Managerial stability and payout policy: Does state regulation matter?

Abstract

In practice, it is increasingly common for companies to use NON-COMPETITION covenants in employment contracts that put restrictions on post-employment activities. Making use the variation of legal enforcement of NON-COMPETITION agreements in different states (NON-COMPETITION index) across the U.S., this chapter empirically examines whether and to what extent labor market concern will affect firm payout policy when managers are bound to their firms by NON-COMPETITION agreements. We find that the likelihood for a firm to pay DIVIDEND or conduct repurchasing is positively related to NON-COMPETITION index. We directly measure PAYOUT RATIO and find a significant positive relation between firm PAYOUT RATIO and NON-COMPETITION index. Our results indicate that managers with increased stability and reduced job opportunity in the external labor market are more likely use cash payout as a pre-commitment device and send a signal that they will not entrench themselves.

Citation

Song, L. and Wang, H. (2009), "Managerial stability and payout policy: Does state regulation matter?", Hirschey, M., John, K. and Makhija, A.K. (Ed.) Corporate Governance and Firm Performance (Advances in Financial Economics, Vol. 13), Emerald Group Publishing Limited, Leeds, pp. 243-259. https://doi.org/10.1108/S1569-3732(2009)0000013012