Managerial opportunism and proportional corporate payout policies

Purpose - The purpose of this paper is to investigate the relative preference for dividends vs share repurchases based on managers' personal wealth and control benefits. Design/methodology/approach - The paper presents an analytical model of managerial preferences and information advantages, and analyses how the choice between dividends and repurchases relates to the manager's personal objectives in this setting. The approach specifies preferences consistent with the agency theory of economics. Findings - It is found that, when managers can influence share price prior to a repurchase, due to their superior information, repurchases present an opportunity to increase managerial wealth relative to dividends. In addition, if managers can influence the post-repurchase share price, due to an upward sloping supply curve for the company's stock, repurchases present an opportunity to protect the managers' personal benefits of control. The ability to protect control depends on the toehold purchased by potential acquirers, and on the source of the upward-sloping supply. Repurchases are less protective when toeholds are small and the supply curve reflects tax lock-in effects. Practical implications - The results indicate that managerial concerns over their personal wealth or ability to maintain control of the firm can influence the method of corporate distributions. As such, market valuations and the market reaction to distribution announcements may reflect these managerial concerns. This could be an important determinant of investor stock choices. Originality/value - The factors determining firms' payout methods remains a topic of significant importance and debate. The method of analysis here is new, and the insights into managerial preferences, toeholds and payout decisions help to inform this debate.