.
Based on a large panel data set of 12,895 firm-year observations from 1992 to 2010, our empirical evidence is consistent with the
prediction of agency theory. In particular, our results show that firms with more powerful CEOs are significantly less likely to pay
dividends. The effect of CEO power survives even after controlling for firm size, profitability, leverage, growth opportunities, cash
holdings, retained earnings, taxes, share repurchases, as well as variation across industries and over time.
The marginal effect of CEO power on the lower probability of paying dividends is 17.48%. Among dividend-paying firms, those with
more powerful CEOs exhibit significantly lower dividend payouts. In particular, an increase in CEO power by one standard deviation
reduces dividend payouts by 5.91%, an economically meaningful magnitude. The results appear to suggest that dividend policy is driven
at least in part by the agency conflict.
Given the results in Bebchuck, Cremers, and Peyer (2011), endogeneity appears unlikely. In any case, we execute a number of tests to
minimize endogeneity. First, using the CEO pay slice (CPS), our measure of CEO power, in the earliest year for each firm in the sample as
an instrumental variable, we perform a 2SLS analysis and obtain consistent results. Because CPS in the earliest year could not have
resulted from dividend policy in subsequent years, reverse causality is unlikely. As a robustness check, we also employ industry-average
CPS as an instrument and obtain similar results. Additionally, to show that our results are not vulnerable to the endogeneity bias caused
by unobservable firm characteristics, we exploit the insight in Altonji, Elder, and Taber (2005) and estimate that the effect of the
unobservables would have to be at least 2.74 times stronger than the effect of the observables to render our conclusion invalid. It does
not appear that our results are primarily driven by the unobservables.2
In addition, we also investigate how powerful CEOs view share repurchases. Like dividends, share repurchases also reduce the free
cash flow that the CEO could otherwise exploit. Similarly, share repurchases also subject the CEO to more frequent monitoring because
repurchasing shares makes it more likely that the company has to raise equity more often. Unlike dividends, however, share repurchases
are not expected by investors to occur on a regular basis. Therefore, the CEO has considerably more control over the timing of share
repurchases than he does over dividend payments. Repurchases thus impose less restrictive constraints on the CEO. Our evidence reveals
that share repurchases are not influenced by CEO power. Apparently, powerful CEOs do not view share repurchases unfavorably,
although repurchases do take away the free cash flow just like dividends do. Finally, we compare firms that pay dividends only with
those that use repurchases only and find that more powerful CEOs are associated with a significantly weaker tendency to pay dividends
relative to using share repurchases.
Taken together, it appears that the CEO does not have a negative view about cash disbursements per se because both dividends and
repurchases represent cash distributions to shareholders. Rather, the CEO seems to dislike the fact that dividends are required to be
maintained at a constant level or even increased over time, thereby placing constant restrictions over his discretion on the free cash flow.
The results of our study make contribution to the literature in several ways. First, our study is the first to investigate the effect of CEO
power on dividend policy. Although several determinants of dividends have been examined in the literature, our study is the first to
identify CEO power as having a consequential impact on dividend policy. Our study contributes to the strand of the literature that
relaxes the assumption of perfect capital markets by including the agency conflict. Second, we add to the literature that assesses the
impact of managers on firm outcomes. In the management literature, there is a fierce debate over whether top executives matter. The
early literature argues that managers do not matter (Finkelstein & Hambrick, 1996; Lieberson & O’Connor, 1972; Pfeffer, 1997). On the
contrary, several studies argue and present evidence that executives do matter (Child, 1972; Hambrick & Mason, 1984; Tushman &
Romanelli, 1985; Weiner & Mahoney, 1981). In economics and finance, a large number of studies address related questions (Hermalin &
Weisbach, 1988; Agrawal & Knoeber, 2001; Denis & Denis, 1995; Huson, Malatesta and Parrino, 2001; Malmendier & Tate, 2005; and;
Bertrand & Schoar, 2003). We aptly contribute to the rich literature in this area by showing that CEO dominance influences critical
2
It is important to stress that endogeneity is an issue that has plagued most studies in this area. We certainly do not claim to resolve endogeneity totally. We execute
a number of robustness tests usually performed in the literature. Although each test might not be adequate, a combination of these tests collectively confirm that our
results are unlikely driven by endogeneity. In any event, our caveat remains that it is nearly impossible to completely rule out endogeneity.
2
corporate decisions such as dividend policy.

