Does CEO ownership affect payout policy? Evidence from using CEO scaled wealth-performance sensitivity

Higher CEO ownership and cash payouts have the potential to mitigate agency conflicts associated with overinvestment of free cash flows. But empirical evidence on the effect of CEO ownership on payout policy is mixed. Previous studies, however, use CEO ownership percentage as a proxy for delta (the sensitivity of CEO wealth to stock price). Ownership percentage is known to decrease in firm size, while the likelihood of cash payouts increases with firm size. This study uses scaled wealth-performance sensitivity (Edmans et al., 2009), a proxy for CEO delta uncorrelated with firm size, to examine the effect of CEO ownership on payout policy for a sample of 6656 firm-year observations from 1995 to 2008. Our results suggest that CEO ownership has significant influence on payout policy, but that the nature of the relation depends on the prior payout history of the firm, and the level of free cash flow in the firm.