Stock Incentives, Self-serving Behavior And Dividend Payout

In the case of separation of ownership and management, owners and managers pursue different interests. Managers are likely to utilize the company’s resources to maximize their own interests and harm the owners’ interests. Owners and managers are always in a state of interest conflict. Stock incentives combine the managers’ efforts with rewards and make the convergence of interests between the manager and the owner, achieving the purpose of maximization of shareholders’ value. Many studies suggest that stock incentives effectively motivate managers and significantly improved the firm’s performance and value as a result. In practice, as a good coordination mechanism of interest conflict between managers and shareholders, stock incentives have been implemented successfully and rapidly promoted since its inception in western countries. However, Chinese listed companies’ incentive mechanism construction process is relatively slow, until January1,2006,"Stock incentive management approach of the listed company (trial)" marked the incentive of listed companies in China has entered a phase of operation. With the issuing of "Stock incentive-related matters as memorandums,1th,2nd and3rd"and other policies and regulations, supporting policies of stock incentives have been constantly improved and refined. An increasing number of listed companies selected to launch stock incentive plan,2012alone, more than a hundred companies made an announcements of the plan of stock incentives.However, the outbreak of "Bonus scandal of AIG" made executive pay issues, particularly the issue of incentive compensation pitched into the forefront of public opinion. An increasing number of studies also found that, under the background of stock incentives, executives had obvious self-serving behavior in news manipulation, design and other aspects of the stock incentive plan. At the same time, we note that the stock incentives are dividend-protected in our country, namely, the strike price in the incentive plan can be adapted in case of ex-right and ex-dividend. On the one hand, China’s capital market is weak-form efficient market, the manager’s effort does not necessarily bring a company’s share price to rise and thus weaken the motivation of managers to raise stock prices through improving the firm’s performance. Therefore, when an adjustment of the strike price can be easily achieved through a simple dividend distribution, managers probably take some self-serving behavior. On the other hand, dividend signaling hypothesis holds that, in imperfect capital markets, dividend payments always delivery the manager’s optimistic message to the market and thus shareholders have more confidence in the company. Finally, the stock price rises and the value of stock incentives which were granted to managers also rises. Therefore, managers who have the stock incentive may choose to increase the dividend payout to obtain more substantial income of price differential. In this way, managers maximize their personal wealth. So we can see that, under the background of stock incentives, the above-mentioned two aspects reasons are likely to lead to the managers’self-interest behavior on the dividend decisions and the agency cost between shareholders and managers increase.Further, the Chairman usually affects the financial decision-making process to a large extent. If the subject of stock incentives contains the chairman, executives have a stronger ability to be self-serving and have a stronger will to adjust the strike price and rise the stock price for the benefit of their own interests. Also, the theory of manager power deems that the Board cannot completely control management in the aspect of compensation contract making because it’s usually captured by management. Management has motives as well as capacity to manipulate power and make an impact on private income or compensation contract. At last, the control right of state-own company inevitably fall into the hands of management and form the serious problem of "internal control" due to owner "absence". Thus, internal management has greater and more extensive power in the state-owned company and has a stronger ability to be self-serving. Design and implementation of the plan of stock incentive probably becomes a way for executives to expand their private benefits. Therefore, under the background of stock incentives, the author finds it necessary to make the subject of stock incentives, manager power, nature of property right be an independent variable when doing research about the influence of self-serving behavior to dividend distribution.Based on the above analysis, this paper discusses two issues:Whether there are obvious self-serving behaviors for manager to impact dividend decisions after the plan of stock option to be carried out. Furthermore, how the ability to be self-serving of executives affects the level of dividend distribution of listed companies. Specifically, there are three areas:incentive targets, manager power and property differences. Specifically, this paper contains six parts:The first chapter is Introduction. According to the research background of this paper it briefly illustrates its research significance, the main content of the paper, research methods,framework arrangement and finally its contribution in this paper.The second chapter is literature review. This chapter summarizes the research achievements of review which are divided into3phases:the basic theory of stock incentives, the self-serving behavior of executives and the influence of self-serving behavior to dividend distribution.In this way, we get to know the dynamic and cutting-edge knowledge in related fields at home and abroad. At last, this chapter also makes a conclusion and evaluation about the existing literature.The third chapter firstly combs related basic theory, on the basis of literature and the analysis of basic theory; it puts forward the research hypothesis.The fourth chapter is research design. Three sections are included in this chapter. Section one details sample selection, data sources and the standard of removing of samples. Section two describes the research method and multiple regression model used in this paper, section three defines all variables used in this study in detail.The fifth chapter is empirical analysis. This chapter is divided into four sections:descriptive statistics, correlation analysis, regression results and robustness testing. Through the above analysis, not only had we get a full understanding of the current situation of stock incentives as well as manager power, but also the hypotheses we put forward before be tested.Chapter VI is the conclusions and recommendations. According to the results of the empirical analysis in this paper, we obtain the conclusion of it as well as relevant recommendations. At the same time, we points out the limitations of this research.Through empirical analysis and summing up, we come to the following conclusion:(1)The implementation of stock incentive have a significantly positive correlation with both cash dividends and stock dividends, indicating that there are obvious self-serving behavior for manager to impact dividend decisions after the plan of stock option to be carried out(2)The variable that whether the subject of stock incentives contain the chairman has a significantly positive correlation with both cash dividends and stock dividends, indicating that as representative of the largest shareholder, chairman of the board has a great influence on the company’s financial decisions. So, if the subject of stock incentives contains the chairman, executives have a stronger ability and will to be self-serving and have a stronger will to adjust the strike price for the benefit of their own, thus choosing a higher level of dividend distribution.(3)In order to better measure the power of management, we choose the following five index to build a comprehensive index "POWER":whether the CEO serves as directors or Chairman, CEO in-service time, board scale, independent directors proportion and management holdings proportion. The regression results show that the variable "POWER"has a significantly positive correlation with both cash dividends and stock dividends. So, the greater manager power, the executives have stronger will to be self-serving and use the power to effect the level of dividend distribution.(4) Judging from the property rights of listed companies, their differences do not result in different self-serving behavior after implementation of stock incentive. After preliminary analysis, this study holds the view that:on the one hand, the state-own companies do not largely rely on endogenous financing due to their wider channel of financing, so they probably choose a higher level of dividend distribution; on the other hand, private enterprises often entrust their relatives or even themselves to be involved in the operation and management of the company. When the company has a surplus and there are no better investment opportunities, they prefer a higher level of dividend distribution due to a lower agency cost. Therefore, compared to the private holding company, state-own company may have a lower level of dividend distribution. So, taking both of these reasons into account, property differences will not significantly affect dividend distribution.The contributions of this study: For one thing, this study expands the perspective of related research. Based on previous research, this study focuses on self-serving behavior of executive under the background of stock incentives.Secondly, there has been little research taking both cash dividends and stock dividends into account in the area of the influence of stock incentives to dividends payout, this study considers them both. Besides, this study builds a comprehensive index "POWER" to better measure the manager power, the method is relatively new.Thirdly, with the issuing of more incentive-related policies and regulations, an increasing number of listed companies selected to launch stock incentive plan and this expands the study sample.The limitations of this study:firstly, this study does not take the incentive degree into account. If executives have a higher level of incentive degree, their self-serving motivations may be stronger; they are more likely to choose a high level of dividend payout to maximize their earnings. Second, manager power is actually a variable which cannot be directly and accurately observed. So, the judging method in this study may miss some other factors of manager power.