Takeover risk and dividend strategy: A study of UK firms

We investigate the relationship between a company's dividend strategy and its risk of takeover, Our results from a large panel of UK quoted companies suggest that higher dividend payments are associated with a significantly lower conditional probability (hazard) of takeover. Moreover, firms which wish to avoid takeover would be better to distribute the marginal pound 1 of earnings in dividends rather than investing it in the company. We consider two explanations for these findings. We suggest that the presence of an active market for corporate control could encourage firms to raise dividends to maintain shareholder loyalty.