Management Ownership and Dividend Policy: The Role of Managerial Overconfidence

Abstract

This paper examines whether the relationship between management ownership and dividend policies is subject to the influence of managerial overconfidence among listed companies in Taiwan. The empirical study suggests a non-linear relationship between management ownership and dividend payouts. Most importantly, this study finds that managerial overconfidence affects the non-monotonic linear relationship between management ownership and dividend payout policies. Even when management ownership is sufficient to effectively control the company and managers seek to expropriate the shareholders' interests by reducing payouts, overconfident managers will have a weaker intention to reduce payouts than non-overconfident managers because overconfident managers overestimate future cash flows and prospects. Whilst managers may resort to high payouts to reduce the risk of wealth concentration due to high management ownership, overconfident managers will overestimate their personal capabilities and project values or even underestimate investment risks. As a result, they choose to retain earnings to meet future capital needs. The rate with which payouts increase along with ownership is lower for overconfident managers than for non-overconfident managers. Finally, this paper shows that managerial overconfidence lessens the entrenchment effects due to the strengthened position of managers and the resulting payout reductions.