Does Option-Based Compensation Affect Payout Policy? Evidence from FAS 123R

Fabrizio Ferri and Nan Li

Journal of Financial and Quantitative Analysis, 2020, vol. 55, issue 1, 291-329

Abstract: Does option-based compensation affect payout policy? To address this question, we examine the adoption of mandatory expensing of stock options. Our identification strategy exploits the fact that the reduction in option-based compensation after the accounting change varies with the firm-specific expected accounting impact. Across a battery of tests, we do not find that (accounting-driven) reductions in option-based pay cause dividends to increase or repurchases to decrease. Our results contrast with the widely held belief that option-based pay has a significant causal influence on payout policy and cast doubts on its role in the shift from dividends to repurchases.

Date: 2020
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