Dividend policies surrounding CEO turnover

Purpose This study explores the relationship between US public firms’ dividend policies and CEO selection. Specifically, we examine the association between successor CEOs’ prior employment and firms’ payout policies around CEO turnover events. Design/methodology/approach Using Execucomp, we identify a sample of 1,021 S&P 1500 firms with CEO turnover events occurring from 2010 to 2016. We categorize successor CEOs by their prior position as a public insider (hired internally from the public firm), public outsider (hired from a different public firm) or private outsider (hired from a private firm). We investigate dividend policies around CEO turnovers using differences-in-means and probit analyses. Findings Firms that hired private CEOs were 11.0% less likely to have paid a dividend in the year prior to the CEO turnover. However, those firms that had paid a dividend in the prior year were 5.4% more likely to subsequently drop their dividend. This finding supports a distinct effect that is related to the successor CEOs’ prior experience managing private firms, rather than an “outsider” effect: payout policies of firms that hired public outsiders were no different from those that hired public insiders. Originality/value We show that public firms that hire private CEOs tend to have dividend policies similar to those of private firms. This evidence suggests that human capital developed at private firms is applied when CEOs transfer to public firms. We show that outsiders from public firms behave differently from outsiders from private firms, and we are the first to measure the frequency of each kind of CEO successor: public insiders, public outsiders and private outsiders. These findings suggest a method to indirectly study private firms using more readily available data from public firms led by private CEOs.