This study examines the use of dividend provisions in executive compensation contracts to influence dividend policy. A sample is constructed with the largest companies in the oil and gas, defense/aerospace and food processing industries, where dividend-related agency costs are expected to be high. The results indicate that the existence of a dividend incentive in the compensation plan is positively associated with higher dividend payouts and yields, and higher annual changes in dividend levels. Evidence is also provided on firm characteristics associated with the use of a compensation contract with a dividend provision. The results are consistent with the theory that firms link compensation incentives to dividend payments to reduce conflicts between shareholders and management over dividend decisions.
Journal of Corporate Finance – Elsevier
Published: Jul 1, 1996
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