This study empirically investigates the relation between CEO power and the likelihood of dividend payouts. It argues that powerful CEOs pay dividends to establish reputation in capital markets to raise external financing at favorable terms. The net expected value of such reputation, however, depends on the likelihood of external financing, which is positively related to low profitability and high cash flow volatility. Empirical results show that powerful CEOs are more likely to pay and increase dividends when their firms face low profitability and high cash flow volatility.

We test the hypothesis that managers who face a high termination risk make less risky investments than the managers who face a low termination risk. A 10% increase in our measure of termination risk is associated with a 5%–23% decline in stock returns volatility for the median firm in our sample. We also find that for CEOs who are more likely to be fired in the event of investment failure, the inhibiting effect of termination risk appears to offset the positive effect of convexity of managerial compensation on managerial risk taking. These results are robust to alternative definitions of forced turnover and various measures of firm performances.