Abstract
This paper examines how corporate payout policy is affected by CEO compensation structure using data from more than 1,600 firms during 1992-2006. Specifically, it studies the effects of CEO compensation structure, firm characteristics, and dividend payout policies on dividend type and relative dividend size.It finds CEO salary is positively associated with cash dividends, share repurchases, and relative dividend size whereas CEO salary (compared to bonus) as a percentage of total compensation has negative effects on cash dividends and share repurchases. It also discovers CEO stock awards as a percentage of total compensation are positively associated with share repurchases and CEO option awards are negatively related to cash dividends.In addition, this paper shows larger firms and firms with more free cash flow distribute more cash dividends and share repurchases. On the other hand, firms with higher leverage ratio and more investment opportunities prefer to save earnings for future re-investment projects. Finally, it show dividend payout policy (either cash dividends or share repurchases) increases relative dividend size. The results of this study suggest that CEO compensation components affect CEOs’ dividend payout decisions: when CEOs’ stock award increases, they prefer to use share repurchases; when CEOs’ option award increases, they prefer not to use cash dividends.
Highlights
Since Lintner (1956) presents a paper about distribution of incomes of corporations among dividends, retained earnings, and taxes, literature discussing corporate payout policy has been prolific
This paper examines how corporate payout policy is affected by CEO compensation structure using data from more than 1,600 firms during 1992-2006
We estimate the effect of CEO compensation structure, firm characteristics, and dividend payout policy on dividend type and relative dividend size
Summary
Since Lintner (1956) presents a paper about distribution of incomes of corporations among dividends, retained earnings, and taxes, literature discussing corporate payout policy has been prolific. A consensus on corporate policy has not been reached, and research on new explanations for dividend policy continues. Of the papers discussing corporate payout policies, some try to find whether dividend payout policy has an effect on a company’s value (Miller and Modigliani, 1961; DeAngelo and DeAngelo, 2006; Bhattacharyya, 2007). Papers examining the relationship between the components of CEO compensation in size and percentage and dividend payout decisions are rare
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