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Stock Options and Dividend Protection

Markus C. Arnold and Robert M. Gillenkirch
Journal of Institutional and Theoretical Economics (JITE) / Zeitschrift für die gesamte Staatswissenschaft
Vol. 161, No. 3 (September 2005), pp. 453-472
Stable URL: http://www.jstor.org/stable/40752532
Page Count: 20
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Stock Options and Dividend Protection
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Abstract

Stock-option programs (SOPs) became the dominant compensation instrument for top management in the nineties. Usually, they 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, in an increase in share repurchases. This paper analyzes different forms of dividend protection and addresses the importance of dividend protection in SOPs. Finally, the paper relates the theoretical analysis to empirical work on the link between share repurchases and SOPs.

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