Chapter 5 The dividend puzzle: A laboratory investigation

Purpose We investigate the implications of the misalignment between manager and shareholder interests and the effects of initial ownership stakes and reinvestment of unpaid dividends on managerial self-dealing. Methodology We collect and analyze data from controlled laboratory experiments with an experimental setting which captures the role of ownership in managerial considerations. Findings We see the emergence of both investor-aligned outcomes and managerial self-dealing outcomes. We find that increasing managers’ initial endowment of shares makes it harder for managers to coordinate on an outcome and lowers return on investment. Moreover, allowing managers to reinvest unpaid dividends results in a transfer of wealth to management. Research limitations The results and the conclusions are drawn upon data from the particular setting we investigate. Generalizing them beyond the specific setting should be done with caution. Practical implications Higher managerial ownership stake means that managers have a greater incentive to reward shareholders, but we find that it may also imply a more difficult coordination problem between managers – sometimes to the detriment of shareholders. Originality This study is the first to consider the direct relationship between managers’ portfolios and voting decisions regarding dividends and investment levels.