Do Co‐Opted Directors Influence Dividend Policy?

Abstract

AbstractWe explore how co‐opted directors affect dividend policy. Co‐opted directors are those appointed after the incumbent chief executive officer (CEO) assumes office. Our results show that co‐opted directors lead to a weaker propensity to pay dividends and, for dividend‐paying firms, significantly lower dividend payouts. We also show that board co‐option has more explanatory power for dividend policy than does the traditional measure of board effectiveness, that is, board independence. Exploiting the passage of the Sarbanes‐Oxley Act as a natural experiment, we show that the effect of board co‐option on dividend policy is more likely causal, rather than merely an association.