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Does Option-Based Compensation Affect Payout Policy? Evidence from FAS 123R

Published online by Cambridge University Press:  19 September 2018

Fabrizio Ferri  and
Nan Li
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Abstract

Does option-based compensation affect payout policy? To address this question, we examine the adoption of mandatory expensing of stock options. Our identification strategy exploits the fact that the reduction in option-based compensation after the accounting change varies with the firm-specific expected accounting impact. Across a battery of tests, we do not find that (accounting-driven) reductions in option-based pay cause dividends to increase or repurchases to decrease. 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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 55 , Issue 1 , February 2020 , pp. 291 - 329
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

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Footnotes

1

We thank Chris Armstrong (discussant), David Becher, Thomas Bourveau, David De Angelis (discussant), Vivian Fang, Gustavo Grullon (the referee), Jarrad Harford (the editor), Wei Jiang, Christian Leuz, Greg Nini, Shiva Rajgopal, Jesus Salas, Terry Shevlin, Joanna Wu, and workshop/conference participants at Columbia University, Drexel University, Fordham University, Temple University, University of North Carolina, the Stanford Accounting Summer Camp, the 2016 Accounting Conference at Temple University, and the 2017 American Finance Association for their comments. We thank Jennifer Blouin for sharing her data on firms repatriating funds under the American Jobs Creation Act of 2004, Jack Ciesielski of The Analyst’s Accounting Observer for his data on accelerated vesting, Wei Jiang for her data on hedge funds’ activism, and Lalitha Naveen for her data on co-opted directors.

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