Third, we also make contributions to a significant body of literature that employs agency theory to explain dividend policy
(Grossman & Hart, 1980; Easterbrook, 1984; Jensen, 1986; Fluck, 1999; La Porta, Lopez-De Salinas, Shleifer, & Vishny, 2000; Jiraporn
& Ning, 2006; Denis & Osobov, 2007; Jiraporn, Kim, and Kim, 2011). We demonstrate that strong CEO power has a significant impact on
dividend payouts. Finally, our study is related to the fledging, albeit growing, literature that uses CEO pay slice (CPS) to measure CEO
dominance. CPS has been related to firm value and various performance measures (Bebchuk et al., 2011), to bond ratings and yields (Liu
& Jiraporn, 2010), to capital structure decisions (Jiraporn, Chintrakarn, and Liu, 2011; Chintrakarn, Jiraporn, and Singh, 2013), to
analyst coverage and to corporate social responsibility (Jiraporn & Chintrakarn, 2013). Our study is the first to relate CPS to dividend
policy and stock repurchases.
The remainder of this paper is organized as follows. Section II reviews the literature and develops the hypotheses. Section III de-
scribes the sample and the variables. Section IV presents and discusses the empirical results. Finally, Section V concludes.
2. Literature review and hypothesis development
2.1. CEO power
CEO power or CEO dominance indicates how much decision-making power is concentrated in the hands of the CEO. There are
multiple dimensions to the concept of “power”, some of which are not easily observable. Finkelstein (1992) identifies four sources of
power: structural power, ownership power, expert power, and prestige power. Structural power is the most commonly cited in the
literature and is based on formal organizational structure and hierarchical authority (Brass, 1984; Hambrick, 1981; Perrow, 1970;
Tushman & Romanelli, 1985). Like Adam, Almeida, and Ferreira (2005), our study focuses on structural power, especially the power of
the CEO over the top executive team. We do not argue that all forms of CEO power should affect dividend policy.
2.2. The role of CEO power on corporate outcomes
The notion that variation in senior executives’ choices is crucial to the understanding of firm behavior is behind the management and
organizational behavior literature on managerial discretion. Finkelstein and Hambrick (1996) offer an exhaustive review on this
important topic. This issue is part of an interesting debate over whether managers “matter” for corporate decisions and outcomes.
Hannan and Freeman (1977) play down the impact of managerial discretion on corporate performance because of organization and
environmental constraints that limit the scope of managerial actions. By contrast, Hambrick and Mason (1984) and Tushman and
Romanelli (1985) contend that executive leadership is a basic driving force behind the evolution of organizations. The literature on this
topic is rich and varied and also spans several areas of research, including management, economics, and finance. For conciseness, we
discuss only the most recent studies that provide direct empirical evidence on this debate.
One of the earliest studies that show that top managers have limited influence on firm performance is Lieberson and O'Connor
(1972). Analyzing sales, earnings, and profit margins as performance metrics, they conclude that industry (18.6–28.5% variance
explained) and firm effects (22.6–67.7% variance explained) are far more important than CEO effects (6.5%–14.5% variance explained)
in explaining variance in firm performance. More recently, Wasserman, Nohria, and Anand (2001) report that CEO effects account for
14.7% of the variance in firm profitability, still relatively less explanatory power than industry and company effects. Fitza (2014) shows
that prior empirical studies investigating the CEO effects on firm performance wrongly attribute the performance effect of randomness-
of chance-to the CEO. He demonstrates how randomness can affect the measured effects in a variance decomposition analysis. In other
words, the CEO effects documented in prior studies are inflated. CEOs do not matter as much as previously thought.
On the contrary, other studies support the notion that CEOs do matter. Recent empirical evidence demonstrates that strong CEO
dominance appears to exacerbate agency costs and has an adverse impact on firm performance. In a recent crucial study, Bebchuck,
Cremers, and Peyer (2011) report that strong CEO dominance is associated with lower firm value as measured by Tobin's q and with
poorer accounting profitability. Furthermore, firms with more dominant CEOs are more likely to make unwise acquisitions that destroy
value, as measured by the market reaction to the acquisition announcement. They argue that the poor performance may be attributed to
the agency conflict because strong CEO power is also related to several instances of agency-related outcomes. In particular, strong CEO
power is related to higher odds of the CEO receiving a “lucky” option grant at the lowest price of the month and a higher tendency to
reward the CEO for luck in the form of positive industry-wide shocks. In addition, firms with powerful CEOs show a lower likelihood of
CEO turnover controlling for prior performance and lower firm-specific variability in stock returns over time.
The rich results in Bebchuk et al. (2011) constitute a solid piece of evidence that CEO dominance is a critical variable that affects
several important corporate outcomes. Moreover, the mechanism through which CEO power influences these outcomes seems to be
related to agency costs. Specifically, the evidence suggests that strong CEO power allows the CEO to act in manners advantageous to
himself but not necessarily to the shareholders, thereby worsening the agency conflict.
In a related study, Liu and Jiraporn (2010) explore the agency conflict between shareholders and bondholders. They report that
bondholders regard CEO dominance as a critical determinant of the cost of debt. In particular, firms where the CEO plays a more
dominant role incur significantly higher costs of debt in terms of bond yields. Similarly, firms with more powerful CEOs also experience
lower credit ratings. In a similar vein, Adam et al. (2005) investigate how CEO power influences performance variability. They hy-
pothesize that powerful CEOs are less likely to have to compromise with other top executives, resulting in more extreme decisions, either
beneficial or deleterious to the firm. The evidence corroborates this hypothesis, suggesting that variability in firm performance increases
with the degree of CEO influence because extreme decisions are more likely to be taken when the CEO is more dominant. This study
3
demonstrates that a vital CEO characteristic, i.e. CEO power, does have a material impact on corporate outcomes.
Jiraporn, Chintrakarn, and Liu examine the effect of CEO power on capital structure decisions. The evidence shows that, within
firms, when the CEO gains more power, there is a decline in leverage. Consistent with the prediction of agency theory, the CEO avoids
high leverage because interest payments deprive him of the free cash flow. Chintrakarn, Jiraporn, and Singh (2013) report similar
results, although they show that CEO power has to be consolidated to a certain point before there is a significant decrease in leverage.
2.3. The role of dividends in alleviating the agency conflict
Dividend payouts have been argued to mitigate agency costs in, at least, two ways. First, predicated on the early work by Berle and
Means (1932) on the separation of ownership and control, Jensen (1986) argues that a firm with substantial free cash flows is inclined to
overinvest by adopting marginal investment projects with negative net present values. If managers are overinvesting, an increase in
dividend will, all else being equal, reduce the amount of free cash flows, thereby mitigating the overinvestment problem. Hence,
dividend payouts helps control agency problems by getting rid of the excess cash that otherwise would result in unprofitable projects.
Second, Easterbrook (1984) argues that dividends function as a mechanism for controlling agency costs by exposing the firm to the
primary capital market monitoring. Higher dividends increase the likelihood that the firm will have to issue new common stock in the
capital markets more often. This, in turn, leads to an investigation of management by investment banks, security exchanges, and capital
suppliers. The importance of monitoring by investment banks has been recognized by several studies (Bhagat, 1986; Hansen & Tor-
regrosa, 1992; Jain & Kini, 1999; Smith, 1977).3
2.4. Hypothesis development
Existing research on the determinants of dividend payouts shows that a large amount of variation remains unexplained after con-
trolling for firm-level characteristics such as firm size, growth opportunities and profitability. One vital objective of this study is to
ascertain whether manager-specific characteristics such as CEO dominance, as opposed to firm, industry, or market factors, can in part
account for these unexplained differences.
We use agency theory to explain variation in dividend policy. Previous literature shows that the CEO who plays a more dominant role
is more likely to exacerbate agency costs, resulting in poor firm performance (Bebchuk et al., 2011). Prior literature also suggests that
dividend payouts represent a disciplinary mechanism that helps mitigate agency problems (Easterbrook, 1984; Grossman & Hart, 1980;
Jensen, 1986). Thus, we hypothesize that dominant CEOs may be motivated to adopt dividend choices that deviate from the optimal
level. This is the central hypothesis of this study. We develop three hypotheses on the association between CEO power and dividend
payouts.4
2.4.1. The irrelevance hypothesis

It can be argued that CEO power does not influence dividend policy. Firms show a tendency to smooth dividends. Dividends are
largely determined by the existing payout ratio. Only significant and sustainable changes in earnings lead to gradual changes in divi-
dends. In other words, dividend policy is “sticky” (Allen & Michaely, 2003; Brav et al., 2005; Lintner, 1956). Lintner (1956) observes
that firms are extremely reluctant to terminate or lower dividends, a fact that still hold true today.5 Because dividend policy is sticky, the
CEO may have very little discretion over his firm's dividend payouts and simply have to follow the dividend policy that has been
established over the years. If this is the case, then, how much power the CEO wields among the top executives is irrelevant to dividend
payouts.
2.4.2. The outcome hypothesis

This argument is predicated on the notion that dividend policy is an “outcome” of how much power the CEO commands in the top
executive team. The free cash flow hypothesis suggests that powerful CEOs may dislike dividends. Regular dividend payments place
serious constrains on the CEO's actions by depriving him of the free cash flow (Easterbrook, 1984; Grossman & Hart, 1980; Jensen,
1986). Furthermore, dividends also subject the CEO to more frequent and rigorous monitoring from the external capital markets as
paying dividends increases the probability that the firm has to raise equity more often (Easterbrook, 1984). Obviously, the more fre-
quent oversight from the capital markets imposes more constraints on the CEO, keeping him from pursuing personal objectives that may
not be in the best interest of the shareholders. For these reasons, CEOs may exhibit a preference for lower dividends. More powerful
CEOs may be able to influence their firms' dividend policy to a larger extent than less powerful CEOs. This view thus predicts that firms
with more powerful CEOs are less likely to pay dividends and that firms that pay dividends pay lower dividends when their CEOs
command more power in the top executive team. In other words, an inverse association should exist between dividend payouts and CEO
power.
A number of recent studies offer empirical evidence consistent with the outcome model. For instance, Renneboog and Szilagyi
3
More recent studies on dividend policy are Deng Li and Liao (2017), Chen and Xie (2017), Mishra and Ratti (2014), and Deng, Li, Liao, and Wu (2013).
4
Recent studies that investigate dividend policy using agency theory include Su, Fung, Huang, and Shen (2014), Liu, Uchida, and Yang (2014), and Karpavicius and
Yu (2017).
5
Brav et al. (2005) survey 384 financial executives at the beginning of the 21st century and find that 94% of firms that pay dividends admit that they try to avoid
cutting dividends. They also state that “Today, some executives tell stories of selling assets, laying off a large number of employees, borrowing heavily, or bypassing
positive NPV projects, before slaying the sacred cow by cutting dividends.” (p. 500).
4
(2006) report that firms with strong shareholders appear to force higher payouts in Dutch firms. Michaely and Roberts (2006) conclude
that strong governance encourage higher and more consistent payouts using data on private firms in the U.K. La Porta et al. (2000),
examining over 4000 firms in 33 countries, find strong support for the outcome model. Firms pay more dividends in countries where
minority shareholder rights are better protected. Using the governance standards from the Institutional Shareholder Services (ISS),
Jiraporn, Kim, and Kim (2011) show that more effective governance force managers to disgorge more cash through larger dividend
payments, thereby reducing what is left for potential expropriation by opportunistic managers.
2.4.3. The substitution hypothesis

