Managerial Entrenchment Hypothesis Research Articles

Revisiting the Effect of Dividend Policy on Firm Performance and Value: Empirical Evidence from the Korean Market

This study investigates the relationship between dividend policy, firm performance, and value within the Korean market, taking into account the unique context of Chaebol ownership structures. Utilizing a robust dataset of 5478 observations from the Korean Composite Stock Price Index, our empirical analysis employs advanced regression models, revealing distinctive effects of various dividend policy measures through the lenses of interest alignment and managerial entrenchment hypotheses. Surprisingly, while cash dividend payments exhibit a robust positive impact on Tobin’s Q and market-to-book ratios, suggesting an overall positive link with market valuations, a closer inspection reveals divergent impacts for Chaebol and non-Chaebol firms. In Chaebol entities, dividend policy proxies consistently demonstrate positive effects on performance metrics, aligning with the interest alignment hypothesis and highlighting strategic signaling efforts. Conversely, non-Chaebol firms exhibit intriguingly negative impacts, supporting the managerial entrenchment hypothesis and implying potential challenges to market value. Firms should prioritize transparent communication on dividend policies for improved investor decision making and enhanced corporate governance in the dynamic Korean market.

Another look at the managerial entrenchment hypothesis of acquisitions: A replication of Humphery-Jenner (2014)

Anti-takeover provisions have long been associated with managerial entrenchment, self-interested strategic behaviors, and lower performance. Humphery-Jenner (2014) offers an opposing view, arguing that anti-takeover provisions can lead to beneficial managerial entrenchment for acquiring firms in hard-to-value industries. These firms are particularly vulnerable to opportunistic takeovers and once shielded from those threats, managers could undertake acquisition strategies that offer positive performance outcomes over a longer-term horizon. We replicate Humphery-Jenner's study to assess the boundaries and generalizability of his hypothesis. After we first reproduce his findings for his sample of 3935 acquisitions occurring between 1990 and 2005, we find no relationship between anti-takeover provisions, acquisitions by firms in hard-to-value industries, and firm performance in both an updated sample of acquisitions (3372 acquisitions made during 2006–2015) and a combined sample encompassing 7307 acquisitions spanning the complete 26-year period (1990–2015). We also find no relationships between anti-takeover provisions and acquisition performance in the replication. Overall, the beneficial managerial entrenchment hypothesis of acquisitions appears to have limits to its generalizability.

Managerial litigation risk and auditor choice

Our study investigates the causal relationship between managerial litigation risk and auditor choice decisions. Exploiting the staggered adoption of universal demand (UD) laws at the state level in the United States, we use a stacked regression approach and find a lower propensity for affected firms to switch to higher‐quality auditors after the exogenous reduction of managerial litigation risk. This result supports the managerial entrenchment hypothesis that lower litigation risk leads to more managerial entrenchment, which allows managers to be opaque in order to enjoy private benefits. This negative effect is mitigated for firms with more audit committee industry expertise and for firms that are more reliant on external finance. Our study contributes to our understanding of how regulatory changes that have an impact on agency problems affect firms' demand for auditing.

The impact of preventive takeover defences on corporate financial performance: Evidence from the US

This study investigates the impact on financial performances of preventive takeover defences in S&P500 firms from 2017 to 2021. This study aims to study takeover defences impact on non-market performance indicators. Previous research is not extensive, and it provides contradictory evidence focusing more on market-related measures. Four shark repellents' impact on ROE, ROA, CAPEX and EBIT were studied. Panel data pooled OLS models results highlight that takeover defences impact is heterogeneous. Firstly, there is a negative correlation between takeover defences and profitability indicators, supporting the managerial entrenchment hypothesis. In particular, few defences directly cause a reduction in ROE. Other negative relations damage shareholders. Secondly, directors' removal limitations are positively correlated with long-term investments: in line with the shareholders' interest hypothesis. Finally, the combination of different takeover defences has a moderating effect on the initial impact. This study contributes to the debate on the harmfulness of takeover defences and provides insights to firms and regulators on the best defence to adopt.

How powerful CEOs adopt antitakeover provisions?

ABSTRACT We investigate how powerful chief executive officers (CEOs) adopt antitakeover provisions (ATPs). Prior studies indicate that CEOs adopt ATPs to increase their private benefits and job security. However, our evidence reveals a nonmonotonic relationship between CEO power and ATPs. Specifically, relatively less powerful CEOs adopt more ATPs, supporting the managerial entrenchment hypothesis. However, when CEOs become sufficiently powerful, they adopt fewer ATPs, supporting the quiet life hypothesis. Overall, our findings support the notion that a simple linear relationship does not explain the effect of CEO power.

