THE IMPACT OF CORPORATE GOVERNANCE MECHANISMS ON THE DIVIDEND POLICY OF CANADIAN FIRMS: EMPIRICAL STUDY

Fodil Adjaoud
University of Ottawa

Nadia Hermassi
University Elmanar of Tunis

ABSTRACT

This study investigates the impact of corporate governance mechanisms (board composition, board independence and CEO duality) on the dividend policy of Canadian firms listed on the Toronto Stock Exchange over the period 2008-2011. Within agency theory, corporate governance mechanisms align managers’ interests with shareholders’ interests in order to mitigate the agency costs of free cash flows.
The authors divided governance mechanisms into three groups: Board characteristics (board composition, independence), CEO characteristics (duality, compensation and entrenchment) and ownership characteristics (family ownership). The authors also included variables related to profitability, leverage, growth opportunities and firm size. Dividend policy is defined as dividend payouts as well as the decision to pay or not to pay dividends to shareholders.
The results show that dividend payouts and the likelihood to pay dividends were impacted significantly by board composition, board independence and CEO duality. The results also confirm the significant role of profitability, firm size and leverage on dividend policy. The results are consistent with the idea that dividend policy is a tool used by managers to mitigate agency costs of free cash flows and to protect shareholders.
The study sheds more light on why firms pay or do not pay dividends to their owners. It adds a little piece of information towards finding a solution to the dividend puzzle.

Keywords: Canadian firms, governance mechanisms, dividend policy, agency theory