Dividend Policy and Entrenchment -Evidence from Japan-

J33

M52

This paper analyzes the relation between firm's dividend policies and managerial ownership. Prior research has suggested that firms pay dividends when the agency problem is mitigated. Instead we conjecture that firms with larger managerial ownership pay more dividends even when it is not appropriate to reduce firms' cash to compensate them. Using sample of 1818 firms during 1990 to 1996, we find that firm with larger managerial ownership are more likely to pay dividends, more likely to increase dividends and less likely to decrease dividends. This result holds even for firms in which it is not appropriate to pay out cash. We observe this relationship for firms whose profit is negative and whose Tobin's q is larger than one. Our results imply that managers are paying cash as a way to compensate themselves.