CEO Option Sensitivity to Dividend Yield and Its Impact on Corporate Dividend Policy

42 Pages Posted: 20 Nov 2015 Last revised: 15 Dec 2015

See all articles by Huseyin Gulen

Huseyin Gulen

Purdue University - Krannert School of Management

Jin Xu

Virginia Tech - Pamplin College of Business

Date Written: November 18, 2015

Abstract

We document a significantly negative correlation between the absolute sensitivity of the CEO’s option portfolio value to dividend yield (denoted by the Greek letter Psi) and corporate dividend payouts. After the implementation of the FAS 123R, firms that reduce the CEOs’ holdings of highly dividend-sensitive options increase dividends significantly. Furthermore, after the 2003 dividend tax cut, firms are much less likely to increase dividends if their CEOs’ option Psi is larger. The result is stronger for firms with less independent boards and when directors receive large amounts of option grants. These results support a causal impact of the CEO’s portfolio (dis)incentives on corporate dividend policy.

Keywords: portfolio Psi, dividend policy, FAS 123R, 2003 Dividend Tax Cut

JEL Classification: G32, G34, G35, J33

Suggested Citation

Gulen, Huseyin and Xu, Jin, CEO Option Sensitivity to Dividend Yield and Its Impact on Corporate Dividend Policy (November 18, 2015). Available at SSRN: https://ssrn.com/abstract=2692724 or http://dx.doi.org/10.2139/ssrn.2692724

Huseyin Gulen

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

Jin Xu (Contact Author)

Virginia Tech - Pamplin College of Business ( email )

Department of Finance
880 West Campus Dr
Blacksburg, VA 24061
United States

HOME PAGE: http://finance.pamplin.vt.edu/directory/xu.html

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