Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/76934
Authors: 
Gillenkirch, Robert M.
Arnold, Markus C.
Year of Publication: 
2002
Series/Report no.: 
Working Paper Series: Finance & Accounting, Johann Wolfgang Goethe-Universität Frankfurt a. M. 89
Abstract: 
Executive Stock Option Programs (SOPs) have become the dominant compensation instrument for top-management in recent years. The incentive effects of an SOP both with respect to corporate investment and financing decisions critically depend on the design of the SOP. A specific problem in designing SOPs concerns dividend protection. Usually, SOPs are not dividend protected, i.e. any dividend payout decreases the value of a manager’s options. Empirical evidence shows that this results in a significant decrease in the level of corporate dividends and, at the same time, into an increase in share repurchases. Yet, few suggestions have been made on how to account for dividends in SOPs. This paper applies arguments from principal-agent-theory and from the theory of finance to analyze different forms of dividend protection, and to address the relevance of dividend protection in SOPs. Finally, the paper relates the theoretical analysis to empirical work on the link between share repurchases and SOPs.
Subjects: 
Executive stock options
dividend protection
dividends
managerial incentives
share repurchases
JEL: 
D82
G30
G35
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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