Dividends on Unearned Shares and Corporate Payout Policy: An Analysis of Dividend Equivalent Rights

53 Pages Posted: 17 Aug 2016 Last revised: 24 Apr 2019

See all articles by Z. Tingting Jia

Z. Tingting Jia

University of Arkansas at Little Rock

Don M. Chance

Louisiana State University, Baton Rouge - Department of Finance; Louisiana State University, Baton Rouge - E.J. Ourso College of Business Administration

Date Written: April 19, 2019

Abstract

We investigate a little-known executive compensation device called dividend equivalent rights (DERs), which are provisions on some options and performance-based equity awards that permit executives to receive dividends on shares they do not own and may ultimately never own. To our knowledge, this device is the only instance in the financial world where dividends are paid to entities who are not shareholders. We find that as many as 30 percent of our sample firms have had this policy in place. In this paper we address two principal questions: Do DERs affect dividend policy and do they influence the holding of excess cash? After controlling for factors that affect dividend policy in general, we find that firms with DERs are more likely to pay dividends and to pay higher dividends. We also find a negative relationship between DERs and excess cash. Thus, DERs clearly have an impact on corporate policy.

Keywords: Dividend Equivalent, Dividend Equivalent Right, Executive Compensation, Corporate Governance, Dividend Policy

JEL Classification: G35, G34

Suggested Citation

Jia, Zi and Chance, Don M., Dividends on Unearned Shares and Corporate Payout Policy: An Analysis of Dividend Equivalent Rights (April 19, 2019). Available at SSRN: https://ssrn.com/abstract=2823116 or http://dx.doi.org/10.2139/ssrn.2823116

Zi Jia

University of Arkansas at Little Rock ( email )

Little Rock, AR 72201
United States

Don M. Chance (Contact Author)

Louisiana State University, Baton Rouge - Department of Finance ( email )

2900 BEC
Baton Rouge, LA 70803
United States

Louisiana State University, Baton Rouge - E.J. Ourso College of Business Administration ( email )

Baton Rouge, LA 70803-6308
United States
225-578-0372 (Phone)
225-578-6366 (Fax)

HOME PAGE: http://www.bus.lsu.edu/academics/finance/faculty/dchance/

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