ERASMUS UNIVERSITY ROTTERDAM
ERASMUS SCHOOL OF ECONOMICS
MSc Economics & Business
Master Specialisation Financial Economics
Master Thesis:
Executive Incentives and Corporate Pay-out Policy in the United
Kingdom
Date final version: 06-04-2020
1
,NON-PLAGIARISM STATEMENT
By submitting this thesis the author declares to have written this thesis completely by himself/herself,
and not to have used sources or resources other than the ones mentioned. All sources used, quotes
and citations that were literally taken from publications, or that were in close accordance with the
meaning of those publications, are indicated as such.
COPYRIGHT STATEMENT
The author has copyright of this thesis, but also acknowledges the intellectual copyright of
contributions made by the thesis supervisor, which may include important research ideas and data.
Author and thesis supervisor will have made clear agreements about issues such as confidentiality.
2
Electronic versions of the thesis are in principle available for inclusion in any EUR thesis database and repository,
such as the Master Thesis Repository of the Erasmus University Rotterdam
,Abstract
I examine the relation between executive incentives and corporate pay-out policy in the United
Kingdom using a sample of 5,551 observations. I find that executive stock ownership is positively
related to dividends and stock repurchases, which gives reason to believe that equity stakes handed
to executives are used to align the interests of executives with those of shareholders. Executive
option holdings also have a positive effect on corporate pay-outs, but only via share repurchases.
Delta of stock options has a positive relation with dividends and total pay-outs. When the sample is
split into large and small firms, there is a considerable difference in the outcomes.
Keywords: Executive stock ownership; Executive option holdings; Dividends; Stock Repurchases
3
, Table of Contents
ABSTRACT ..................................................................................................................................................... 3
1. INTRODUCTION ..................................................................................................................................... 5
2. LITERATURE REVIEW AND HYPOTHESES SETUP ...................................................................................... 7
2.1 CORPORATE PAY-OUT POLICY ............................................................................................................................... 7
2.2 EXECUTIVE COMPENSATION ................................................................................................................................. 8
2.3 HYPOTHESES ..................................................................................................................................................... 9
3. METHODOLOGY .................................................................................................................................. 11
3.1 DATA AND SAMPLE SELECTION ..................................................................................................................... 11
3.1.1 Executive incentive variables ........................................................................................................... 12
3.1.2 Control variables ............................................................................................................................. 14
3.2 RESEARCH METHOD .................................................................................................................................. 15
4. EMPIRICAL RESULTS ............................................................................................................................ 15
4.1 BASELINE MODEL ............................................................................................................................................. 15
4.2 ALTERNATIVE MODELS ...................................................................................................................................... 19
4.2.1 Sample split between below-median-firms and above-median-firms ................................................. 19
4.2.2 Free cash flow dummies ...................................................................................................................... 23
4.2.3 Executive incentives scaled by common stock outstanding................................................................. 25
4.3 OTHER ROBUSTNESS TESTS ................................................................................................................................. 26
5. CONCLUSION....................................................................................................................................... 27
REFERENCES ................................................................................................................................................ 30
APPENDIX A ......................................................................................................................................................... 32
A.1 Dividends regression .............................................................................................................................. 32
A.2 Repurchase regression ........................................................................................................................... 32
A.3 Total pay-out regression ........................................................................................................................ 32
A.4 Repurchase share regression ................................................................................................................. 32
A.5 Delta regression ..................................................................................................................................... 32
APPENDIX B - FCF DUMMIES WITHOUT NET OPERATING CASH FLOW AND GROWTH OPPORTUNITIES....................................... 33
APPENDIX C - NO LEVERAGE .................................................................................................................................... 34
APPENDIX D - LOW LEVERAGE DUMMY ...................................................................................................................... 35
4
ERASMUS SCHOOL OF ECONOMICS
MSc Economics & Business
Master Specialisation Financial Economics
Master Thesis:
Executive Incentives and Corporate Pay-out Policy in the United
Kingdom
Date final version: 06-04-2020
1
,NON-PLAGIARISM STATEMENT
By submitting this thesis the author declares to have written this thesis completely by himself/herself,
and not to have used sources or resources other than the ones mentioned. All sources used, quotes
and citations that were literally taken from publications, or that were in close accordance with the
meaning of those publications, are indicated as such.
COPYRIGHT STATEMENT
The author has copyright of this thesis, but also acknowledges the intellectual copyright of
contributions made by the thesis supervisor, which may include important research ideas and data.
Author and thesis supervisor will have made clear agreements about issues such as confidentiality.
2
Electronic versions of the thesis are in principle available for inclusion in any EUR thesis database and repository,
such as the Master Thesis Repository of the Erasmus University Rotterdam
,Abstract
I examine the relation between executive incentives and corporate pay-out policy in the United
Kingdom using a sample of 5,551 observations. I find that executive stock ownership is positively
related to dividends and stock repurchases, which gives reason to believe that equity stakes handed
to executives are used to align the interests of executives with those of shareholders. Executive
option holdings also have a positive effect on corporate pay-outs, but only via share repurchases.
Delta of stock options has a positive relation with dividends and total pay-outs. When the sample is
split into large and small firms, there is a considerable difference in the outcomes.
Keywords: Executive stock ownership; Executive option holdings; Dividends; Stock Repurchases
3
, Table of Contents
ABSTRACT ..................................................................................................................................................... 3
1. INTRODUCTION ..................................................................................................................................... 5
2. LITERATURE REVIEW AND HYPOTHESES SETUP ...................................................................................... 7
2.1 CORPORATE PAY-OUT POLICY ............................................................................................................................... 7
2.2 EXECUTIVE COMPENSATION ................................................................................................................................. 8
2.3 HYPOTHESES ..................................................................................................................................................... 9
3. METHODOLOGY .................................................................................................................................. 11
3.1 DATA AND SAMPLE SELECTION ..................................................................................................................... 11
3.1.1 Executive incentive variables ........................................................................................................... 12
3.1.2 Control variables ............................................................................................................................. 14
3.2 RESEARCH METHOD .................................................................................................................................. 15
4. EMPIRICAL RESULTS ............................................................................................................................ 15
4.1 BASELINE MODEL ............................................................................................................................................. 15
4.2 ALTERNATIVE MODELS ...................................................................................................................................... 19
4.2.1 Sample split between below-median-firms and above-median-firms ................................................. 19
4.2.2 Free cash flow dummies ...................................................................................................................... 23
4.2.3 Executive incentives scaled by common stock outstanding................................................................. 25
4.3 OTHER ROBUSTNESS TESTS ................................................................................................................................. 26
5. CONCLUSION....................................................................................................................................... 27
REFERENCES ................................................................................................................................................ 30
APPENDIX A ......................................................................................................................................................... 32
A.1 Dividends regression .............................................................................................................................. 32
A.2 Repurchase regression ........................................................................................................................... 32
A.3 Total pay-out regression ........................................................................................................................ 32
A.4 Repurchase share regression ................................................................................................................. 32
A.5 Delta regression ..................................................................................................................................... 32
APPENDIX B - FCF DUMMIES WITHOUT NET OPERATING CASH FLOW AND GROWTH OPPORTUNITIES....................................... 33
APPENDIX C - NO LEVERAGE .................................................................................................................................... 34
APPENDIX D - LOW LEVERAGE DUMMY ...................................................................................................................... 35
4
