Chief executive officer duality and the relationship between firm performance and dividend payouts

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Abstract

Using a panel of data on manufacturing firms listed on the Chinese stock exchange over the period 2017 to 2022, this research paper empirically investigates the relationship between firm performance and dividend payouts. Unique features of Chinese financial markets allow us to contribute to the literature on how corporate governance, in particular concentrated managerial power and state ownership, affects agency costs and therefore the relationship between firm performance and dividend payouts (Burdeos, 2021; Debnath et al., 2022; Vicente, 2020). The main findings of this study are as follows. Firms follow the pecking order theory when funding their capital needs: firms wait for dividends, preferring to take advantage of profitable investment opportunities when firm performance is good. This negative relationship between firm performance and dividend payout is even stronger at firms with highly concentrated managerial power as indicated by chief executive officer (CEO) duality. However, state-owned enterprises, which face a double principal–agent problem that cannot be fully addressed by CEO duality, demonstrate a weaker negative relationship between firm performance and dividend payouts. We find evidence that the negative relationship between firm performance and dividend payouts strengthened during the COVID-19 pandemic: firms were even more likely during to prefer internal financing during the pandemic years.

Keywords: Capital Structure, Dividend Payout, Pecking Order Theory, Management Power, State-Owned Enterprises

Authors’ individual contribution: Conceptualization — D.S. and H.A.M.; Methodology — D.S. and H.A.M.; Resources — D.S. and H.A.M.; Writing — Original Draft — D.S. and H.A.M.; Writing — Review & Editing —D.S. and H.A.M.; Visualization — D.S. and H.A.M.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: G30, G32, G35, G40, G41

Received: 07.05.2023
Accepted: 15.01.2024
Published online: 18.01.2024

How to cite this paper: Sheng, D., & Montgomery, H. A. (2024). Chief executive officer duality and the relationship between firm performance and dividend payouts. Journal of Governance & Regulation, 13(1), 96–110. https://doi.org/10.22495/jgrv13i1art9