Executive Stock-Based Compensation And Firms' Cash Payout: The Role Of Shareholders' Tax-Related Payout Preferences

This study investigates the extent to which the structure of executive stock-based compensation helps to align managers' cash payout choices with shareholders' tax-related payout preferences. Specifically, shareholders' preferences between dividends, which are taxed as ordinary income, and share repurchases, which can result in gains taxed as long-term capital gains, can depend on the relative magnitudes of their tax consequences. Similarly, stock options, which are not dividend-protected, can induce self-interested executives to favor repurchases over dividends as a form of payout. In contrast, compensation in the form of restricted stock, which is dividend-protected, is more likely to induce the use of dividends.