This hypothesis is based on the substitution hypothesis advanced by La Porta et al. (2000). This argument relies critically on the need
for firms to raise money in the external capital markets, at least occasionally. To be able to raise external funds on attractive terms, a firm
must establish a reputation for moderation in expropriating shareholders’ wealth. One way to establish such a reputation is by paying
dividends, which reduces what is left for expropriation (La Porta et al., 2000).
Agency problems are likely more severe in firms where the CEO wields stronger power as their enormous influence better allows
them to act counter to shareholders’ interests.6 A reputation for good treatment of shareholders is therefore worth the most for firms
with powerful CEOs. As a result, the need for dividends to establish a reputation is the greatest for such firms. By contrast, for firms
where CEO power is low, the need for a reputation mechanism is weaker, and, thus, so is the need to pay dividends. This view, therefore,
posits that, all else equal, dividends payouts should be larger in firms with stronger CEO power. This hypothesis thus predicts a positive
association between dividend payouts and CEO power.
Several recent studies provide evidence in favor of the substitution hypothesis. Officer (2007), Pan (2007), Jiraporn and Ning
(2006), and Nielsen (2006) use the Governance Index, developed by Gompers, Ishii, and Metrick (2003), to measure the strength of
corporate governance. They report that firms show a stronger propensity to pay dividends when the quality of corporate governance is
lower. John and Knyazeva (2006), using a broader index that takes into account board structure, institutional blokholding, and Gompers
et al.’s (2003) Index, also document a substitution effect between governance quality and dividend payouts. Hu and Kumar (2004) show
that both the likelihood and the level of dividend payouts are significantly and positively related to factors that increase executive
entrenchment. The influence of entrenchment-related variables on payout policy is significant even after controlling for firm size, lever-
age, and the ratio of tangible to total assets. Complementary evidence in support of the substitution hypothesis can also be found in
Rozeff (1982), Jensen, Solberg, and Zorn (1992), and Gugler (2003).
3. Sample construction and data description
3.1. Sample selection
Our original sample came from the ExecuComp database. We use the compensation data from the database to compute the CEO pay
slice (CPS). We eliminate firms whose accounting and financial variables are not available on COMPUSTAT. The final sample consists of
12,895 firm-year observations with 2805 unique firms from 1992 to 2010, an unbalanced panel data set. Our sample is among the
largest and most recent in the literature in this area.
3.2. Measuring CEO power using CEO pay slice (CPS)
One way to capture CEO power more objectively is to examine his relative compensation among top executives. Bebchuk et al.
(2011) argue that the CEO's pay slice (CPS) captures the relative significance of the CEO in terms of abilities, contribution, or power. As
such, CPS provides a useful proxy for the relative centrality of the CEO in the top management team. This particular measure of CEO
power is especially interesting because Bebchuk et al. (2011) find that CPS has strong explanatory power for a rich set of critical
corporate outcomes, including firm value as measured by Tobin's q, accounting profitability, and stock market reactions to acquisition
announcements.
We follow their approach and define CPS (i.e., CEO's pay slice) as the CEO's total compensation as a fraction of the combined total
compensation of the top five executives (including the CEO) in a given company. Total compensation includes salary, bonus, other
annual pay, long-term incentive payouts, the total value of restricted stock granted that year, the Black-Scholes value of stock options
granted that year, and all other total compensation (EXECUCOMP item TDC1).
3.3. CEO pay slice vs. other indicators
Previous studies have used a number of indicators of power such as the number of titles captured by the CEO and CEO duality-where
one person jointly serves as CEO and chairman of the board- (Adam et al., 2005; Harrison, Torres, and Kukalis, 1988; Davidson, Jir-
aporn, Kim, & Nemec, 2004; Finkelstein, 1992, for instance). Bebchuk et al. (2011) point out that, relative to other measures of power,
CPS is more advantageous for at least two reasons. First, because CPS is likely the product of many observable and unobservable di-
mensions of the firm's top executives and management model, it enables researchers to capture dimensions of the CEO's role in the top
6
This argument is supported by the empirical evidence in Bebchuk et al. (2011), which shows that strong CEO power appears to worsen agency conflicts, thus
resulting in lower firm value.
5
Table 1
Descriptive Statistics.
CPS is calculated as the CEO's total compensation as a fraction of the combined total compensation of the top five executives (including the CEO) in a given company. The
effective tax rate is taxes divided by pre-tax income.
Mean Median S.D. 25th 75th
CEO pay slice (CPS) 0.34 0.35 0.13 0.24 0.43

Dividend-paying Dummy 0.60 – – – –
Dividend/Total Assets 0.011 0.003 0.018 0.000 0.016
Repurchase Dummy 0.53 – – – –
Repurchase/Total Assets 0.024 0.000 0.066 0.000 0.021
Total Assets (thousands of dollars) 11190 1653 61650 533 5713
Total Debt/Total Assets 0.237 0.205 0.190 0.059 0.344
Capital Expenditures/Total Assets 0.049 0.034 0.052 0.013 0.065
Cash Holdings/Total Assets 0.088 0.046 0.106 0.015 0.123
Retained Earnings/Total Assets 0.156 0.177 0.439 0.039 0.377
Effective Tax Rate 0.278 0.341 0.267 0.252 0.382
executive team beyond the ones captured by formal and easily observed variables such as whether the CEO also chairs the board.
Second, because CPS is computed based on compensation information from executives who are all at the same firm, it controls for any
firm-specific characteristics that affect the average level of compensation in the firm's top executive team.
In addition to the reasons given by Bebchuk et al. (2011), CPS is also advantageous because it is a continuous variable. CEO duality,
which is widely examined in the literature, is a dichotomous variable. As a measure of CEO power, it can classify a given CEO as either
“powerful” or “not powerful” and nothing else in between. So, CEO duality is simply a coarse measure of CEO power. Other indicators
previously used in the literature also suffer a similar drawback. For instance, Adam et al. (2005) use a dummy variable indicating
whether or not the CEO is a company founder or not. Other studies use a dummy for whether the CEO is the only insider on the board of
directors. Evidently, all of these dichotomous variables are not much more useful than CEO duality as each of them can be assigned only
one of the two possible values.
Some studies utilize indicators that allow for more variation in CEO power. For instance, a few studies look at the number of titles
captured by the CEO. Because a given CEO can hold as many titles as four (such as CEO, Chair, President, and COO), the value of this
variable can range from one to four. Similarly, Ashbaugh-Skaife, Collins, and LaFond (2006) measure CEO power by counting the
number of board committees on which the CEO serves; the more board committees he serves, the more decision-making influence he is
expected to wield. There are typically three board committee; nominating, compensation, and audit. Thus, this measure of CEO power is
limited to only a few values. Although these measures may be more refined than CEO duality, they still do not capture the fine gradation
of CEO power very effectively. Given the complexity of the modern corporation, it is difficult to imagine that variation in CEO power can
be captured by only a handful of variable values. CPS offers an interesting alternative because it is a continuous variable that can
represent the fine nuances of CEO power.
Finally, as an index of CEO power, CPS is particularly interesting because it is linked to firm value, profitability, and stock returns.
Moreover, it is shown to be related to several crucial agency-related outcomes such as CEO turnover and the timing of option grants
(Bebchuk et al., 2011). Research using other indicators of CEO power has not produced such clear evidence on their effects on important
corporate outcomes. For instance, in spite of a tremendous volume of research, it remains ambiguous whether CEO duality is ultimately
beneficial or deleterious to firm value. For all the reasons discussed above, CPS appears to be an advantageous measure of CEO power.
3.4. Other variables
We create a dividend-paying dummy which is set to one if the firm pays dividends and zero if not. We also construct a continuous
variable for dividend payouts, calculated as total dividends divided by total assets.7 We also create analogous variables for share
repurchases. Based on the literature, we control for the following firm characteristics that have been found to influence dividends; firm
size (total assets), profitability (EBIT/total assets), leverage (total debt/total assets), corporate investments (capital expenditures/total
assets), cash holdings (cash holdings/total assets), corporate life cycle (retained earnings/total assets), effective tax rate (income taxes/
pre-tax income), and share repurchases (repurchase/total assets). To control for possible variation over time and across industries, we
include year and industry dummies (based on the first two digits of the SIC).
3.5. Summary statistics and correlation analysis
Table 1 shows the descriptive statistics. The average CEO pay slice (CPS) is 0.34, which is very close to the average in Bebchuk et al.
(2011). About 60% of the sample firms pay dividends. The average dividend payouts as a ratio of total assets are 0.011. About 53% of the
sample firms repurchase shares. Table 2 shows the coefficients of correlation for the variables. It is worth noting that CPS is negatively
correlated both with the dividend dummy and dividend payouts. This is preliminary evidence that powerful CEOs do not view dividends
favorably. To ensure that multi-collinearity does not pose a problem, we check the variance inflation factors (VIF) for all the variables
7
We use alternative variables in the denominator and obtain consistent results such as sales, EBITDA, and free cash flow.
6
Table 2
Correlation Matrix.
effective tax rate is taxes divided by pre-tax income. *, **, *** show statistical significance at the 10%, 5%, and 1% respectively (p-value is shown in parentheses).
1 2 3 4 5 6 7 8 9 10 11
1 CEO Pay Slice (CPS) 1.00

