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We examine how corporate payout policy is affected by managerial
stock incentives using data on more than 1100 nonfinancial firms
during 1993-97. We find that management share ownership encourages
higher payouts by firms with potentially the greatest agency
problems--those with low market-to-book ratios and low management
stock ownership. We also find that management stock options change
the composition of payouts. We find a strong negative relationship
between dividends and management stock options, as predicted by
Lambert, Lannen, and Larcker (1989), and a positive relatinship
between repurchases and management stock options. Our results
suggest that the growth in stock options may help to explain the
rise in repurchases at the expense of dividends.
We estimate the cross-sectional relationship between open market
repurchases and accounting data for a large sample of dividend-
paying and non-dividend paying firms over a twelve year period
(1984-95). Consistent with the hypothesis that firms use open
market repurchases to reduce the agency costs of free cash flow, we
find that repurchases are positively related to proxies for free
cash flow and negatively related to proxies for marginal financing
costs. We also examine the extent to which management stock options
influence the choice between open market repurchases and dividend
payments. Because the value of management stock options--like any
call option--is negatively related to expected future dividend
payments, management can increase the value of its stock options by
substituting share repurchases for dividend growth. We find
evidence that such substitution occurs: for dividend-paying firms,
share repurchases are positively related and dividend increases are
negatively related to a proxy for management stock options, whereas
for non-dividend-paying firms, the relationship between repurchases
and options is weak and statistically insignificant.
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Nadine Gordimer
Paperback
(2)
R398
R330
Discovery Miles 3 300
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