Board Characteristics and Payout Policy: A Comparison Between SMEs and Large Firms

In the face of agency problems surrounding dividends payout, strong corporate governance attempts to distribute excess cash flows to shareholders if attractive investment opportunities are rare. Using the publicly traded firms from 2001 to 2010, this paper finds that dividends are positively associated with board expertise measured by experience as outside directors and accounting competency. However, the positive association between dividends and board expertise is attenuated in small- and medium- sized enterprises (SMEs). Other board characteristics such as board independence and legal expertise do not show positive associations with dividends. The results imply that the board effectiveness in monitoring management and distributing dividends is improved by outside directors’ quality, rather than by the formal appointment of outside directors itself. Also, the results suggest that the board effectiveness is lower in SMEs than in large firms.