Hostname: page-component-6bb9c88b65-s7dlb Total loading time: 0 Render date: 2025-07-21T17:27:20.682Z Has data issue: false hasContentIssue false
  • English
  • Français

Hot-Stove Effects: The Impact of CEO Past Corporate Experiences on Dividend Policy

Published online by Cambridge University Press:  28 June 2021

Matthew Faulkner Open the ORCID record for Matthew Faulkner [Opens in a new window]  and
Luis García-Feijóo
Matthew Faulkner*
Affiliation:
San José State University Lucas College of Business
Luis García-Feijóo
Affiliation:
Florida Atlantic University College of Business luis.garcia@fau.edu
*
matthew.faulkner@sjsu.edu (corresponding author)
Get access Rights & Permissions [Opens in a new window]

Abstract

The personal traits of chief executive officers (CEOs) have been found to influence corporate policy decisions. We examine the impact of CEO past corporate distress experiences on payout policy. CEOs who have experienced a distress event in their career, while working in a non-CEO position at a different firm, subsequently alter corporate payout policy once in the CEO position. They are less likely to pay dividends and repurchase shares, pay out lower levels of dividends, and are less likely to increase dividends. They further exhibit preference toward repurchases. Overall, we report that experience-driven conservatism affects payout policy, a novel finding in the literature.

Information

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 57 , Issue 5 , August 2022 , pp. 1695 - 1726
Copyright
© The Author(s), 2021. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Article purchase

Temporarily unavailable

Footnotes

We thank Anup Agrawal (the referee) and gratefully acknowledge the helpful comments from Alice Bonaimé, David Javakhadze, and Dong Hyun Kim (discussant), as well as seminar participants at Florida Atlantic University, San José State University, East Carolina University, the University of Tennessee at Chattanooga, California State University at Northridge, Florida Gulf Coast University, and the Southern Finance Association (SFA) 2019 Annual Meeting.

