Hostname: page-component-78c5997874-fbnjt Total loading time: 0 Render date: 2024-11-15T06:29:49.314Z Has data issue: false hasContentIssue false
  • English
  • Français

Stock Options and Total Payout

Published online by Cambridge University Press:  01 April 2009

Charles J. Cuny ,
Gerald S. Martin  and
John J. Puthenpurackal
Charles J. Cuny
Affiliation:
Washington University, Olin School of Business, 1 Brookings Dr., St. Louis, MO 63130. cuny@wustl.edu
Gerald S. Martin
Affiliation:
American University, Kogod School of Business, 4400 Massachusetts Ave., Washington, DC 20016 and Texas A&M University, Mays Business School, 4218 TAMU, College Station, TX 77843. gmartin@american.edu
John J. Puthenpurackal
Affiliation:
University of Nevada Las Vegas, College of Business, Box 456008, Las Vegas, NV 89154. john.puthenpurackal@unlv.edu
Get access Rights & Permissions [Opens in a new window]

Abstract

In this paper, we examine how stock option usage affects total corporate payout. Using fixed-effects panel data estimators on various samples of ExecuComp firms from 1993 to 2005, we find the higher the executive stock options, the lower the total payout, ceteris paribus. We also find some evidence that firms increase payouts through repurchases in order to offset earnings per share dilution that occurs due to usage of executive and non-executive stock options. However, incentives from not having dividend protection for options appear to dominate those from antidilution, resulting in lower total payout for firms with higher options usage.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 44 , Issue 2 , April 2009 , pp. 391 - 410
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2009

