Dividends and Corporate Governance: Canadian Evidence

Abstract

This paper examines the role of corporate governance as a determinant of dividend policy with Canadian data over the period 1997-2004. It finds that firms with large board favor higher dividend payments. Further, the ratio of option over cash in CEO’s compensation negatively affects dividend payments. Findings generally show support for the ‘substitution model’ (La Porta et al., 2000). As per the ‘substitution model’, firms with weaker governance characteristics (such as large board size, lower alignment of CEO pay, lower percentage of unrelated director, CEO duality, lower CEO ownership, prevalence of dual-class share structure) are likely to pay higher dividends. It also finds that firms which pay higher dividends are those with less investment opportunities, larger size, and less market risk. These findings are robust even after controlling for endogeneity, external monitoring by equity analysts, joint effect of investment opportunity and corporate governance variables, stock repurchases, or dividend premium.

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