Does Option-Based Compensation Affect Payout Policy? Evidence from FAS123R

68 Pages Posted: 2 Dec 2016 Last revised: 24 Jul 2017

See all articles by Fabrizio Ferri

Fabrizio Ferri

University of Miami - Miami Business School; European Corporate Governance Institute

Nan Li

University of Minnesota - Twin Cities - Carlson School of Management

Date Written: November 2, 2016

Abstract

Does option-based compensation have a causal influence on payout policy? To address this question we examine the adoption of mandatory expensing of stock options (via accounting standard FAS123R), a plausible exogenous shock to the use of option-based compensation. As FAS123R applies to all firms, our identification strategy exploits the fact that the reduction in option-based compensation in response to the accounting standard varies with the firm-specific expected accounting impact, as measured by the option expense disclosed in the footnotes prior to FAS123R. Using a difference-in-difference research design, across a battery of tests we do not find that (accounting-driven) reductions in option-based pay cause dividends to increase, repurchases to decrease or the payout composition to change. Our results contrast with the widely held belief that option-based pay has a significant causal influence on payout policy and cast doubts on its role in the shift from dividends to repurchases in recent decades.

Keywords: dividends, repurchases, executive stock options, FAS123R, payout policy

JEL Classification: G35, M41, M48, M52

Suggested Citation

Ferri, Fabrizio and Li, Nan, Does Option-Based Compensation Affect Payout Policy? Evidence from FAS123R (November 2, 2016). Columbia Business School Research Paper No. 17-2, 28th Annual Conference on Financial Economics and Accounting, Available at SSRN: https://ssrn.com/abstract=2879218 or http://dx.doi.org/10.2139/ssrn.2879218

Fabrizio Ferri (Contact Author)

University of Miami - Miami Business School ( email )

Coral Gables, FL 33146-6531
United States

European Corporate Governance Institute ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Nan Li

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

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