Do boards of directors affect CEO behavior? Evidence from payout decisions

In this article, we evaluate CEO behavior in terms of his or her preferences to risk, and how the actions of boards of directors interplay with these behaviors. Specifically, we set out to test whether the actions of boards of directors can overcome the negative impacts of CEO behavior on various aspects of payout policy. We set out to examine these tendencies in terms of the levels of payout, the propensity to pay, and the choice of payout channel utilized. We use several compensation-based proxies to measure CEO risk preferences on a sample of non-financial and non-utility companies from the US for 2007 to 2016 from the S&P 1500 Index. Our contribution is threefold. First, the findings fill the gaps in the research on the impact of CEO risk preferences on the decision to start paying dividends and on the decisions to switch between cash dividend and share repurchase. The results indicate that CEOs who are encouraged by the boards to take more risks paid out more through repurchases, while less risky CEOs are more likely to initiate paying dividends. Second, by means of quantile regression we demonstrate that the level of repurchases is more sensitive to the CEO’s risk preferences in the companies from top quartiles. Third, by introducing our index of corporate governance quality, we may document that corporate governance tools reduce or even eliminate the negative effects of CEO risk preferences. In companies with high corporate governance index, the risk preferences of the CEO do not affect payout decisions.