Stock Options as Incentive Contract and Dividend Policy

Arbeitspapier

Executive Stock Option Programs (SOPs) have become the dominant compensation instrument for top-management in recent years. The incentive effects of an SOP both with respect to corporate investment and financing decisions critically depend on the design of the SOP. A specific problem in designing SOPs concerns dividend protection. Usually, SOPs are not dividend protected, i.e. any dividend payout decreases the value of a manager’s options. Empirical evidence shows that this results in a significant decrease in the level of corporate dividends and, at the same time, into an increase in share repurchases. Yet, few suggestions have been made on how to account for dividends in SOPs. This paper applies arguments from principal-agent-theory and from the theory of finance to analyze different forms of dividend protection, and to address the relevance of dividend protection in SOPs. Finally, the paper relates the theoretical analysis to empirical work on the link between share repurchases and SOPs.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Working Paper Series: Finance & Accounting ; No. 89

Classification and Topics

• Classification: Wirtschaft ; Asymmetric and Private Information; Mechanism Design ; Corporate Finance and Governance: General ; Payout Policy
• Subject: Executive stock options ; dividend protection ; dividends ; managerial incentives ; share repurchases ; Leistungsentgelt ; Aktienoption ; Führungskräfte ; Dividende ; Anreizvertrag ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Gillenkirch, Robert M. ; Arnold, Markus C.
• Event: Veröffentlichung
• (who): Johann Wolfgang Goethe-Universität Frankfurt am Main, Fachbereich Wirtschaftswissenschaften
• (where): Frankfurt a. M.
• (when): 2002

Further information

• Handle: http://hdl.handle.net/10419/76934
• URN: urn:nbn:de:hebis:30-18296
• Last update: 10.03.2025, 11:41 AM CET