Employee Compensation Still Impacts Payout Policy

Alice Bonaimé, Kathleen Kahle, David Moore and Alok Nemani

Critical Finance Review, 2024, vol. 13, issue 3-4, 419-463

Abstract: the shift from options to restricted stockEmployee 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 of. 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.

Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:now:jnlcfr:104.00000145

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