2 Ln (Total Assets) 0.00 1.00
(0.86)
3 Total Debt/Total Assets 0.01 0.23*** 1.00
(0.31) (0.00)
4 Capital Expenditures/Total Assets 0.04*** 0.18*** 0.02** 1.00
(0.00) (0.00) (0.03)
5 Cash holdings/Total Assets 0.03*** 0.36*** 0.35*** 0.05*** 1.00
(0.00) (0.00) (0.00) (0.00)
6 Retained Earnings/Total Assets 0.03*** 0.11*** 0.23*** 0.08*** 0.11*** 1.00
(0.00) (0.00) (0.00) (0.00) (0.00)
7 Effective Tax Rate 0.02* 0.05*** 0.05*** 0.07*** 0.09*** 0.26*** 1.00
(0.05) (0.00) (0.00) (0.00) (0.00) (0.00)
8 Share Repurchase Dummy 0.01 0.11*** 0.07*** 0.03*** 0.03*** 0.22*** 0.06*** 1.00
(0.55) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00)
9 Share Repurchase/Total Assets 0.01 0.05*** 0.07*** 0.02** 0.13*** 0.14*** 0.04*** 0.35*** 1.00
(0.48) (0.00) (0.00) (0.03) (0.00) (0.00) (0.00) (0.00)
10 Dividend-paying Dummy 0.04*** 0.40*** 0.13*** 0.12*** 0.32*** 0.18*** 0.08*** 0.04*** 0.13*** 1.00
(0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00)
11 Dividend/Total Assets 0.03*** 0.08*** 0.09*** 0.03*** 0.07*** 0.15*** 0.05 0.11*** 0.14*** 0.51*** 1.00
(0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.58) (0.00) (0.00) (0.00)
and find that none of the VIFs is greater than one.
4. Results
4.1. The effect of CEO power on dividends
Table 3 shows the regression analysis. Model 1 is a logistic regression predicting the probability of paying dividends. The standard
errors are adjusted for clustering at the firm level. The dependent variable is the dividend-paying dummy. The CEO pay slice (CPS)
Table 3
Regression Analysis of Dividend Payouts on the CEO Pay Slice.
effective tax rate is taxes divided by pre-tax income. *, **, *** show statistical significance at the 10%, 5%, and 1% respectively (t-statistics are shown in parentheses).
Dependent Variable 1 2 3 4
Logit OLS Tobit OLS
Dividend-Paying Dummy Dividend/TA Dividend/TA Dividend/TA (Dividend-paying firms only)
Intercept 0.304 0.015*** 0.004 0.022***

(-0.45) (3.04) (1.10) (7.28)
CEO Pay Slice (CPS) 0.458*** 0.003** 0.005*** 0.004**
(-2.65) (-2.00) (-2.85) (-2.56)
Ln (Total Assets) 0.425*** 0.001*** 0.002*** 0.001***
(22.34) (2.77) (12.29) (-3.94)
EBIT/Total Assets 0.157 0.021*** 0.036*** 0.049***
(-0.38) (2.95) (12.74) (4.78)
Total Debt/Total Assets 0.170 0.001 0.000 0.005***
(1.01) (-0.69) (0.23) (-2.81)
Capital Expenditures/Total Assets 2.828*** 0.010* 0.026*** 0.006
(-5.17) (-1.88) (-4.25) (-0.77)
Cash holdings/Total Assets 3.210*** 0.002 0.019*** 0.023***
(-11.22) (-0.82) (-5.16) (5.43)
Retained Earnings/Total Assets 1.221*** 0.005*** 0.014*** 0.002*
(9.98) (6.03) (10.48) (-1.74)
Effective Tax Rate 0.152 0.000 0.002* 0.002**
(1.62) (0.89) (1.70) (-2.09)
Share Repurchase Dummy 0.539***
(11.28)
Share Repurchase/Total Assets 0.025*** 0.032*** 0.030***
(5.48) (6.16) (5.27)
Year Dummies Yes Yes Yes Yes
Industry Dummies Yes Yes Yes Yes
R2 or Pseudo R2 28.42% 23.59% 13.96% 34.33%
7
Table 4
Two-stage Least Squares (2SLS) Regressions.
Dependent Variable 1 2 3
Two-stage Probit Two-stage Tobit
First Stage Second Stage Second Stage
CEO Pay Slice Dividend-Paying Dummy Dividend/TA
Intercept 0.112*** 0.198 0.010

