The impact of dividend-protected CEO equity incentives on firm value and risk

Sigitas Karpavičius, Fan Yu

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

Stock options and restricted stock are the two main vehicles of equity-based compensation. In this paper, we analyze how different dividend treatment of stock options and restricted stock grants impacts stock price and the riskiness of the firm. We find that if a firm's manager's utility function includes contemporaneous dividends (as in the case of restricted stock grants), the manager increases the risk level of equity in order to maintain the preferred risk level of her utility function. Increased risk level negatively impacts stock price, ceteris paribus. However, the calibrated model reveals that the impacts are rather trivial, specifically, equity value is lower by 1.5% and leverage is greater by 4%.
Original languageEnglish
Pages (from-to)16-24
Number of pages9
JournalEconomic Modelling
Volume71
DOIs
Publication statusPublished - Apr 2018

Keywords

  • Dividends
  • Firm value
  • Restricted stock grants
  • Stock options

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