Incentive Compensation and the Stock Price Response to Dividend Increase Announcements

Posted: 27 Feb 2001

See all articles by Eugene A. Pilotte

Eugene A. Pilotte

Rutgers Business School - Camden

Terry Nixon

Miami University

Robert L. Lippert

University of South Carolina - Darla Moore School of Business

Abstract

Linking executive compensation to stock price performance is predicted to decrease the usual positive price response to dividend increases for two reasons. One, increasing pay-performance sensitivity (PPS) exacerbates managers' optimistic bias regarding future firm performance, reducing the credibility of dividend signals. Two, increasing pay-performance sensitivity reduces the need for dividends as a means of reducing agency costs. Consistent with behavioral and agency theories of corporate finance, we find that price response does decrease as pay-performance sensitivity increases and that this effect is concentrated in firms with low market-to-book ratios. Additional findings are most consistent with the agency cost explanation.

Suggested Citation

Pilotte, Eugene A. and Nixon, Terry David and Lippert, Robert L., Incentive Compensation and the Stock Price Response to Dividend Increase Announcements. Available at SSRN: https://ssrn.com/abstract=246349

Eugene A. Pilotte (Contact Author)

Rutgers Business School - Camden ( email )

227 Penn Street
Camden, NJ 08102
United States
856-225-6548 (Phone)

Terry David Nixon

Miami University ( email )

Oxford, OH 45056
United States

Robert L. Lippert

University of South Carolina - Darla Moore School of Business ( email )

1705 College St
Francis M. Hipp Building
Columbia, SC 29208
United States

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