(5.11) (0.56) (1.64)
CEO Pay Slice 0.530***
(Earliest Year) (78.13)
CEO Pay Slice 1.386*** 0.025***
(Instrumented) (-8.15) (-3.83)
Ln (Total Assets) 0.005*** 0.235*** 0.002***
(6.38) (22.52) (5.64)
EBIT/Total Assets 0.015 0.288** 0.035***
(1.41) (-2.01) (12.46)
Total Debt/Total Assets 0.019*** 0.082 0.001
(2.94) (0.94) (0.37)
Capital Expenditures/Total 0.063** 1.698*** 0.030***
Assets (-2.52) (-5.13) (-2.92)
Cash holdings/Total Assets 0.019* 1.780*** 0.018***
(-1.73) (-11.86) (-3.22)
Retained Earnings/Total 0.007*** 0.525*** 0.014***
Assets (2.99) (14.06) (6.03)
Effective Tax Rate 0.008** 0.101*** 0.007
(2.16) (2.01) (1.63)
Share Repurchase Dummy 0.002 0.333***
(1.10) (12.14)
Share Repurchase/Total Assets 0.031***
(4.88)
Year Dummies Yes Yes Yes
Industry Dummies Yes Yes Yes
R2 or Pseudo R2 36.10% 27.99% –
exhibits a significantly negative coefficient, suggesting that firms with more powerful CEOs are substantially less likely to pay dividends.
The marginal effect of CEO power on the probability of paying dividends is 17.48%, which is economically meaningful.8 Model 2 is an
OLS regression where the dependent variable is dividend payouts. The coefficient of CPS is negative and significant, indicating that more
powerful CEOs prefer lower dividends. Because dividend payouts cannot be below zero and a large number of firms do not pay divi-
dends, dividend payouts can be viewed as a variable censored below zero. A Tobit regression would be particularly appropriate for such
a variable. Model 3 is a Tobit regression. CPS shows a negative and significant coefficient, again showing that powerful CEOs favor lower
dividends. About 40% of our sample firms are non-dividend payers. As a robustness test, we run a regression excluding the non-dividend
payers in Model 4. Again, the coefficient of CPS remains negative and significant.
Consistent with the prediction of agency theory, powerful CEOs view dividend payments unfavorably. In terms of economic sig-
nificance, a rise in CEO power by one standard deviation results in a 5.91% decline in dividends.9 In conclusion, the results support the
outcome hypothesis, where higher CEO power leads to a weaker tendency to pay dividends and a smaller size of dividend payouts.
4.2. Exploring endogeneity
We perform additional analysis to ensure that our conclusion is not confounded by endogeneity. First, we execute a two-stage probit
regression. We identify the first year each firm shows up in the sample. Then, we substitute CPS in the earliest year for each firm for CPS
in each given year. Evidently, CPS in the earliest year could not have resulted from dividends in any of the subsequent years, making
reverse causality unlikely. We use CPS in the earliest year as our instrumental variable in the two-stage probit regression. Table 4 shows
the two-stage least squares (2SLS) results. Model 1 is the first-stage regression where CPS is the dependent variable. As expected, CPS in
the earliest year shows a significant and positive coefficient. Model 2 is the second-stage probit regression where the dividend-paying
dummy is the dependent variable. CPS instrumented from the first stage shows a negative and significant coefficient. Stronger CEO
power leads to lower dividends.
Furthermore, we investigate the magnitude of dividend payouts by executing a two-stage Tobit regression. In Model 3, which is the
second-stage Tobit regression, the dependent variable is dividend payouts (the two-stage Tobit regression shares the same first-stage
8
The marginal effect is computed as the slope of the logistic regression line when all independent variables are held at their means.
9
CPS has a standard deviation of 0.13. The coefficient of CPS in Model 3 is 0.005. We multiply 0.13 by 0.005 and obtain 0.00065. The average dividend payouts
(dividends/total assets) are 0.011. Thus, a decline of 0.00065 translates into a 5.91% reduction in dividends.
8
Table 5
Fixed-effects analysis of dividend payouts.
CPS is calculated as the CEO's total compensation as a fraction of the combined total compensation of the top five executives
(including the CEO) in a given company. The effective tax rate is taxes divided by pre-tax income. *, **, *** show statistical
significance at the 10%, 5%, and 1% respectively (t-statistics are shown in parentheses).
Dependent Variable (1) (2)
Dividend/TA Dividend/TA
Intercept 0.023*** 0.012***

(11.36) (6.19)
CEO Pay Slice (CPS) 0.002** 0.002**
(-2.14) (-2.08)
Ln (Total Assets) 0.001*** 0.001***
(-4.97) (-4.17)
EBIT/Total Assets 0.008*** 0.008***
(5.50) (5.43)
Total Debt/Total Assets 0.003*** 0.004***
(-2.78) (-3.43)
Capital Expenditures/Total Assets 0.007** 0.003
(-2.03) (-0.83)
Cash Holdings/Total Assets 0.006*** 0.006***
(-3.77) (-4.28)
Retained Earnings/Total Assets 0.000 0.000
(-0.29) (-0.86)
Effective Tax Rate 0.000 0.001
(0.96) (1.45)
Share Repurchase/Total Assets 0.011*** 0.011***
(6.91) (7.05)
Industry-average Dividend/TA No Yes
R-squared 78.10% 79.70%
regression with the two-stage probit model, which is Model 1 in the table). CPS instrumented from the first stage exhibits a negative and
significant coefficient, again, corroborating the notion that more powerful CEOs prefer lower dividends. As a robustness check, we
execute a two-stage Tobit regression using an alternative instrumental variable, the industry-average CPS. Dividends at an individual
firm might be related to the CPS of that particular firm. However, it is highly unlikely that dividends at a given firm would be related to
CPS at the industry level because there are many firms in the industry (the average number of firms in an industry in our sample is 31,
the median 26). Therefore, industry-average CPS is more likely exogenous. Using this alternative instrumental variable produces similar
results.10 Taken together, our two-stage analysis, which explicitly takes into account possible reverse causality, yields consistent results.
It does not appear that our conclusion is confounded by endogeneity.
It is conceivable that both CEO power and dividends are driven by certain unobservable characteristics that are omitted in the model.
Therefore, we run further tests to explore the possible impact of the omitted-variable bias. One way to deal with this issue is to run
a fixed-effects analysis, which control for unobservable characteristics that remain constant over time. Table 5 shows the results of the
fixed-effects regression analysis. The dependent variable is the ratio of dividends over total assets. In Model 1, the coefficient of the CEO
pay slice is negative and significant, suggesting that powerful CEOs do not view dividends favorably. We cannot include the industry
dummies in Model 1 because the industry dummies are time-invariant. As a result, in Model 2, we control for industry effects by
including the industry-median of the dependent variable, using the first two digits of SIC. Again, the CEO pay slice still retains a negative
and significant coefficient. Because the fixed-effects analysis controls for unobservable firm characteristics that remain constant over
time, our results seem to be robust and are not vulnerable to the omitted-variable bias.
In addition, we also explore the possible omitted-variable bias by exploiting the insight in Altonji et al. (2005). This potential bias can
be estimated in the following way. Considering two regressions: one with a restricted set of controls and the other with a full set of
control variables. Denote the estimated coefficient for the variable of interest from the first regression βR (where R stands for Restricted)
and the estimated coefficient from the second regression βF (where F stands for Full). Then the ratio can be computed as βF/(βR - βF). The
intuition behind the formula is straightforward. First, consider why the ratio is decreasing in (βR - βF). The smaller the difference be-
tween βR and βF, the less the estimate is affected by the selection of observables, and the stronger the selection on unobservables needs to
be (relative to observables) to explain away the entire effect. Then consider the intuition behind βF in the numerator. The larger βF, the
more the effect needs to be explained away by the selection on unobservables, and therefore the higher the ratio.
Our full model is Model 1 in Table 3 where the dividend-paying dummy is the dependent variable. We run a restricted model where
CPS is the only independent variable. Then, we compute the ratio following Altonji et al. (2005), using the coefficients of CPS from the
full and the restricted models. The ratio turns out to be 2.74, suggesting that selection from unobservables would have to be over 2.74
times stronger than selection on observables to explain away our results. For comparison, Altonji et al. (2005) report the ratio to be
between 2 and 4 in their study. They argue that, with those numbers, the endogeneity bias due to possibly omitted variables is unlikely.
Thus, it does not appear that our results are driven principally by unobservable characteristics.
10
The 2SLS results with the industry-average CPS as the instrument are shown in Table A1 in the Appendix.
9
Furthermore, it can be argued that more CEO-specific characteristics should be included as control variables in the regression
analysis, in addition to the firm-level control variables. As a result, we add five additional CEO-specific attributes, i.e. CEO tenure, CEO
age, CEO gender (female ¼ 1), total compensation, and percentage of share ownership. The regression results are shown in Table A2 in
the Appendix. In Model 1, the coefficient of the CEO pay slice is still negative and significant. In Model 2, which is a fixed-effects
regression, the CEO pay slice carries a negative and significant coefficient as well. Thus, even after controlling for a larger set of
CEO-specific attributes, the results remain similar, i.e. more powerful CEOs show a tendency to pay lower dividends.
Finally, we investigate CPS around CEO changes to shed further light on the issue of endogeneity. We identify 497 CEO changes in
our sample. We compare the CPS of CEOs joining dividend-paying and non-dividend-paying firms. If non-dividend-paying firms are
more optimally run by CEOs with high CPS, then we would expect to observe that the new CEOs of non-dividend-paying firms have, on
average, a significantly higher CPS than the new CEOs of dividend-paying firms. We find that the CPS of new CEOs does not differ
significantly between dividend-paying and non-dividend-paying firms. Furthermore, there is no significant difference in terms of
changes in CPS around CEO turnover. The results are shown in Table A3 in the Appendix. There is therefore no support for the notion
that the negative association between CPS and dividends can be explained by a tendency of non-dividend-paying firms to provide new
CEOs with relatively high CPS. The direction of causality does not appear to run from dividends to CPS.
It is imperative to emphasize that endogeneity is an issue that defies complete and flawless solutions. We obviously do not claim to
offer such solutions. However, our series of additional tests collectively point to the conclusion that the effect of endogeneity, albeit
possibly present, is not particularly severe. We execute robustness checks that have been performed in prior literature, although our
caveat remains that it is nearly impossible to totally rule out endogeneity.
4.3. The effect of CEO power on share repurchases
Like dividends, share repurchases represent one mechanism through which cash is distributed to shareholders. Unlike dividends,
however, shareholders do not expect share repurchases to occur on a regular basis. A share repurchase is viewed as a one-time cash
distribution that does not imply any regularity in the future. Therefore, the CEO can exercise much more discretion over the size and the
timing of a share repurchase.
We explore how powerful CEOs view stock buybacks in Table 6. Model 1 has the repurchase dummy as the dependent variable,
which is equal to one if the firm repurchases shares and zero otherwise. The logit regression result in Model 1 reveals that the coefficient
of CPS is not significant. In Model 2, the dependent variable is the ratio of share repurchase to total assets. The Tobit regression result in
Model 2 shows that CPS is not significantly related to share repurchases. Unlike dividends, stock buybacks are not influenced by CEO
power. It appears that the CEO does not view share repurchases unfavorably because share repurchases do not impose as much
Table 6
Regression Analysis of Share Repurchases.
CPS is calculated as the CEO's total compensation as a fraction of the combined total compensation of the top five executives (including
the CEO) in a given company. The effective tax rate is taxes divided by pre-tax income. *, **, *** show statistical significance at the 10%,
5%, and 1% respectively (t-statistics are shown in parentheses).
Dependent Variable 1 2
Logit Tobit
Repurchase Dummy Repurchase/TA
Intercept 2.703*** 0.101**

