Relaxed Managerial Fiduciary Duties and Corporate Payout Policy

Abstract

We examine the effect of corporate opportunity waiver (COW) laws on corporate payout policies across nine U.S. states. Using a difference-in-differences approach, we document a significant decline in payouts following the adoption of COW laws. This reduction is more pronounced in firms where managers face greater conflicts of interest with shareholders and in firms reliant on external financing, particularly equity. Our results align with two non-mutually exclusive hypotheses: (1) the resource diversion hypothesis, where COW laws incentivize self-dealing managers to cut payouts and reallocate resources to alternative uses, and (2) the reduced signaling incentive hypothesis, where COW laws diminish managers’ motivation to use payouts as a tool to mitigate free-cash-flow agency problems. Further supporting the resource diversion channel, we find that affected firms experience deteriorating corporate performance and higher equity financing costs. These results suggest that managerial opportunism plays a dominant role in explaining the payout decline.