Stock options as incentive contracts and dividend policy

  • 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.

Download full text files

Export metadata

Additional Services

Share in Twitter Search Google Scholar
Author:Markus C. Arnold, Robert M. Gillenkirch
Parent Title (English):Universität Frankfurt am Main. Fachbereich Wirtschaftswissenschaften: [Working paper series / Finance and accounting] Working paper series, Finance & Accounting ; No. 89
Series (Serial Number):Working paper series / Johann-Wolfgang-Goethe-Universität Frankfurt am Main, Fachbereich Wirtschaftswissenschaften : Finance & Accounting (89)
Publisher:Univ., Fachbereich Wirtschaftswiss.
Place of publication:Frankfurt am Main
Document Type:Working Paper
Year of Completion:2002
Year of first Publication:2002
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2005/10/10
Tag:dividend protection; dividends; executive stock options; managerial incentives; share repurchases
GND Keyword:Führungskraft; Vergütung; Aktienoption
Page Number:28
Institutes:Wirtschaftswissenschaften / Wirtschaftswissenschaften
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Licence (German):License LogoDeutsches Urheberrecht