Managerial entrenchment hypothesis and dividend payout policy

The influence of managerial entrenchment on dividend payout policies is studied for the period 2006 to 2014. The results of the study indicate that the ratio of the sum of shares owned by the CEO, the Chairman and the directors (i.e., insider ownership) is negatively related to both the likelihood and the payment of dividends. Even when controlling for firm size and leverage, it is found that the ratio of shares owned by the block holder shows negative and significant results (for both the logit and the tobit regression). This study proves that either the block holders are part of the management or they have strong board representation, so they do not consider dividend payouts as a disciplining and monitoring mechanism. Investment opportunities and leverage have a negative and significant relationship with both the likelihood and the level of payouts.

Managerial entrenchment hypothesis and dividend payout policy

Managerial entrenchment hypothesis and dividend payout policy

Private Placements of Equity and Firm Value: Value Enhancing or Value Destroying?

AbstractThis paper reassesses two conflicting hypotheses on the valuation impacts of private placements of equity (PPEs), the monitoring/certification hypothesis and the managerial entrenchment hypothesis, by focusing on the shareholder approval, active buyer, and premium pricing features of PPEs. We find that PPEs with these features have significant positive announcement returns and insignificant mean long-run returns, while the corresponding announcement and long-run returns for PPEs without such features are significantly negative. Firms with value-enhancing PPE features are better governed and use proceeds more efficiently. Thus, the heterogeneous nature of PPEs helps reconcile the puzzling return patterns and conflicting hypotheses regarding PPEs.

Political uncertainty and labour investment efficiency

ABSTRACT We examine the impact of political uncertainty on the labour investment efficiency (LIE) of a firm. Using a sample of Chinese firms, we test the market discipline and managerial entrenchment hypotheses. Our findings suggest that political uncertainty adversely affects LIE. The results are consistent with the managerial entrenchment hypothesis. That is, firms hire more labour in a period of increased information asymmetry due to the political uncertainty, which deteriorates LIE. Our findings are robust to a battery of alternative measures of LIE and estimation methods. We conduct several additional analyses and document that the adverse impact of political uncertainty is stronger when the newly appointed government official is older, the firm is state-owned, the firm belongs to a politically sensitive industry or the firm operates in locations with stringent labour protection. By contrast, when the firm locates in a region with weak Chinese government intervention or after President Xi Jinping’s anti-corruption campaign, the adverse impact of political uncertainty on LIE is less pronounced. Last, we document that after hiring more labour, firms receive tangible and intangible benefits in terms of receiving more loans, collect more government subsidies, and able to re-establish some political connection but at the cost of lower performance.

Incentive Effects of Granting Equity-Based Payment on Reducing Top Executive Turnover

The main focus of the study is to examine the incentive effect of granting equity-based payments for reducing turnover among the executives. In specific, the study was guided on determining the influencing effects of managerial ownership and equity-based payment may reduce executive turnover among the Malaysian Listed companies. From the analysis, the main finding shows that firms with equity-based programme with a presence of family control indicates that turnover is likely to be a lower. This implies that family ties play a significant role for removing of inefficient executives. And, where the family members are also served as the board members, the likelihood to shield from being removed is consistent with the management entrenchment hypothesis. Then, extended examination results for the mix pay components of cash and equity reveal the turnover is found to produce less incentive for executives to stay in the firm. The result implies that executives are willing to lose their equity benefits from unexercised value of shares equity and nd the firms fail to restrain executives’ departure as the findings documented in past studies.

Managerial entrenchment and capital structure: The effect of diversification

This paper empirically examines how diversification influences the relation between corporate governance and capital structure. Consistent with the creditor alignment hypothesis, we find a positive relation between managerial entrenchment and leverage in diversified firms. In contrast, we find a negative relation between managerial entrenchment and leverage in focused firms, which supports the managerial entrenchment hypothesis. These effects are stronger or only exist in samples with low excess values, which supports the agency channel through which governance influences leverage decisions. Our results are robust to different measures of leverage, diversification, and governance, and continue to hold when we attempt to account for selection bias and the joint endogeneity of leverage, diversification, and governance.