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Allen, F., and Michaely, R.. “Payout Policy.” In Handbook of the Economics of Finance, Constantinides, G. M., Harris, M., and Stulz, R. M., eds. Amsterdam, The Netherlands: North Holland (2003).Google Scholar
Banyi, M.; Dyl, E.; and Kahle, K.. “Measuring Repurchases.” Working Paper, University of Arizona (2007).Google Scholar
Bebchuk, L., and Fried, J.. “Pay Without Performance: The Unfulfilled Promise of Executive Compensation.” Cambridge, MA and London, England: Harvard University Press (2004).Google Scholar
Bens, D.; Nagar, V.; Skinner, D.; and Wong, F.. “Employee Stock Options, EPS Dilution, and Stock Repurchases.” Journal of Accounting & Economics, 36 (2003), 51–90.CrossRefGoogle Scholar
Bertrand, M., and Mullainathan, S.. “Are CEOs Rewarded for Luck? The Ones Without Principals Are.” Quarterly Journal of Economics, 116 (2001), 901–932.CrossRefGoogle Scholar
Boudoukh, J.; Michaely, R.; Richardson, M.; and Roberts, M.. “On the Importance of Measuring Payout Yield: Implications for Empirical Asset Pricing.” Journal of Finance, 62 (2007), 877–915.CrossRefGoogle Scholar
Chi, J. “Understanding the Endogeneity Between Firm Value and Shareholder Rights.” Financial Management, 34 (2005), 65–76.CrossRefGoogle Scholar
Core, J.; Guay, W.; and Larcker, D.. “Executive Equity Compensation and Incentives: A Survey.” Federal Reserve Board of New York Economic Policy Review, 9 (2003), 27–50.Google Scholar
Dittmann, I., and Maug, E.. “Lower Salaries and No Options? On the Optimal Structure of Executive Pay.” Journal of Finance, 62 (2007), 303–343.CrossRefGoogle Scholar
Dittmar, A., and Dittmar, R.. “The Timing of Stock Repurchases.” Working Paper, University of Michigan (2007).CrossRefGoogle Scholar
Efendi, J.; Srivastava, A.; and Swanson, E.. “Why Do Corporate Managers Misstate Financial Statements? The Role of Option Compensation and Other Factors.” Journal of Financial Economics, 85 (2007), 667–708.CrossRefGoogle Scholar
Fama, E., and French, K.. “Disappearing Dividends: Changing Firm Characteristics or Lower Propensity to Pay?” Journal of Financial Economics, 60 (2001), 3–43.CrossRefGoogle Scholar
Fenn, G., and Liang, N.. “Corporate Payout Policy and Managerial Stock Incentives.” Journal of Financial Economics, 60 (2001), 45–72.CrossRefGoogle Scholar
Greene, W. “Fixed Effects and the Incidental Parameters Problem in the Tobit Model.” Econometric Reviews, 23 (2004), 125–148.CrossRefGoogle Scholar
Grullon, G., and Michaely, R.. “Dividends, Share Repurchases and the Substitution Hypothesis.” Journal of Finance, 57 (2002), 1649–1684.CrossRefGoogle Scholar
Guay, W., and Harford, J.. “The Cash Flow Permanence and Information Content of Dividend Increases versus Repurchases.” Journal of Financial Economics, 57 (2000), 385–415.CrossRefGoogle Scholar
Hall, B., and Liebman, J.. “Are CEOs Really Paid Like Bureaucrats?” Quarterly Journal of Economics, 113 (1998), 653–691.CrossRefGoogle Scholar
Himmelberg, C.; Hubbard, R.; and Palia, D.. “Understanding the Determinants of Managerial Ownership and the Link Between Ownership and Performance.” Journal of Financial Economics, 53 (1999), 353–384.CrossRefGoogle Scholar
Hribar, P.; Jenkins, N.; and Johnson, B.. “Stock Repurchases as an Earnings Management Device.” Journal of Accounting and Economics, 41 (2006), 3–27.CrossRefGoogle Scholar
Hu, A., and Kumar, P.. “Managerial Entrenchment and Payout Policy.” Journal of Financial and Quantitative Analysis, 39 (2004), 759–790.CrossRefGoogle Scholar
Jagannathan, M.; Stephens, C.; and Weisbach, M.. “Financial Flexibility and the Choice Between Dividends and Stock Repurchases.” Journal of Financial Economics, 57 (2000), 355–384.CrossRefGoogle Scholar
Jensen, M. “Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers.” American Economic Review, 76 (1986), 323–329.Google Scholar
Jensen, M., and Murphy, K.. “Remuneration: Where We Have Been, How We Got to Here, What Are the Problems, and How to Fix Them.” Working Paper, Harvard Business School NOM (2004).Google Scholar
Kahle, K. “When a Buyback Isn’t a Buyback: Open Market Repurchases and Employee Options.” Journal of Financial Economics, 63 (2002), 235–261.CrossRefGoogle Scholar
Lambert, R.; Lanen, W.; and Larcker, D.. “Executive Stock Option Plans and Corporate Dividend Policy.” Journal of Financial and Quantitative Analysis, 24 (1989), 409–425.CrossRefGoogle Scholar
Liljeblom, E., and Pasternack, D.. “Share Repurchases, Dividends and Executive Options: The Effect of Dividend Protection.” European Financial Management, 12 (2006), 7–28.CrossRefGoogle Scholar
Murphy, K. J. “Executive Compensation.” In Handbook of Labor Economics, Vol. 3, Orley, A. and David, C., eds. Amsterdam, The Netherlands: North-Holland (1999).Google Scholar
Ofek, E., and Yermack, D.. “Taking Stock: Equity Based Compensation and the Evolution of Managerial Ownership.” Journal of Finance, 55 (2000), 1367–1384.CrossRefGoogle Scholar
Opler, T., and Titman, S.. “The Determinants of Leveraged Buyout Activity: Free Cash Flow vs. Financial Distress Costs.” Journal of Finance, 48 (1993), 1985–1999.CrossRefGoogle Scholar
Stephens, C., and Weisbach, M.. “Actual Share Reacquisitions in Open-Market Repurchase Programs.” Journal of Finance, 53 (1998), 313–333.CrossRefGoogle Scholar
Smith, C. W. Jr, and Watts, R. L.. “The Investment Opportunity Set and Corporate Financing, Dividend, and Compensation Policies.” Journal of Financial Economics, 32 (1992), 263–292.CrossRefGoogle Scholar
Weisbenner, S. “Corporate Share Repurchases in the 1990s: What Role Do Stock Options Play? ” Federal Reserve Board, Finance and Economics Working Paper 2000-29 (2000).CrossRefGoogle Scholar
Yermack, D. “Do Corporations Award CEO Stock Options Effectively?” Journal of Financial Economics, 39 (1995), 237–269.CrossRefGoogle Scholar
Yermack, D. “Good Timing: CEO Stock Options Awards Company News Announcements.” Journal of Finance, 52 (1997), 449–476.CrossRefGoogle Scholar
Zhou, X. “Understanding the Determinants of Managerial Ownership and its Relationship to Firm Performance: Comment.” Journal of Financial Economics, 62 (2001), 559–571.CrossRefGoogle Scholar