Managerial Ability and Dividend Policy

Abstract

This study investigates the relationship between managerial ability and a firm’s dividend policy in the Korean stock market. Korean firms have been criticized for low dividend payments. Foreign investors in Korean firms, taking a dramatically increasing portion of the ownership, are demanding management to raise dividends. However, dividend policy must involve not only the fair distribution of profits to shareholders but firm growth and investment opportunities. Also, in the recession period, managers should be able to evaluate the costs and benefits of paying dividends to decide an optimal size of distribution. Motivated by the fact that managers have discretion over the firm’s payout policy, we examine how the firm’s dividend payout and its performance depend upon the ability of management. Using Korean firms listed in KOSPI market during 2003-2013, we find the following results. First, high-ability managers show the higher propensity of paying dividends and the larger size of dividends than low-ability managers. Second, the positive relationship is more pronounced in the firms with higher information asymmetry and weaker corporate governance. Lastly, among the competent managers, the future performance is greater for managers who pay larger dividends than those who pay smaller dividends. This study contributes to the literature by providing evidence that high-ability managers are more willing to pay larger dividends to benefit shareholders, and the dividend payments do not harm future firm performance.