Do Stock Option Rewards Increase Dividend Payments? New Evidence from Japan

Abstract

Japanese firms are more likely to adopt new stock option plans when they are more owned by directors and arms-length investors (institutional investors and foreigners) while the probability of adopting option plans is negatively associated with ownership by stable and controlling shareholders. Approximately 75 percent of firms adopting new stock option plans during our sample period have introduced stock options before the period. Those firms have significantly more independent boards and pay higher dividends surrounding the adoption year than their size-matched industry peers, although analyses using propensity-score matching find no evidence that stock option adoptions directly change board characteristics and dividend payments. These findings suggest that in Japan firms mainly owned by arms-length investors have good governance practices in multiple dimensions such as introduction of equity-based compensations and independent boards. The coexistence of arms-length, stable, and controlling shareholders generate the situation that stock options and outside directors are introduced but not widely used in Japan. Unlike US previous research, we do not find strong evidence that stock option adoptions increase shareholder wealth and induce managerial risk-taking behaviors.