Policyholder dividend policy and the costs of managerial discretion

This study examines whether mutual life insurers pay policyholder dividends in response to the costs of managerial discretion. The insurer's free cash flow and the variation in free cash flow explain over 85 percent of the variation in policyholder dividends for a time-series, cross-sectional sample of mutual life insurers. The findings hold under different specifications of the estimated model and for a control sample of stock life insurers.