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Stock Options and Dividend Protection

Author

Listed:
  • Markus C. Arnold
  • Robert M. Gillenkirch

Abstract

Stock-option programs (SOPs) became the dominant compensation instrument for top management in the nineties. Usually, they are not dividend-protected, i.e., any dividend payout decreases the value of a manager's options. Empirical evidence shows that this results in a significant decrease in the level of corporate dividends and, at the same time, in an increase in share repurchases. This paper analyzes different forms of dividend protection and addresses the importance of dividend protection in SOPs. Finally, the paper relates the theoretical analysis to empirical work on the link between share repurchases and SOPs.

Suggested Citation

  • Markus C. Arnold & Robert M. Gillenkirch, 2005. "Stock Options and Dividend Protection," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 161(3), pages 453-472, September.
    • Handle: RePEc:mhr:jinste:urn:sici:0932-4569(200509)161:3_453:soadp_2.0.tx_2-a
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    References listed on IDEAS

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    1. Ikenberry, David & Lakonishok, Josef & Vermaelen, Theo, 1995. "Market underreaction to open market share repurchases," Journal of Financial Economics, Elsevier, vol. 39(2-3), pages 181-208.
    2. Lambert, Richard A. & Lanen, William N. & Larcker, David F., 1989. "Executive Stock Option Plans and Corporate Dividend Policy," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(4), pages 409-425, December.
    3. Brian J. Hall & Jeffrey B. Liebman, 1998. "Are CEOs Really Paid Like Bureaucrats?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 113(3), pages 653-691.
    4. Christine Jolls, 1998. "Stock Repurchases and Incentive Compensation," NBER Working Papers 6467, National Bureau of Economic Research, Inc.
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    Citations

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    Cited by:

    1. Zhang, Dan, 2018. "CEO dividend protection," Journal of Empirical Finance, Elsevier, vol. 45(C), pages 194-211.
    2. Burns, Natasha & McTier, Brian C. & Minnick, Kristina, 2015. "Equity-incentive compensation and payout policy in Europe," Journal of Corporate Finance, Elsevier, vol. 30(C), pages 85-97.
    3. Olaf Korn & Clemens Paschke & Marliese Uhrig-Homburg, 2012. "Robust stock option plans," Review of Quantitative Finance and Accounting, Springer, vol. 39(1), pages 77-103, July.

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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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