Do Co-Opted Directors Influence Dividend Policy?

We explore how co-opted directors affect dividend policy. Co-opted directors are those appointed after the incumbent chief executive officer (CEO) assumes office. Our results show that co-opted directors lead to a weaker propensity to pay dividends and, for dividend-paying firms, significantly lower dividend payouts. We also show that board co-option has more explanatory power for dividend policy than does the traditional measure of board effectiveness, that is, board independence. Exploiting the passage of the Sarbanes-Oxley Act as a natural experiment, we show that the effect of board co-option on dividend policy is more likely causal, rather than merely an association.