Insider Ownership and Dividend Payout Policy: The Role of Business Cycle

Abstract: We investigate how the relationship between managerial stock incentives and the dividend payout policy is impacted by the business cycle by using the data of S&P 1500 companies during 2000-2018. We find a strong negative relationship between managerial stock options and annual dividend payouts of companies for the full sample. Although the direction of the relationship is also negative for the recession period, the coefficient is found to be insignificant. We also find that the mentioned relationship may vary during the recession depending on the size of the company. The impact of stock options on the dividend payout is negative for medium-sized companies and the coefficient is both economically and statistically significant. The direction of impact changes for large-cap companies indicating to deterioration of the CEO voting power in those companies and less agency problem. We also determine that the percentage of shares held by the CEO has a positive impact on annual dividends distributed for large-cap companies, whereas this relationship changes in times of recession.