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Incentive Compensation and the Stock Price Response to Dividend Increase Announcements

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  • Lippert, Robert L
  • Nixon, Terry D
  • Pilotte, Eugene A

Abstract

Linking executive compensation to stock price performance is predicted to decrease the usual positive price response to dividend increases for two reasons. One, increasing pay-performance sensitivity (PPS) exacerbates managers' optimistic bias regarding future firm performance, reducing the credibility of dividend signals. Two, increasing pay-performance sensitivity reduces the need for dividends as a means of reducing agency costs. Consistent with behavioral and agency theories of corporate finance, we find that price response does decrease as pay-performance sensitivity increases and that this effect is concentrated in firms with low market-to-book ratios. Additional findings are most consistent with the agency cost explanation. Copyright 2000 by MIT Press.

Suggested Citation

  • Lippert, Robert L & Nixon, Terry D & Pilotte, Eugene A, 2000. "Incentive Compensation and the Stock Price Response to Dividend Increase Announcements," The Financial Review, Eastern Finance Association, vol. 35(4), pages 69-93, November.
  • Handle: RePEc:bla:finrev:v:35:y:2000:i:4:p:69-93
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    Cited by:

    1. Frankfurter, George M. & Wood, Bob Jr., 2002. "Dividend policy theories and their empirical tests," International Review of Financial Analysis, Elsevier, vol. 11(2), pages 111-138.
    2. repec:eee:jocaae:v:12:y:2016:i:3:p:241-256 is not listed on IDEAS
    3. João Paulo Vieito & António Cerqueira & Elísio Brandão & Walayet A. Khan, 2009. "Executive Compensation: the Finance Perspective," Portuguese Journal of Management Studies, ISEG, Universidade de Lisboa, vol. 0(1), pages 3-32.

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