Influential contributors to debates concerning corporate governance assert that it
is impossible to understand key trends without taking politics into account. This
proposition has, however, remained largely untested. This paper therefore offers
an empirical study of the relation between politics and corporate governance, with
the focus being on the determinants of dividend policy in publicly quoted United
Kingdom (U.K.) companies between 1950 and the present. The departure point is the
well-known partial adjustment model of dividend policy, which we augment to take
into account the ideological orientation of the party in power and other potentially
salient proxies for politics (e.g. tax policy and dividend controls). The model is
tested by reference to aggregate annual data on earnings and dividends. The results
indicate that the political placement of the party in office lacks explanatory power.
Moreover, even when politics manifests itself in regulation explicitly designed to
regulate corporate behaviour, political variables generally do not correlate in the
predicted direction with dividend pay-outs. The evidence therefore is inconsistent
with the proposition that politics shape corporate governance.