Equity-Incentive Compensation and Payout Policy in Europe

26 Pages Posted: 12 Oct 2013

See all articles by Natasha Burns

Natasha Burns

University of Texas at San Antonio - Department of Finance

Brian McTier

Washington State University

Kristina Minnick

Bentley University

Date Written: October 11, 2013


Given the increasing use of equity-incentive compensation in Europe, we examine the effects of executive compensation and investor protection on payout policy. We find a negative (positive) relationship between equity-incentive compensation and dividends (repurchases). In countries with weak investor protection, firms with high growth opportunities compensate their CEOs with more incentive compensation, thus aligning managers to shareholders’ interests. These firms also pay higher dividends consistent with maintaining a reputation with minority shareholders for distributing excess free cash flows. However, they reduce dividends payouts and increase repurchases at a greater rate in relation to increases in incentive compensation, thereby increasing financial flexibility. Considered together, our results are consistent with growth firms in weak investor protection countries using equity incentives as a substitute for dividends for reducing agency costs.

Keywords: Incentive Compensation, Payout Policy, Agency Costs

JEL Classification: G35, G30

Suggested Citation

Burns, Natasha and McTier, Brian and Minnick, Kristina, Equity-Incentive Compensation and Payout Policy in Europe (October 11, 2013). Available at SSRN: https://ssrn.com/abstract=2339161 or http://dx.doi.org/10.2139/ssrn.2339161

Natasha Burns

University of Texas at San Antonio - Department of Finance ( email )

San Antonio, TX 78249
United States
210-458-6838 (Phone)

Brian McTier (Contact Author)

Washington State University ( email )

Wilson Rd.
College of Business
Pullman, WA 99164
United States

Kristina Minnick

Bentley University ( email )

175 Forest Street
Waltham, MA 02154
United States

HOME PAGE: http://www.profminnick.com/

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