Essays on CEO overconfidence, labor protection laws, and corporate opportunity waivers in shaping corporate payout policies

Abstract

This dissertation provides a comprehensive examination of the complex interactions
between CEO overconfidence, labor protection laws, and corporate opportunity
waivers (COW) in shaping corporate payout policies, specifically focusing on
dividends and share repurchases. Through an integrative analysis of three distinct
studies, the research elucidates the multifaceted ways in which managerial
characteristics, legal regulations, and governance mechanisms influence corporate
financial decisions. The findings offer significant insights into the nexus of corporate
governance, legal frameworks, and firm behavior, providing implications for both
theoretical development and practical policy-making.
The first study explores the impact of CEO overconfidence on corporate payout
strategies, with a particular emphasis on the moderating role of board independence.
It demonstrates that overconfident CEOs, who often have an inflated perception of
their own decision-making abilities, prioritize aggressive investment strategies over
shareholder payouts. However, an independent board can significantly mitigate these
tendencies, ensuring a more balanced approach to dividend distributions and retained
earnings. If unchecked, this managerial bias generally leads to reduced dividend
distributions and increased retained earnings, diverging from optimal financial
policies aligned with shareholder value maximization. This study highlights the
critical role of independent directors in curbing the potential excesses of overconfident
CEOs.
The second study provides an in-depth analysis of the impact of labor protection laws,
specifically wrongful discharge laws, on corporate payout behaviors. The research
reveals that these laws, by significantly increasing the costs and risks associated with
terminating employees, prompt firms to reallocate their financial resources towards
more shareholder-friendly mechanisms, particularly share buybacks. The study finds
that in environments where wrongful discharge laws are stringent, firms are more
likely to increase share repurchases as a strategic response to mitigate the potential
financial burden imposed by these laws. This behavior serves as a compensatory
mechanism, ensuring that resources are retained within the firm rather than being
dissipated through costly employee litigation and settlements. Furthermore, the study
concludes that such regulatory frameworks can effectively moderate the adverse
effects of CEO overconfidence, leading to a more prudent and balanced approach to
corporate payouts. This is because the heightened costs associated with labor
protection laws impose a form of financial discipline, encouraging overconfident
CEOs to align their payout strategies more closely with the interests of shareholders.
The third study explores the effects of corporate opportunity waivers (COW) on
corporate governance and payout policies, focusing on the underlying transmission
mechanisms and resultant findings. Corporate opportunity waivers allow directors
and officers to engage in business ventures that might otherwise present conflicts of
interest, fundamentally altering the governance landscape within firms. The study
posits that the adoption of COW provisions can lead to a dual-pathway impact on
corporate payout policies. Firstly, by permitting directors to pursue external business
interests, these waivers can potentially dilute the focus on the firm’s internal
investment opportunities, thereby prompting a reallocation of resources. This
reallocation can manifest as either increased dividends or share buybacks, depending
on the firm’s governance structure and financial strategy. Secondly, the presence of
COWs might reduce the level of scrutiny and oversight typically exerted by
independent directors, as these waivers lessen the perceived need to safeguard
corporate opportunities strictly within the firm. As a result, firms may experience a
shift in resource allocation towards activities that benefit both internal and external
stakeholders, potentially at the expense of traditional payout mechanisms. The study
finds that the degree of board independence plays a crucial moderating role in these
dynamics. In firms with strong independent board oversight, the potential adverse
impacts of COW provisions on shareholder payouts are mitigated, as independent
directors remain vigilant in ensuring that payout policies continue to align with
shareholder interests. Conversely, in firms with weaker governance structures, COW
provisions may lead to a more significant diversion of resources away from
shareholder payouts.
In summary, the integrated findings from these studies provide a holistic view of how
intrinsic managerial traits and extrinsic legal and governance frameworks coalesce to
shape corporate payout policies. The research highlights the critical need to consider
both psychological attributes of CEOs and the broader institutional context in
understanding and predicting corporate financial behavior. This dissertation advances
the scholarly discourse by bridging gaps between corporate governance, legal
regulation, and financial decision-making, offering valuable insights for policymakers,
scholars, and practitioners alike.

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Identifiers

ORCID for Soumyatanu Mukherjee: orcid.org/0000-0003-0674-1064

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