Board independence, excess cash and corporate payout policy

I study how independence of the board of directors affects corporate payout policy. I hypothesize that when firms have excess cash, changes in the proportion of independent directors are positively associated with changes in total cash distributions to shareholders, including both cash dividends and stock repurchases. To test my hypothesis, I study a sample of randomly selected 303 U.S. industrial firms between 1993 and 2002. My main findings are that when firms have excess cash, changes in the proportion of independent directors are positively associated with changes in total cash payouts to shareholders and with changes in the likelihood of an increase in total payouts. When firms have excess cash, an increase of one independent director is associated with approximately a 10% increase over the previous year's total payouts and with approximately a 38% higher probability of an increase in total payouts.; Additional tests address three types of concerns about the robustness of my results. First, I study a possible nonlinear effect of changes in board independence on changes in total payouts. I find no significant nonlinear relation between changes in board independence and changes in total payouts. Second, I address specification issues. I estimate simultaneous regressions and Heckman regressions, and the results are consistent with results of OLS regressions. Third, I study whether the relation between changes in board independence and changes in total payouts is caused by other factors, such as firm characteristics. I do not find evidence that other factors cause simultaneous changes in board independence and total payouts. Overall, my evidence suggests that board independence affects the formation of corporate payout policy in a way that mitigates the managerial agency problem of free cash flow.