References

Adhikari, B. K., and Agrawal, A.. “Peer Influence on Payout Policies.” Journal of Corporate Finance, 48 (2018), 615–637.CrossRefGoogle Scholar
Adhikari, B. K.; Agrawal, A.; and Malm, J.. “Do Women Managers Keep Firms Out of Trouble? Evidence from Corporate Litigation and Policies.” Journal of Accounting and Economics, 67 (2019), 202–225.CrossRefGoogle Scholar
Allen, F.; Bernardo, A. E.; and Welch, I.. “A Theory of Dividends Based on Tax Clienteles.” Journal of Finance, 55 (2000), 2499–2536.CrossRefGoogle Scholar
Allen, F., and Michaely, R.. “Payout Policy.” In Handbook of the Economics of Finance, Vol. 1A, Constantinides, G., Harris, M., and Stulz, R., eds. Amsterdam, Netherlands: North-Holland (2003), 337–429.Google Scholar
Almeida, H.; Fos, V.; and Kronlund, M.. “The Real Effects of Share Repurchases.” Journal of Financial Economics, 119 (2016), 168–185.CrossRefGoogle Scholar
Asch, S. E. “Forming Impressions of Personality.” Journal of Abnormal and Social Psychology, 41 (1946), 258–290.CrossRefGoogle ScholarPubMed
Asquith, P., and Mullins, D. W. Jr. “The Impact of Initiating Dividend Payments on Shareholders’ Wealth.” Journal of Business, 56 (1983), 77–96.CrossRefGoogle Scholar
Baker, H. K.; Singleton, J. C.; and Veit, E. T.. Survey Research in Corporate Finance – Bridging the Gap Between Theory and Practice. New York: Oxford University Press (2011), 236–369.Google Scholar
Baker, H. K., and Weigand, R.. “Corporate Dividend Policy Revisited.” Managerial Finance, 41 (2015), 126–144.CrossRefGoogle Scholar
Baker, M., and Wurgler, J.. “A Catering Theory of Dividends.” Journal of Finance, 59 (2004), 1125–1165.CrossRefGoogle Scholar
Banerjee, S.; Humphery-Jenner, M.; and Nanda, V.. “Does CEO Bias Escalate Repurchase Activity?” Journal of Banking and Finance, 93 (2018), 105–126.CrossRefGoogle Scholar
Barclay, M. J.; Smith, C. W.; Watts, R. L.. “The Determinants of Corporate Leverage and Dividend Policies.” Journal of Applied Corporate Finance, 7 (1995), 4–19.CrossRefGoogle Scholar
Barkan, R.; Zohar, D.; and Erev, I.. “Accidents and Decision Making Under Uncertainty: A Comparison of Four Models.” Organizational Behavior and Human Decision Processes, 74 (1998), 118–144.CrossRefGoogle ScholarPubMed
Benmelech, E., and Frydman, C.. “Military CEOs.” Journal of Financial Economics, 117 (2015), 43–59.CrossRefGoogle Scholar
Bernile, G.; Bhagwat, V.; Rau, P. R.. “What Doesn’t Kill You Will Only Make You More Risk-Loving: Early-Life Disasters and CEO Behavior.” Journal of Finance, 72 (2017), 167–206.CrossRefGoogle Scholar
Bertrand, M., and Schoar, A.. “Managing with Style: The Effect of Managers on Firm Policies.” Quarterly Journal of Economics, 118 (2003), 1169–1208.CrossRefGoogle Scholar
Billett, M. T., and Xue, H.. “The Takeover Deterrent Effect of Open Market Share Repurchases.” Journal of Finance, 62 (2007), 1827–1850.CrossRefGoogle Scholar
Bonaimé, A. A.; Hankins, K. W.; and Harford, J.. “Financial Flexibility, Risk Management, and Payout Choice.” Review of Financial Studies, 27 (2013), 1074–1101.CrossRefGoogle Scholar
Bordalo, P.; Gennaioli, N.; and Shleifer, A.. “Salience Theory of Choice Under Risk.” Quarterly Journal of Economics, 127 (2012), 1243–1285.CrossRefGoogle Scholar
Brav, A.; Graham, J. R.; Harvey, C. R.; and Michaely, R.. “Payout Policy in the 21st Century.” Journal of Financial Economics, 77 (2005), 483–527.CrossRefGoogle Scholar
Brockman, P., and Unlu, E.. “Dividend Policy, Creditor Rights and the Agency Costs of Debt.” Journal of Financial Economics, 92 (2009), 276–299.CrossRefGoogle Scholar
Cain, M. D., and McKeon, S. B.. “CEO Personal Risk-Taking and Corporate Policies.” Journal of Financial and Quantitative Analysis, 51 (2016), 139–164.CrossRefGoogle Scholar