Managerial Entrenchment and Capital Structure: The Effect of Diversification

This paper empirically examines how diversification influences the relation between corporate governance and capital structure. Consistent with the creditor alignment hypothesis, we find a positive relation between managerial entrenchment and leverage in diversified firms. In contrast, we find a negative relation between managerial entrenchment and leverage in focused firms, which supports the managerial entrenchment hypothesis. These effects are stronger or only exist in samples with low excess values, which supports the agency channel through which governance influences leverage decisions. The results are robust to different measures of leverage, diversification, and governance, and continue to hold when we correct for selection bias and account for the joint endogeneity of leverage, diversification, and governance. Our evidence shows that the conflict in the literature on the relation between leverage and managerial entrenchments is because earlier empirical studies do not condition on the diversification status of firms. Entrenched managers in focused firms eschew leverage, whereas entrenched managers in diversified firms take advantage of their better access to debt finance and use more financial leverage.

How Do Institutional Investors Affect Corporate Performance? Evidence from Private Placements in China

ABSTRACTUsing data on private placements in China from 2007 to 2014, we show that abnormal returns of issuing companies’ stocks are significantly positive on the announcement day, but they become significantly negative during the event window [−20, +20]. Participation by institutional investors has a significant and negative impact on the short-term stock returns. This negative effect is also present in issuing companies’ long-term stock returns and profitability. Furthermore, we find that participation by institutional investors reduces dividend payments after private placements. Overall, our findings do not support the monitoring hypothesis of institutional investors’ role in corporate finance but are consistent with the management entrenchment hypothesis and shareholder pessimism hypothesis.

Could High-Tech Companies Learn from Others While Choosing Capital Structure?

This paper analyzes why high-tech firms are less likely to have debt in their capital structure. The share of zero-leverage firms increased in the US in the Software & Services, Hardware Equipment and the Pharmaceutical & Biotechnical industries which are treated as high-tech firms in our research. We divide the sample of US-based firms from the RUSSELL 3000 index for the period from 2004 to 2015 into two groups, one of them includes only high-tech firms, another contains all other firms from the sample. Traditional determinants of corporate structure such as size, age, asset tangibility, profitability and market-to-book ratio cannot fully explain why high-tech firms choose a zero-debt policy. We found that high-tech firms are more financially constrained than non-high-tech firms. The managerial entrenchment hypothesis could not predict zero-leverage for high-tech firms, but it can partially predict the debt conservatism of non-high-tech firms. The evidence shows that the excess cash hypothesis explains why unconstrained high-tech firms have zero-leverage but does not explain it for non-high-tech firms. Finally, we did not find a significant influence of the financial flexibility hypothesis for the decision of unconstrained high-tech firms to be unlevered, while for their non-high-tech counterparts this hypothesis fits.

The Role of Management Ownership in Bank Governance: Evidence from Taiwan

The purpose of this paper is to investigate the relationships that banks’ managerial ownership has with financial performance and firm value. We use a sample of 35 Taiwan domestic banks for the period 2005-2014. In the pooled OLS regression analysis, we find that the banks’ performance and market value fall as the level of management ownership rises, supporting the managerial entrenchment hypothesis. Moreover, the results show that when the ratio of managerial ownership pledge increases, then financial performance decreases while firm value increases. We conjecture that the positive effect of managerial ownership pledge on market value may be caused by the price maintenance effect of stock pledges. In addition, the evidence shows that there is a higher nonperforming loan ratio in family-dominated banks, and this hints that their loan decisions may have more severe agency problems relative to non-family ones.

IMPACT OF MANAGERIAL ENTRENCHMENT AND GROUP AFFILIATION ON DIVIDEND POLICY IN EMERGING ECONOMY OF PAKISTAN EMPIRICAL EVIDENCE FROM KSE LISTED NON-FINANCIAL FIRMS

For analysis of managerial entrenchment hypothesis, insider’s ownership (MSO) is divided into three parts, i.e., MSO less than 25%, between 25% and 50% and above 50%. For data analysis Random effect model and Tobit model are used. Many studies have shown the linear relationship among managerial ownership and firm’s performance but a very few studies documented a non linear relationship in literature (Farinha, 2002; Chen et al., 2005). The study presented a non linear relationship between insiders’ ownership and dividend policy, i.e. at low level (MSO< 25%) a negative relationship exists which proves the agency theory hypothesis, whereas above this level (MSO>25%) a significant positive relationship is documented which is backed by the managerial entrenchment hypothesis, as at high level of MSO “resource extraction” and above 50% level “expropriation of minority rights” exist. Group affiliation (ASSO) is also included to see the impact on dividend policy and results reveal a significant negative relation between group affiliation and dividend policy.

