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Corporate payout policy and managerial stock incentives

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Author Info
George W. Fenn
Nellie Liang
Abstract

We examine how corporate payout policy is affected by managerial stock incentives using data on more than 1100 nonfinancial firms during 1993-97. We find that management share ownership encourages higher payouts by firms with potentially the greatest agency problems--those with low market-to-book ratios and low management stock ownership. We also find that management stock options change the composition of payouts. We find a strong negative relationship between dividends and management stock options, as predicted by Lambert, Lannen, and Larcker (1989), and a positive relationship between repurchases and management stock options. Our results suggest that the growth in stock options may help to explain the rise in repurchases at the expense of dividends.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 1999-23.

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Date of creation: 1999
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Handle: RePEc:fip:fedgfe:1999-23

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Keywords: Stocks ; Corporate profits;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. 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(04), pages 409-425, December. [Downloadable!]
  2. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May. [Downloadable!] (restricted)
  3. Brian J. Hall & Jeffrey B. Liebman, 1997. "Are CEOs Paid Like Bureaucrats?," Harvard Institute of Economic Research Working Papers 1789, Harvard - Institute of Economic Research.
  4. Jagannathan, Murali & Stephens, Clifford P. & Weisbach, Michael S., 2000. "Financial flexibility and the choice between dividends and stock repurchases," Journal of Financial Economics, Elsevier, vol. 57(3), pages 355-384, September. [Downloadable!] (restricted)
  5. Mehran, Hamid, 1992. "Executive Incentive Plans, Corporate Control, and Capital Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 27(04), pages 539-560, December. [Downloadable!]
  6. Berger, Philip G & Ofek, Eli & Yermack, David L, 1997. " Managerial Entrenchment and Capital Structure Decisions," Journal of Finance, American Finance Association, vol. 52(4), pages 1411-38, September. [Downloadable!] (restricted)
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  7. Laurie Simon Bagwell & John B. Shoven, 1988. "Share Repurchases and Acquisitions: An Analysis of Which Firms Participate," NBER Chapters, in: Corporate Takeovers: Causes and Consequences, pages 191-220 National Bureau of Economic Research, Inc. [Downloadable!]
  8. Clifford P. Stephens & Michael S. Weisbach, 1998. "Actual Share Reacquisitions in Open-Market Repurchase Programs," Journal of Finance, American Finance Association, vol. 53(1), pages 313-333, 02. [Downloadable!] (restricted)
  9. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October. [Downloadable!] (restricted)
  10. Smith, Clifford Jr. & Watts, Ross L., 1992. "The investment opportunity set and corporate financing, dividend, and compensation policies," Journal of Financial Economics, Elsevier, vol. 32(3), pages 263-292, December. [Downloadable!] (restricted)
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  11. White, Lourdes Ferreira, 1996. "Executive compensation and dividend policy," Journal of Corporate Finance, Elsevier, vol. 2(4), pages 335-358, July. [Downloadable!] (restricted)
  12. Comment, Robert & Jarrell, Gregg A, 1991. " The Relative Signalling Power of Dutch-Auction and Fixed-Price Self-Tender Offers and Open-Market Share Repurchases," Journal of Finance, American Finance Association, vol. 46(4), pages 1243-71, September. [Downloadable!] (restricted)
  13. 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. [Downloadable!] (restricted)
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  14. Mehran, Hamid & Nogler, George E. & Schwartz, Kenneth B., 1998. "CEO incentive plans and corporate liquidation policy1," Journal of Financial Economics, Elsevier, vol. 50(3), pages 319-349, December. [Downloadable!] (restricted)
  15. Gaver, Jennifer J. & Gaver, Kenneth M., 1993. "Additional evidence on the association between the investment opportunity set and corporate financing, dividend, and compensation policies," Journal of Accounting and Economics, Elsevier, vol. 16(1-3), pages 125-160, April. [Downloadable!] (restricted)
  16. Brian J. Hall & Jeffrey B. Liebman, 1997. "Are CEOs Really Paid Like Bureaucrats?," NBER Working Papers 6213, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. J. Nellie Liang & Steven A. Sharpe, 1999. "Share repurchases and employee stock options and their implications for S&P 500 share retirements and expected returns," Finance and Economics Discussion Series 1999-59, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  2. Reid W. Click & Paul Harrison, 2000. "Does multinationality matter? Evidence of value destruction in U.S. multinational corporations," Finance and Economics Discussion Series 2000-21, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  3. Matthias Benz & Marcel Kucher & Alois Stutzer, . "Are Stock Options the Managers' Blessing? Stock Option Compensation and Institutional Controls," IEW - Working Papers iewwp061, Institute for Empirical Research in Economics - IEW. [Downloadable!]
  4. Beverly Hirtle, 2001. "How do stock repurchases affect bank holding company performance?," Staff Reports 123, Federal Reserve Bank of New York. [Downloadable!]
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