(-7.07) (-2.19)
CEO Pay Slice (CPS) 0.067 0.001
(0.44) (0.20)
Ln (Total Assets) 0.153*** 0.005***
(9.92) (7.04)
Total Debt/Total Assets 0.651*** 0.005
(-4.66) (0.51)
(8.29) (27.18)
Capital Expenditures/Total Assets 1.677*** 0.007
(-3.24) (-0.28)
Cash holdings/Total Assets 0.654*** 0.086***
(2.79) (6.63)
Retained Earnings/Total Assets 0.975*** 0.052***
(12.83) (11.39)
Effective Tax Rate 0.099 0.009**
(1.22) (2.10)
Dividend-paying Dummy 0.577***
(11.93)
Dividend/Total Assets 0.709***
(5.17)
Year Dummies Yes Yes
Industry Dummies Yes Yes
Pseudo R2 11.39% –
10
constraint on the CEO as dividends do, due to the flexibility associated with them.
4.4. The effect of CEO power on the choice between dividends and repurchases
When faced with the choice between dividends and share repurchases, the CEO may choose to use repurchases, rather than pay
dividends. We investigate the effect of CEO power on the likelihood of paying dividends relative to using stock repurchases. The
regression results are shown in Table 7. In Model 1, we compare firms that pay dividends with those that use repurchases only. The
dependent variable is a binary variable, equal to one for firms that pay dividends and may or may not use repurchases as well and equal
to zero for firms that use repurchases only. The coefficient of CPS is negative and significant. In Model 2, we compare those that both pay
dividends and use repurchases to those that use repurchases only. The dependent variable is a binary variable, equal to one for firms that
both pay dividends and use repurchases and equal to zero for firms that use repurchases only. CPS does not carry a significant coefficient.
Finally, in Model 3, we compare those that pay dividends only with those that use repurchases only. The dependent variable is
a binary variable, equal to one for firms that only pay dividends (and do not use repurchases) and equal to zero for firms that use
repurchases only. The coefficient of CPS is negative and highly significant. Taken together, it appears that more powerful CEOs have
a tendency to avoid paying dividends and are more in favor of using share repurchases. To put in perspective the effect of CEO power, we
estimate the marginal effect of CEO power on the choice between dividends and repurchases using the specification in Model 3. The
marginal effect is 24.32%. Our results in this section reinforce those in prior sections and demonstrate that powerful CEOs display
a dislike for dividends relative to share repurchases.
4.5. Robustness check: propensity score matching
We also augment our analysis by performing propensity score matching. We divide the sample into quartiles. We then classify firms
in the top quartile as those with high CPS and are considered run by powerful CEOs. This is our treatment group. We then perform
a propensity score matching analysis (Rosenbaum & Robin, 1983). Essentially, we identify a control sample of firms that exhibit no
observable differences in characteristics relative to those run by powerful CEOs. Therefore, each pair of matched firms are nearly
indistinguishable from one another except for one crucial characteristic: CEO power.
We first compute the probability, i.e. propensity score, that a firm with given characteristics is run by a powerful CEO. This prob-
ability is estimated based on firm characteristics included in the regression analysis, i.e. firm size, profitability, leverage, growth, cash
holdings, retained earnings, and taxes. The outcome variable here is the ratio of dividends divided by total assets. The results show that
firms in the treatment group, i.e. those run by powerful CEOs, indeed pay significantly lower dividends than those in the control group
(p-value for the difference is 0.04). Even when holding observable firm characteristics virtually identical between the two groups, firm
run by powerful CEO exhibit a tendency to pay smaller dividends. Therefore, the evidence from the propensity score matching analysis
corroborates the results obtained earlier.
4.6. Robustness check: alternative measure of CEO power
So far, we have used CPS as our measure of CEO power as this particular measure has been shown to affect several crucial corporate
outcomes (Bebchuk et al., 2011; Liu & Jiraporn, 2010: Jiraporn, Chintrakarn, and Liu, 2011; Jiraporn, Liu, and Kim, 2013; Chintrakarn
et al. 2013). For robustness, we employ an alternative measure of CEO power. In particular, we use the percentage of directors appointed
by the CEO. The logic is that directors appointed by the CEO may feel a sense of allegiance to the CEO and may not monitor the CEO as
rigorously as they should. We regard a director as appointed by the CEO if his appointment is made within the CEO's tenure. This same
measure of CEO power is used by Morse, Nanda, and Seru (2011). A higher percentage of directors appointed by the CEO imply weaker
monitoring by the board and hence stronger CEO power. Unfortunately, however, the data for this particular measure of CEO power are
available only for 1334 observations.
The regression results are shown in Table 8. The percentage of directors appointed by the CEO carries a negative coefficient in Model
Table 7
The Effect of CEO Power on the Choice between Dividends and Repurchases.
DIV vs REP ONLY DIV & REP vs REP ONLY DIV ONLY vs REP ONLY
Intercept 2.122* 0.577 2.000*

