We begin our analysis by regressing a firm's dividend yield on the extent of pensions, as measured by compensation leverage and inside debt of the CEO and for all top executives. All dividend and pension measures are adjusted to industry averages. We control for compensation components that can affect dividend payments incentives: salary and bonus and stock-options value, and for additional variables that are found in prior studies to affect dividend policy. These include size, book-to-market ratio, leverage ratio, prior year capital expenditures, cash flow from operations, distance-to-default (calculated via the Merton-KMV framework; see Crosbie and Bohn (2002)), firm age, past stock return, liquidity constraint (measured by a binary variable that equals 1 if a negative operating income was posted for that year), and tax loss (a binary variable that equals 1 if the firm reported a net tax loss carry forward during that firm-year). As the regressions rely on time-series firm-level data, we also control for year fixed effects, and use robust standard errors clustered by firm to correct for heteroskedasticity and serial correlation. The regression results in Table 3 strongly support our hypothesis. All four models indicate that the extent of pension is associated with lower dividend payments. The results are especially strong when compensation leverage is used, for both CEO only (second column) and all top executives (fourth column); the are -7.28 and -8.70), respectively. While not as strong, results are t-statistics also significant for inside debt (t-statistics of -2.09 and -1.74). This difference may emphasize the importance of pensions in the manager's compensation package, which is captured by the compensation leverage. The results in the table thus provide a first indication that managers with large pension plans appear less likely to commit to high dividend distributions. We recognize that the relation between pension size and dividend policy, observed in Table 3, could involve endogeneity bias. That is, firms that typically maintain a lower level of dividends have larger internal funds available, and therefore can direct more cash into executive pension
We begin our analysis by regressing a firm's dividend yield on the extent of pensions, as measured by compensation leverage and inside debt of the CEO and for all top executives. All dividend and pension measures are adjusted to industry averages. We control for compensation components that can affect dividend payments incentives: salary and bonus and stock-options value, and for additional variables that are found in prior studies to affect dividend policy. These include size, book-to-market ratio, leverage ratio, prior year capital expenditures, cash flow from operations, distance-to-default (calculated via the Merton-KMV framework; see Crosbie and Bohn (2002)), firm age, past stock return, liquidity constraint (measured by a binary variable that equals 1 if a negative operating income was posted for that year), and tax loss (a binary variable that equals 1 if the firm reported a net tax loss carry forward during that firm-year). As the regressions rely on time-series firm-level data, we also control for year fixed effects, and use robust standard errors clustered by firm to correct for heteroskedasticity and serial correlation. The regression results in Table 3 strongly support our hypothesis. All four models indicate that the extent of pension is associated with lower dividend payments. The results are especially strong when compensation leverage is used, for both CEO only (second column) and all top executives (fourth column); the t-statistics are -7.28 and -8.70), respectively. While not as strong, results are also significant for inside debt (t-statistics of -2.09 and -1.74). This difference may emphasize the importance of pensions in the manager's compensation package, which is captured by the compensation leverage. The results in the table thus provide a first indication that managers with large pension plans appear less likely to commit to high dividend distributions. We recognize that the relation between pension size and dividend policy, observed in Table 3, could involve endogeneity bias. That is, firms that typically maintain a lower level of dividends have larger internal funds available, and therefore can direct more cash into executive pension
A-Dividend-Pensions-20-October-21-2013-.docx