The Evolution of Employee Compensation, Dilution, and Payout Policy
68 Pages Posted: 4 Jun 2018 Last revised: 11 Apr 2019
Date Written: April 10, 2019
We examine the relation between equity compensation and payout policy in light of the shift from options to restricted stock and the rise in performance-based compensation. Our results strongly support dilution as the primary channel through which compensation relates to payout policy; dividend protection no longer has first-order effects on payout. Difference-in-differences analyses using a shock to compensation around mandatory option expensing and an instrumental variable approach suggest that the relation between dilution and payout is likely causal. Further, as the dilution channel predicts, equity compensation positively relates to repurchase frequency and thus repurchase timing.
Keywords: Share Repurchases, Dividends, Payout Policy, Stock Options, Restricted Stock, Employee Compensation, Earnings Dilution
JEL Classification: G30, G32, G35
Suggested Citation: Suggested Citation