Charitou, A.; Lambertides, N.; and Theodoulou, G.. “Dividend Increases and Initiations and Default Risk in Equity Returns.” Journal of Financial and Quantitative Analysis, 46 (2011), 1521–1543.CrossRefGoogle Scholar
Chen, J.; Leung, W. S.; and Goergen, M.. “The Impact of Board Gender Composition on Dividend Payouts.” Journal of Corporate Finance, 43 (2017), 86–105.CrossRefGoogle Scholar
Cooper, I. A., and Lambertides, N.. “Large Dividend Increases and Leverage.” Journal of Corporate Finance, 48 (2018), 17–33.CrossRefGoogle Scholar
Custódio, C., and Metzger, D.. “How Do CEOs Matter? The Effect of Industry Expertise on Acquisition Returns.” Review of Financial Studies, 26 (2013), 2008–2047.CrossRefGoogle Scholar
DeAngelo, H.; DeAngelo, L.; and Skinner, D. J.. “Corporate Payout Policy.” Foundations and Trends in Finance, 3 (2009), 95–287.CrossRefGoogle Scholar
DeAngelo, H.; DeAngelo, L.; and Stulz, R. M.. “Dividend Policy and the Earned/Contributed Capital Mix: A Test of the Life-Cycle Theory.” Journal of Financial Economics, 81 (2006), 227–254.CrossRefGoogle Scholar
Denis, D. J.; Denis, D. K.; and Sarin, A.. “The Information Content of Dividend Changes: Cash Flow Signaling, Overinvestment, and Dividend Clienteles.” Journal of Financial and Quantitative Analysis, 24 (1994), 567–587.CrossRefGoogle Scholar
Denis, D. J., and Osobov, I.. “Why Do Firms Pay Dividends? International Evidence on the Determinants of Dividend Policy.” Journal of Financial Economics, 89 (2008), 62–82.CrossRefGoogle Scholar
Denrell, J. “Adaptive Learning and Risk Taking.” Psychological Review, 114 (2007), 177–187.CrossRefGoogle ScholarPubMed
Denrell, J., and March, J. G.. “Adaptation as Information Restriction: The Hot Stove Effect.” Organization Science, 12 (2001), 523–538.CrossRefGoogle Scholar
Dhillon, U. S., and Johnson, H.. “The Effect of Dividend Changes on Stock and Bond Prices.” Journal of Finance, 49 (1994), 281–289.CrossRefGoogle Scholar
Dittmar, A. K. “Why Do Firms Repurchase Stock?” Journal of Business, 73 (2000), 331–355.CrossRefGoogle Scholar
Dittmar, A. K., and Duchin, R.. “Looking in the Rearview Mirror: The Effect of Managers’ Professional Experience on Corporate Financial Policy.” Review of Financial Studies, 29 (2016), 565–602.Google Scholar
Divecha, A., and Morse, D.. “Market Responses to Dividend Increases and Changes in Payout Ratios.” Journal of Financial and Quantitative Analysis, 18 (1983), 163–173.CrossRefGoogle Scholar
Easterbrook, F. H. “Two Agency-Cost Explanations of Dividends.” The American Economic Review, 74 (1984), 650–659.Google Scholar
Eisfeldt, A. L., and Kuhnen, C. M.. “CEO Turnover in a Competitive Assignment Framework.” Journal of Financial Economics, 109 (2013), 351–372.CrossRefGoogle Scholar
Ellis, J.; Guo, L.; and Mobbs, S.. “How Does Forced-CEO-Turnover Experience Affect Directors?” Journal of Financial and Quantitative Analysis, 56 (2021), 1163–1191.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “Disappearing Dividends: Changing Firm Characteristics or Lower Propensity to Pay?” Journal of Financial Economics, 60 (2001), 3–43.CrossRefGoogle Scholar
Feng, X., and Johansson, A. C.. “Living Through the Great Chinese Famine: Early-Life Experiences and Managerial Decisions.” Journal of Corporate Finance, 48 (2018), 638–657.CrossRefGoogle Scholar
Graham, J. R.; Harvey, C. R.; and Puri, M.. “Managerial Attitudes and Corporate Actions.” Journal of Financial Economics, 109 (2013), 103–121.CrossRefGoogle Scholar
Greenwood, R., and Hanson, S. G.. “Waves in Ship Prices and Investment.” Quarterly Journal of Economics, 130 (2015), 55–109.CrossRefGoogle Scholar
