Employee compensation may impact payout policy by (i) incentivizing managers with non-dividend-protected options to favor repurchases over dividends and (ii) diluting earnings, which firms can neutralize through share repurchases. Both the dividend-protection and dilution channels imply a positive relation between stock options and repurchases. Yet, recent studies and trends suggest repurchases do not decline when option usage falls around mandatory option expensing, casting doubt upon a causal relation between equity compensation and payout. We examine this relation in light ofthe shift from options to restricted stock. Our results strongly support a positive relation between compensation and share repurchases via the dilution channel; dividend protection has no first-order effect on payout. Difference-in-differences analyses using a shock to compensation around mandatory option expensing and an instrumental variable approach suggest that the relation between dilution and payout is likely causal. Further, as the dilution channel predicts, equity compensation positively relates to repurchase frequency and timing.
Employee Compensation Still Impacts Payout Policy Available to Purchase
We thank Leonce Bargeron, Seong Byun, Igor Cunha, Amedeo De Cesari, Vincent Intintoli, Sandy Klasa, Tomislav Ladika, Suchismita Mishra, Anjana Rajamani, Rick Sias, Shawn Thomas, Mitch Towner, Aazam Virani, Mark Walker, Ryan Williams, David Yermack, and seminar participants at Clemson University, the 2018 Eastern Finance Association, the 2018 Erasmus Executive Compensation Conference, the 2018 Financial Management Association, Louisiana State University, Miami University, the 2018 Midwest Finance Association, and the University of Arizona for helpful suggestions. We thank Chen Cai, Omesh Kini, and Ryan Williams for their hand-collected compensation consultant data, Jack Ciesielski of R. G. Associates, Inc., Torsten Jochem, Tomislav Ladika, and Zacharias Sautner for sharing their data on accelerated option vesting, Michael Faulkender and Mitchell Petersen for their data on repatriation, and Scott Jones for research assistance.
Bonaimé A, Kahle K, Moore D, Nemani A (2024), "Employee Compensation Still Impacts Payout Policy". Critical Finance Review, Vol. 13 No. 3-4 pp. 419–463, doi: https://doi.org/10.1561/104.00000145
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