An Analysis of the Payout Decisions around CEO Retirements: Evidence from UK Listed Firms

Abstract

This study aims to analyze the dividend payouts of close to
retirement CEOs. Our motivation comes from the fact that as the CEO
gets closer to retirement his pension entitlements increase
substantially making his equity–based incentives to turn
systematically towards debt. This makes the CEO to implement
financial policies that are less risky and would conserve cash in the
firm. We are particularly interested in analyzing this behaviour in the
firm’s dividend payouts. Using panel data of UK non-financial firms
from the FTSE-250 over a period of 2013-2017, we specifically test
whether a close to retirement CEO has an impact over the decision
and level of dividend payouts. We classify a CEO as close to
retirement if he is 55 years of age or above. Panel logistic regressions
and Feasible Generalized Least Squares (FGLS) techniques to address
heteroskedasticity and auto correlation, are used to test the
relationships. Our findings suggest that a close to retirement CEO
would favor a payout decision and would also increase the level of
dividend payments, particularly in the presence of growth
opportunities in order to safeguard the free cash flows from being
invested in risky investments that would otherwise affect the
continuity of his pension entitlements after retirement.