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

Z. Tingting Jia

https://orcid.org/0000-0002-0007-3782

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

E-mail Address: zj004@bucknell.edu

Corresponding author.

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and

Don M. Chance

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

E-mail Address: dchance@lsu.edu

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https://doi.org/10.1142/S2010139222500136Cited by:0 (Source: Crossref)

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.

Keywords:

JEL: G35, G34

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