(1.87) (0.50) (1.67)
CEO Pay Slice (CPS) 0.421* 0.302 0.732***
(-1.94) (-1.25) (-2.62)
Control Variables Included Yes Yes Yes
Pseudo R2 25.28% 25.85% 35.17%
N 9908 6732 5437
11
Table 8
Robustness Check: Alternative Measure of CEO Power.
Percent of Directors Appointed by CEO represents the percentage of directors appointed during the CEO's tenure. We assume
that a higher percentage of directors appointed by the CEO is associated with weaker monitoring by the board and hence more
power for the CEO.
Logit Tobit
Dividend Dividend/Total Assets
Dummy
Intercept 7.564*** 0.030***

(2.71) (5.26)
Percent of Directors 0.906*** 0.005***
Appointed by CEO (-3.62) (-4.75)
Control Variables Included Yes Yes
Pseudo R2 38.85% –
N 1334 1334
1, implying that more powerful CEOs exhibit a tendency to avoid paying dividends. Similarly, in Model 2, our Tobit analysis reveals that
more powerful CEOs are associated with significantly smaller dividend payouts. Thus, even when we use an alternative measure of CEO
power, we still obtain consistent results. Caution should be exercised, however, due to the small sample size. This is why we use this
measure simply as a robustness check, and not as our primary measure of CEO power.
4.7. Analysis of total payouts
It has been argued in the literature that, rather than looking at dividends or repurchases separately, it is more appropriate to examine
total payouts, which are the sum of dividends and repurchases. This argument might be valid in certain circumstances. However, it may
not be particularly suitable in the context of our study. Dividends and repurchases are different along several dimensions, including
shareholders’ expectations, size and timing, and their roles in alleviating the agency conflict etc. The motives behind the decisions to pay
dividends or to use repurchases are different as well. The CEO probably views dividends and repurchases differently. In fact, the evi-
dence so far does reinforce this argument because we find that powerful CEOs view dividends unfavorably, whereas he does not have the
same view about stock buybacks. As a result, we argue that dividends and repurchases should be analyzed separately.
In any event, for the sake of completeness, we execute additional tests on total payouts, which include both dividends as well as
repurchases. The results are shown in Table 9. Model 1 has as the dependent variable the total payouts dummy, which is equal to one if
the firm has positive payouts of any size and zero otherwise. The coefficient of CPS is negative and significant, indicating that more
powerful CEOs tend to avoid cash disbursements of any kind, either through dividends or through share buybacks. In Model 2, we use as
our dependent variable total payouts divided by total assets and run a Tobit regression. CPS does not exhibit a significant coefficient,
suggesting that CEO does not influence the size of total payouts. The mixed evidence implies that CEO power does matter to the decision
whether or not to distribute cash to shareholders, either via dividends or via share repurchases. Nevertheless, after the decision is made
that the firm would distribute cash (of any size via either means) to shareholders, CEO power does not appear to influence the size of the
cash distributions. The mixed evidence, in fact, supports the argument that dividends and repurchases should be analyzed separately to
gain further insights into the motives behind each method of cash distributions.
Table 9
Analysis of Total Payouts (Dividends þ Repurchases).
CPS is calculated as the CEO's total compensation as a fraction of the combined total compensation of the top five ex-
ecutives (including the CEO) in a given company. The effective tax rate is taxes divided by pre-tax income. Total payouts
are calculated as dividends plus repurchases divided by total assets. The total payouts dummy is equal to one if the firm
has positive payouts of any size, and zero otherwise.
Logit Tobit
Total Payouts Total Payouts
Dummy
Intercept 0.777 0.012

(-1.12) (-0.78)
CEO Pay Slice (CPS) 0.420** 0.005
(-2.20) (-0.94)
Control Variables Included Yes Yes
Pseudo R2 19.68% –
12
4.8. Controlling for incentives induced by stock and stock options
Because of the way CPS is computed, CEOs with high CPS may be awarded relatively higher total value of stock or stock options.
Thus, our findings may be attributed to the fact that CEOs with high CPS want to avoid taxes so they dislike dividend payments, and find
stock repurchases more attractive. In other words, the incentives induced by stock and stock options in the compensation structure may
influence dividend policy.
To account for these incentives, we run additional analysis as follows. We create two variables related to the value of stock and stock
options in the compensation structure. First, we calculate the natural logarithm of the value of stock plus stock options awarded to the
CEO, Ln (1 þ Stock þ Stock Options). Second, we compute the proportion of the value of stock and stock options in total compensation,
i.e. the value of stock plus stock options divided by total CEO compensation. These two variables should capture the incentives induced
by stock and stock options. We then control for these two variables in the regression analysis.
The results are shown in Table A4 in the Appendix. Model 1 is an OLS regression controlling for Ln (1 þ Stock þ Stock Options).
Model 2 is a fixed-effects regression controlling for Ln (1 þ Stock þ Stock Options) as well. The coefficients of CPS are negative and
significant in both regressions. Model 3 and Model 4 are OLS and fixed-effects regressions respectively, controlling for the proportion of
stock and stock options in total compensation. Again, the coefficients of CPS remains negative and significant. Therefore, even when we
explicitly control for the incentives induced by stock and stock options, our results remain consistent.
5. Conclusion
We test the prediction of agency theory on dividends and share repurchases, using Bebchuk et al.’s (2011) CEO pay slice. Our results
reveal that powerful CEOs do not favor dividend payments. Firms with more powerful CEOs show a weaker inclination to pay dividends.
Firms that pay dividends pay significantly smaller dividends where the CEO is more powerful. By contrast, share repurchases are un-
related to CEO power, although repurchases take away the free cash flow from the CEO just as dividends do. Taken together, our ev-
idence shows that the CEO dislikes dividends, not so much because they deprive him of the free cash flow, as because the inflexible
nature of dividend payments imposes more restrictive constraints on the CEO. Unlike dividends, repurchases are considerably more
subject to the CEO's discretion in terms of size and timing. As a result, dividends are viewed unfavorably by the CEO, whereas stock
buybacks are not. We also show that our results are unlikely confounded by endogeneity.
Appendix
Table A1
2SLS Regressions with Industry-average CPS as Instrument
Two-stage Probit Two-stage Tobit
First Stage Second Stage Second Stage
CEO Pay Slice Dividend-Paying Dummy Dividend/TA
Intercept 0.024 0.020 0.004

(0.90) (0.05) (1.29)
CEO Pay Slice 0.996***
(Industry-average) (31.99)
CEO Pay Slice 0.769** 0.009*
(Instrumented) (-2.09) (-1.80)
Ln (Total Assets) 0.004*** 0.240*** 0.002***
(-4.42) (22.57) (9.61)
EBIT/Total Assets 0.011 0.260* 0.036***
(-0.88) (-1.79) (5.12)
Total Debt/Total Assets 0.025*** 0.077*** 0.000
(3.36) (-11.68) (0.02)
Capital Expenditures/Total Assets 0.078*** 1.588*** 0.034***
(-2.68) (-4.75) (-6.15)
Cash holdings/Total Assets 0.001 1.774*** 0.022***
(0.11) (-11.68) (-5.47)
Retained Earnings/Total Assets 0.009 0.564*** 0.010***
(-0.28) (13.78) (9.38)
Effective Tax Rate 0.005 0.104** 0.000
(1.14) (2.06) (0.48)
Share Repurchase Dummy 0.000 0.342***
(0.03) (12.35)
Share Repurchase/Total 0.020***
Assets (3.35)
13
Table A2
Regressions with additional control variables for CEO characteristics
Dependent Variable (1) (2)
OLS Tobit
CEO Pay Slice 0.005** 0.008***

