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

Document Type

Article

Publication Date

12-1-2022

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.

Publication Source (Journal or Book title)

Quarterly Journal of Finance

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