The white squire defense: Evidence from private investments in public equity

Abstract Firms can effectively stave off outside takeover bids using private investments in public equity (PIPEs) when they face strong takeover pressure. Greater takeover pressure makes PIPE issuers more likely to grant investors large blocks of shares, price discounts, generous dividends, and board seats. Takeover pressure also encourages issuers to place more shares with friendly investors such as managerial investors and strategic alliance investors. The evidence is consistent with the regular methods of the white squire defense. PIPEs can be a preferred method in the choice of a white squire defense when poorly performing and highly overleveraged firms face severe takeover pressure. There is a negative relation between takeover probability and post-issue performance of issuers, which supports the managerial entrenchment hypothesis over the shareholder interest hypothesis. Therefore PIPEs can increase, not mitigate, agency problems.

Ownership, capital structure and financing decision: Evidence from the UK

This paper examines whether and to what degree agency conflicts in ownership structure affect firm leverage ratios and external financing decisions, using a universal sample of UK firms from 1998 to 2012. We use two distinctive measures to capture ownership structure, namely, managerial share ownership (MSO) and institutional ownership. Our empirical results show a non-monotonic relation between MSO and the debt ratio, supporting two competing theories: interest alignment theory and the management entrenchment hypothesis. Nevertheless, institutional ownership is found to be positively related to firm leverage levels. Our results further suggest that firms with concentrated MSO decrease their leverage by increasing the probability of issuing equity over bonds, an effect strengthened during hot market periods.

Does corporate governance matter in determining CEO compensation in the publicly listed companies in New Zealand? An empirical investigation

Purpose – The purpose of this paper is to investigate the relationship between Chief Executive Officers’ (CEOs) compensation and corporate governance practices of publicly listed companies in New Zealand for the period 2005-2010. Design/methodology/approach – Prior literature argues that corporate governance systems and structures are heterogeneous, that is, corporate governance mechanisms that are important tend to be specific to a country and its institutional structures. The two corporate governance mechanisms most important for monitoring CEO compensation are ownership structure and board structure. The authors use a generalised least squares regression estimation technique to examine the effect ownership structure and board structure has on CEO compensation, and examine whether ownership structure, board structure, CEO and director compensation have an effect on company performance. Findings – After controlling for size, performance, industry and year effects, the authors report that internal features rather than external features of corporate governance practices influence CEO compensation. Companies that have their CEO on the board pay them more than those who do not sit on the board, suggesting CEOs on boards have power to influence board decisions and therefore boards become less effective in monitoring CEO compensation in the New Zealand context. Companies that pay their directors more tend to reward their CEOs more as well, thus supporting the managerial entrenchment hypothesis. Research limitations/implications – The results confirm the findings reported in prior studies that institutional investors are ineffective in monitoring managerial decisions and their focus is on decisions that benefit them on a short-term basis. Practical implications – The findings indicate that although the proportion of independent directors on boards does not significantly influence CEO compensation, it does indicate that outside directors are passive and are no more effective than insiders when it comes to the oversight and supervision of CEO compensation. Originality/value – Being a small and open financial market with many small- and medium-sized listed companies, New Zealand differs from large economies such as the UK and the USA in the sense that CEOs in New Zealand tend to be closely connected to each other. As such, the relationship between pay-performance for New Zealand is found to be different from those reported for the UK and the USA. In New Zealand, the proportion of institutional and/or block shareholders is positively associated with CEO compensation and negatively associated with company performance, suggesting that it is not an effective mechanism for monitoring CEO compensation.

Management Quality and Anti-Takeover Provisions

We present the first analysis in the literature of the relationship between the quality and reputation of a firm's management and the prevalence of anti-takeover provisions in the corporate charters of IPO firms, and the influence of this relationship on post-IPO performance. We test the implications of two theories regarding the above two relationships: the hypothesis, which implies that anti-takeover provisions are meant mainly to enhance the control benefits enjoyed by existing firm management by minimizing the probability of takeovers by rival management teams; and the value hypothesis, which argues that such provisions, while they entrench firm management, can also be value enhancing in the hands of higher quality management teams. Our empirical results can be summarized as follows. First, firms with higher quality managements are associated with a greater number of anti-takeover provisions relative to those with lower quality managements. Further, within the former category, firms with larger growth options are associated with a greater number of anti-takeover provisions. Second, when we divide our sample by management quality (higher versus lower) and then by the number of anti-takeover provisions (greater versus smaller) within each management quality category, firms with higher management quality and a greater number of anti-takeover provisions outperform firms in the remaining three categories in terms of both post-IPO operating and post-IPO stock return performance. The evidence thus rejects the managerial entrenchment hypothesis and supports the long-term value creation hypothesis.