(-2.02) (-2.59)
Ln (CEO Tenure) 0.001 0.001
(0.54) (1.13)
Ln (CEO Age) 0.003 0.003
(0.447) (0.47)
Female CEO (Female ¼ 1) 0.020*** 0.023***
(3.58) (4.02)
Ln (Total CEO Compensation) 0.002*** 0.004***
(-3.18) (-3.52)
Share ownership (%) 0.000 0.000
(0.89) (1.41)
Ln (Total Assets) 0.002** 0.003***
(2.31) (3.66)
(4.93) (5.39)
Total Debt/Total Assets 0.000 0.005
(0.06) (0.57)
Capital Expenditures/Total Assets 0.028* 0.044**
(-1.82) (-2.31)
Cash Holdings/Total Assets 0.029*** 0.056***
(-3.11) (-4.06)
Retained Earnings/Total Assets 0.007** 0.014**
(1.98) (2.05)
Effective Tax Rate 0.004 0.003
(-1.64) (-0.87)
Repurchase/Total Assets 0.008 0.005
(0.62) (0.31)
Constant 0.036 0.041
(1.38) (1.36)
Observations 1112 1112
R-squared 42.60% 17.97%
Robust t-statistics in parentheses.

***p < 0.01, **p < 0.05, *p < 0.1.
Table A3
Do Non-Dividend Paying Firms Lead to More Powerful CEOs?
We identify 497 CEO changes in our sample and compare CPS around the changes
CPS (tþ1) Change in CPS

t-1 to tþ1
Non- dividend payers 0.260 0.07

Dividend payers 0.246 0.08
Difference (t-statistic) 1.08 0.82
Table A4
Additional regressions controlling for incentives induced by stock and stock options.
Ln (1 þ Stock þ Stock Options) is the natural logarithm of the value of stock and stock options awarded to the CEO. Proportion of (Stock þ Stock Options) is the value of
stock and stock options divided by total compensation.
OLS Fixed-Effects OLS Fixed-Effects
(1) (2) (3) (4)
Dividend/TA Dividend/TA Dividend/TA Dividend/TA
CEO Pay Slice 0.003** 0.002** 0.004** 0.002**

(-2.031) (-1.986) (-2.122) (-2.290)
Ln (Total Assets) 0.001** 0.001*** 0.001*** 0.001***
(2.521) (-4.892) (2.817) (-4.870)
EBIT/Total Assets 0.021*** 0.008*** 0.021*** 0.008***
(2.944) (5.515) (2.963) (5.494)
Total Debt/Total Assets 0.002 0.003*** 0.002 0.003***
(-0.941) (-2.760) (-0.959) (-2.773)
Capital Expenditures/Total Assets 0.013** 0.007** 0.013** 0.007**
(-2.498) (-2.010) (-2.420) (-2.002)
(continued on next page)
14
Table A4 (continued )
OLS Fixed-Effects OLS Fixed-Effects
(1) (2) (3) (4)
Dividend/TA Dividend/TA Dividend/TA Dividend/TA
Cash Holdings/Total Assets 0.004 0.006*** 0.004 0.006***

(-1.278) (-3.787) (-1.405) (-3.792)
Retained Earnings/Total Assets 0.003*** 0.000 0.003*** 0.000
(3.736) (-0.296) (3.656) (-0.264)
Effective Tax Rate 0.000 0.000 0.000 0.000
(-0.213) (0.965) (-0.322) (0.970)
Repurchase/Total Assets 0.019*** 0.011*** 0.019*** 0.011***
(3.791) (6.915) (3.836) (6.896)
Ln (1 þ Stock þ Stock Options) 0.000 0.000
(0.147) (-0.497)
Proportion of (Stock þ Stock Options) 0.000 0.000
(-1.115) (-1.186)
Constant 0.014*** 0.023*** 0.014*** 0.023***
(2.865) (11.221) (2.833) (11.315)
Year Dummies Yes Yes Yes Yes
Industry Dummies Yes No Yes No
R-squared 24.6% 78.1% 24.7% 78.0%
Robust t-statistics in parentheses.

***p < 0.01, **p < 0.05, *p < 0.1.
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International Review of Economics and Finance xxx (2017) 1–16

Contents lists available at ScienceDirect

International Review of Economics and Finance

How do powerful CEOs view dividends and stock repurchases?

exacerbates agency conﬂicts, and ultimately jeopardizes ﬁrm value.

corporate decisions such as dividend policy.

2. Literature review and hypothesis development

2.1. CEO power

2.2. The role of CEO power on corporate outcomes

2.3. The role of dividends in alleviating the agency conﬂict

2.4. Hypothesis development

2.4.1. The irrelevance hypothesis

2.4.2. The outcome hypothesis

2.4.3. The substitution hypothesis

3. Sample construction and data description

3.1. Sample selection

3.2. Measuring CEO power using CEO pay slice (CPS)

3.3. CEO pay slice vs. other indicators

Mean Median S.D. 25th 75th

CEO pay slice (CPS) 0.34 0.35 0.13 0.24 0.43

3.4. Other variables

3.5. Summary statistics and correlation analysis

1 CEO Pay Slice (CPS) 1.00

and ﬁnd that none of the VIFs is greater than one.

4.1. The effect of CEO power on dividends

Logit OLS Tobit OLS

Dividend-Paying Dummy Dividend/TA Dividend/TA Dividend/TA (Dividend-paying ﬁrms only)

Intercept 0.304 0.015*** 0.004 0.022***

Two-stage Probit Two-stage Tobit

First Stage Second Stage Second Stage

CEO Pay Slice Dividend-Paying Dummy Dividend/TA

Intercept 0.112*** 0.198 0.010

4.2. Exploring endogeneity

Dependent Variable (1) (2)

Intercept 0.023*** 0.012***

4.3. The effect of CEO power on share repurchases

Repurchase Dummy Repurchase/TA

Intercept 2.703*** 0.101**

4.5. Robustness check: propensity score matching

4.6. Robustness check: alternative measure of CEO power

Intercept 2.122* 0.577 2.000*

Dividend Dividend/Total Assets

Intercept 7.564*** 0.030***

4.7. Analysis of total payouts

Total Payouts Total Payouts

Intercept 0.777 0.012

4.8. Controlling for incentives induced by stock and stock options

Two-stage Probit Two-stage Tobit

First Stage Second Stage Second Stage

CEO Pay Slice Dividend-Paying Dummy Dividend/TA

Intercept 0.024 0.020 0.004

Dependent Variable (1) (2)

CEO Pay Slice 0.005** 0.008***

Robust t-statistics in parentheses.

CPS (tþ1) Change in CPS

Non- dividend payers 0.260 0.07

OLS Fixed-Effects OLS Fixed-Effects

(1) (2) (3) (4)

Dividend/TA Dividend/TA Dividend/TA Dividend/TA

CEO Pay Slice 0.003** 0.002** 0.004** 0.002**

OLS Fixed-Effects OLS Fixed-Effects

(1) (2) (3) (4)

Dividend/TA Dividend/TA Dividend/TA Dividend/TA

Intercept 0.304 0.015* 0.004 0.022*

Intercept 0.023* 0.012*

Intercept 2.703* 0.101

Intercept 7.564* 0.030*

CEO Pay Slice 0.005 0.008*

CEO Pay Slice 0.003 0.002 0.004 0.002

Cash Holdings/Total Assets 0.004 0.006* 0.004 0.006*