Grullon, G., and Michaely, R.. “Dividends, Share Repurchases, and the Substitution Hypothesis.” Journal of Finance, 57 (2002), 1649–1684.CrossRefGoogle Scholar
Grullon, G., and Michaely, R.. “The Information Content of Share Repurchase Programs.” Journal of Finance, 59 (2004), 651–680.CrossRefGoogle Scholar
Hendrick, C., and Costantini, A. F.. “Effects of Varying Trait Inconsistency and Response Requirements on the Primacy Effect in Impression Formation.” Journal of Personality and Social Psychology, 15 (1970a), 158–164.CrossRefGoogle Scholar
Hendrick, C., and Costantini, A. F.. “Number Averaging Behavior: A Primacy Effect.” Psychonomic Science, 19 (1970b), 121–122.CrossRefGoogle Scholar
Hertwig, R. “The Psychology and Rationality of Decisions from Experience.” Synthese, 187 (2012), 269–292.CrossRefGoogle Scholar
Hertwig, R.; Barron, G.; Weber, E. U.; and Erev, I.. “Decisions from Experience and the Effect of Rare Events in Risky Choice.” Psychological Science, 15 (2004), 534–539.CrossRefGoogle ScholarPubMed
Hertwig, R., and Erev, I.. “The Description–Experience Gap in Risky Choice.” Trends in Cognitive Sciences, 13 (2009), 517–523.CrossRefGoogle ScholarPubMed
Hilary, G., and Hui, K. W.. “Does Religion Matter in Corporate Decision Making in America?” Journal of Financial Economics, 93 (2009), 455–473.CrossRefGoogle Scholar
Hoberg, G., and Prabhala, N. R.. “Disappearing Dividends, Catering, and Risk.” Review of Financial Studies, 22 (2008), 79–116.CrossRefGoogle Scholar
Huang, J., and Kisgen, D. J.. “Gender and Corporate Finance: Are Male Executives Overconfident Relative to Female Executives?” Journal of Financial Economics, 108 (2013), 822–839.CrossRefGoogle Scholar
Ikenberry, D.; Lakonishok, J.; and Vermaelen, T.. “Market Underreaction to Open Market Share Repurchases.” Journal of Financial Economics, 39 (1995), 181–208.CrossRefGoogle Scholar
Iyer, S. R.; Feng, H.; Rao, R. P.. “Payout Flexibility and Capital Expenditure.” Review of Quantitative Finance and Accounting, 49 (2017), 633–659.CrossRefGoogle Scholar
Jiang, F.; Ma, Y.; and Shi, B.. “Stock Liquidity and Dividend Payouts.” Journal of Corporate Finance, 42 (2017), 295–314.CrossRefGoogle Scholar
Kahle, K. M. “When a Buyback Isn’t a Buyback: Open Market Repurchases and Employee Options.” Journal of Financial Economics, 63 (2002), 235–261.CrossRefGoogle Scholar
Kahneman, D., and Tversky, A.. “Prospect Theory: Analysis of Decisions Under Risk.” Econometrica, 47 (1979), 263–291.CrossRefGoogle Scholar
Kang, J. H. “The Usefulness and Uselessness of the Decomposition of Tobit Coefficients.” Sociological Methods Research, 35 (2007), 572–582.CrossRefGoogle Scholar
Kim, S., and Ng, J.. “Executive Bonus Contract Characteristics and Share Repurchases.” The Accounting Review, 93 (2018), 289–316.CrossRefGoogle Scholar
Kuhnen, C. M. “Asymmetric Learning from Financial Information.” Journal of Finance, 70 (2015), 2029–2062.CrossRefGoogle Scholar
Larkin, Y.; Leary, M. T.; and Michaely, R.. “Do Investors Value Dividend-Smoothing Stocks Differently?” Management Science, 63 (2017), 4114–4136.CrossRefGoogle Scholar
Leary, M. T., and Michaely, R.. “Determinants of Dividend Smoothing: Empirical Evidence.” Review of Financial Studies, 24 (2011), 3197–3249.CrossRefGoogle Scholar
Li, K., and Zhao, X.. “Asymmetric Information and Dividend Policy.” Financial Management, 37 (2008), 673–694.CrossRefGoogle Scholar
Li, W., and Lie, E.. “Dividend Changes and Catering Incentives.” Journal of Financial Economics, 80 (2006), 293–308.CrossRefGoogle Scholar
Lichtenstein, S.; Slovic, P.; Fischhoff, B.; Layman, M.; and Combs, B.. “Judged Frequency of Lethal Events.” Journal of Experimental Psychology: Human Learning and Memory, 4 (1978), 551–578.Google Scholar
