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

Author

Listed:
  • Z. Tingting Jia

    (Bucknell University, One Dent Drive, Lewisburg, PA 17837, USA)

  • Don M. Chance

    (Louisiana State University, 2909 Business Education Complex North, 501 South Quad Drive, Baton Rouge, LA 70803, USA)

Abstract

We investigate a little-known executive compensation device called dividend equivalents, which are provisions on some options and performance-based equity awards permitting executives to receive dividends on shares not owned and which they may ultimately never own. We find that up to 30% of sample firms have had this policy. While dividend equivalents may appear to exacerbate agency problems, they have a positive impact on cash holdings and help align incentives — firms with dividend equivalent policies tend to pay dividends, and firms that make dividend equivalent payments tend to pay higher dividends and keep lower excess cash.

Suggested Citation

  • Z. Tingting Jia & Don M. Chance, 2022. "Dividends on Unearned Shares and Corporate Payout Policy: An Analysis of Dividend Equivalent Rights," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 12(04), pages 1-42, December.
    • Handle: RePEc:wsi:qjfxxx:v:12:y:2022:i:04:n:s2010139222500136
    DOI: 10.1142/S2010139222500136
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    More about this item

    Keywords

    Dividend equivalent; executive compensation; corporate governance; dividend policy;
    All these keywords.

    JEL classification:

    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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