The impact of dividend-protected CEO equity incentives on firm value and risk

Sigitas Karpavičius and Fan Yu

Economic Modelling, 2018, vol. 71, issue C, 16-24

Abstract: Stock options and restricted stock are the two main vehicles of equity-based compensation. In this paper, we analyze how different dividend treatment of stock options and restricted stock grants impacts stock price and the riskiness of the firm. We find that if a firm's manager's utility function includes contemporaneous dividends (as in the case of restricted stock grants), the manager increases the risk level of equity in order to maintain the preferred risk level of her utility function. Increased risk level negatively impacts stock price, ceteris paribus. However, the calibrated model reveals that the impacts are rather trivial, specifically, equity value is lower by 1.5% and leverage is greater by 4%.

Keywords: Stock options; Restricted stock grants; Dividends; Firm value (search for similar items in EconPapers)
JEL-codes: G32 H32 M12 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:71:y:2018:i:c:p:16-24

DOI: 10.1016/j.econmod.2017.11.016

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