Lie, E. “Operating Performance Following Dividend Decreases and Omissions.” Journal of Corporate Finance, 12 (2005a), 27–53.CrossRefGoogle Scholar
Lie, E. “Operating Performance Following Open Market Share Repurchase Announcements.” Journal of Accounting and Economics, 39 (2005b), 411–436.CrossRefGoogle Scholar
Lintner, J. “Distribution of Incomes of Corporations Among Dividends, Retained Earnings, and Taxes.” American Economic Review, 46 (1956), 97–113.Google Scholar
Liu, H., and Swanson, E. P.. “Is Price Support a Motive for Increasing Share Repurchases?” Journal of Corporate Finance, 38 (2016), 77–91.CrossRefGoogle Scholar
Malmendier, U. “Behavioral Corporate Finance.” In Handbook of Behavioral Economics: Applications and Foundations 1, Vol. 1, North-Holland (2018), 277–379.Google Scholar
Malmendier, U.; Tate, G.; and Yan, J.. “Overconfidence and Early-Life Experiences: The Effect of Managerial Traits on Corporate Financial Policies.” Journal of Finance, 66 (2011), 1687–1733.CrossRefGoogle Scholar
March, J. G. “Learning to Be Risk Averse.” Psychological Review, 103 (1996), 309–319.CrossRefGoogle Scholar
McDonald, J. F., and Moffitt, R. A.. “The Uses of Tobit Analysis.” Review of Economics and Statistics, 62 (1980), 318–321.CrossRefGoogle Scholar
Miller, M. H., and Modigliani, F.. “Dividend Policy, Growth, and the Valuation of Shares.” Journal of Business, 34 (1961), 411–433.CrossRefGoogle Scholar
Nguyen, T.; Nguyen, L. T.; Ngo, A. D.; and Adhikari, H.. “CEO Optimism and the Credibility of Open-Market Stock Repurchase Announcements.” Journal of Behavioral Finance, 19 (2018), 49–61.CrossRefGoogle Scholar
Nisbett, R. E., and Ross, L.. Human Inference: Strategies and Shortcomings of Social Judgment. Englewood Cliffs, NJ: Prentice Hall (1980).Google Scholar
Schoar, A., and Zuo, L.. “Shaped by Booms and Busts: How the Economy Impacts CEO Careers and Management Styles.” Review of Financial Studies, 30 (2017), 1425–1456.CrossRefGoogle Scholar
Shao, L.; Kwok, C. C.; and Guedhami, O.. “National Culture and Dividend Policy.” Journal of International Business Studies, 41 (2010), 1391–1414.CrossRefGoogle Scholar
Stephens, C. P., and Weisbach, M. S.. “Actual Share Reacquisitions in Open-Market Repurchase Programs.” Journal of Finance, 53 (1998), 313–333.CrossRefGoogle Scholar
Taylor, S. E., and Thompson, S. C.. “Stalking the Elusive ‘Vividness’ Effect.” Psychological Review, 89 (1982), 155–181.CrossRefGoogle Scholar
Tversky, A., and Kahneman, D.. “Judgment Under Uncertainty. Heuristics and Biases.” Science, 185 (1974), 1124–1131.CrossRefGoogle ScholarPubMed
Tversky, A., and Kahneman, D.. “Loss Aversion in Riskless Choice: A Reference-Dependent Model.” Quarterly Journal of Economics, 106 (1991), 1039–1061.CrossRefGoogle Scholar
UCLA: Statistical Consulting Group. “Tobit Analysis.” Retrieved December 1, 2019, from https://stats.idre.ucla.edu/stata/dae/tobit-analysis (n.d.).Google Scholar
Watson, J. Behaviorism, 2nd ed. New York: W. W. Norton & Company (1930).Google Scholar
Xuan, Y. “Empire-Building or Bridge-Building? Evidence from New CEOs Internal Capital Allocation Decisions.” Review of Financial Studies, 22 (2009), 4919–4948.CrossRefGoogle Scholar
Yechiam, E.; Barron, G.; and Erev, I.. “The Role of Personal Experience in Contributing to Different Patterns of Response to Rare Terrorist Attacks.” Journal of Conflict Resolution, 49 (2005), 430–439.CrossRefGoogle Scholar
Supplementary material: PDF

Faulkner and García-Feijóo supplementary material

Faulkner and García-Feijóo supplementary material

Download Faulkner and García-Feijóo supplementary material(PDF)
PDF 174.5 KB