Controlling stockholders and the disciplinary role of corporate payout policy: a study of the Times Mirror Company

The Times Mirror Company, a NYSE-listed Fortune 500 firm controlled for 100 years by the Chandler family, hired an industry outsider as CEO in 1995 fo llowing an extended period of poor operating and stock price performance un der non-family management. This change was apparently an unintended consequ ence of actions taken by old management to fund its capital expansion plans while satisfying the family's desire for dividends. Specifically, in 1994 old management agreed to (1) sell TM's cable business and reinvest most of the $1.3 billion proceeds in new technology, and (2) maintain the Chandlers ' dividends while radically cutting those to minority stockholders. While W all Street reacted favorably to the cable sale, it punished TM's stock when it later learned about management's reinvestment plans. Shortly thereafter TM's board brought in a noted financial disciplinarian, who as CEO substan tially increased stockholder value by terminating low return investments an d distributing free cash flow. While pressure to pay dividends and monitori ng by large block stockholders ultimately improved TM's performance, the pa th to this outcome was slow and circuitous, so that these disciplinary forc es were weaker than theory typically implies. (C) 2000 Elsevier Science S.A . All rights reserved. JEL classification: G35; G32.