A Board’s Composition Influences Dividend Policy

Gender diversity in a company’s board of directors was found to be associated with a higher likelihood of dividend payments and an increase in the yield of the dividend paid.

“Board composition is a more important determinant of dividend payout policy than that of managerial characteristics,” argue researchers from Korea University and the City University of Hong Kong. They found that average board member age and the number of board members, in addition to gender diversity, financial expertise and independent chairmen all influence dividend policy more than managerial characteristics.

Having at least one woman serving on the board was found to be associated with a higher likelihood of dividend payments and an increase in the yield of the dividend paid. Previous studies have shown that gender diversity within the board enhances the creativity, innovation and performance of firms, a finding further supported by this study.

Older directors have a higher likelihood of paying dividends than younger directors. As directors get older, they gain experience and practical knowledge that improves decision-making. They may also become less risk-averse and develop a larger preference for paying dividends as they age.

The larger the board, the more likely the company will pay dividends and the higher the yield will likely be. A larger board dilutes the influence of a select few directors, and means that there are more people with complimentary expertise and greater access to resources.

Directors with more financial expertise tend to be more conservative and reduce the amount of dividends paid. These directors would rather hold on to their cash for future investment opportunities and prefer strong fundamentals over dividend payments. An independent chairman, contrary to the researcher’s original hypothesis, is negatively associated with the likelihood of paying dividends. The researchers, however, could not find a reason for this.

These findings were the result of a sample of 905 firms and 6,238 firm-year observations spanning from 2007 to 2018.

The study’s authors describe their research into the impact of board composition on dividend policy as being unique. Prior studies have focused on company characteristics such as cash flow and growth opportunities. Others have looked at how the preferences of managers compare to those of shareholders. While corporate executives can exert influence on directors, it is the board that decides whether or not a dividend is paid.

Source: “The Impact of Board Composition on the Dividend Policy of US Firms,” by Ephraim Kwashie Thompson and Sylvester Adasi Manu, January 2021.