Research on stock option and cash dividend smoothing——Based on the suppressing effects of Inefficient Investment

TANG Jian-Rong; WANG Ning

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Science Research Management ›› 2021, Vol. 42 ›› Issue (2) : 190-199.

Research on stock option and cash dividend smoothing——Based on the suppressing effects of Inefficient Investment

Tang Jianrong, Wang Ning, Zhou Wei

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Abstract

This paper quantifies the rent-seeking level of executives by the inefficient investment value of enterprises. Then it studies the impact of equity incentives on the stability of cash dividend policy. Furthermore, the mechanism of non-efficiency investment in equity incentive affecting the stability of cash dividend policy is also discussed. The theoretical basis of this article is the theory of agency cost and dividend signal theory. Through market research, we find that the stability of dividend policy is a topic of concern to shareholders. Besides, combined with the research status of China′s cash dividend policy, we find that the stability of cash dividend policy is much more suitable than other indexes to be taken as the parameter of equity incentive effect evaluation.

In this paper, data of A-share listed companies that implemented equity incentive from 2006 to 2015 are selected from CCER and CSMAR databases. The free model nonparametric method found by Richardson determines the level of stability of dividend policy to replace the level of executive rent-seeking. Compared with other methods used by researchers in theory, we find that the residual analysis method is the most scientific method to measure the level of inefficient investment. The main analysis methods of this paper are panel regression and analytic hierarchy process method.

By analyzing the regression results, we come to the following conclusions: (1) The level of inefficient investment increases after the implementation of the equity incentive policy. The stability of cash dividend policy declines since the executives got share options. According to these conclusions, we find that equity incentives may not play a positive effect which is not considered as other researchers. (2) The level of inefficient investment is negatively related to the stability of dividend policy. The other explain of this conclusion is that low-efficiency investment reduces corporate′s free cash flow, which in turn leads to increased volatility of corporate cash dividend policy. (3) Inefficient investment in the impact of equity incentives on the stability of cash dividend policy, it does not play an "intermediary role" to reduce the stability of cash dividend. The result shows that inefficient investment hides the degree of decline in the stability of dividend policy after executives getting equity incentives, and becomes a mask for executives to seek rent.

Based on this, the paper puts forward three countermeasures and suggestions：Firstly, we should take an objective view of the cash dividend stability index, so we need to improve the equity incentive effect evaluation index system. Secondly, listed companies ought to establish and improve the supervision system of enterprise investment efficiency due to the existence of executive rent-seeking. Besides, the best way to improve the investment efficiency of enterprises is to set up a long-term and short-term investment evaluation system. In the end, we need to optimize the equity incentive scheme design of listed companies. According to the characteristics of options and restricted stock, the executive incentive grant proportion should be adjusted dynamically.

Key words

stock option / executive rent-seeking / inefficient investment / cash dividend smoothing

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Tang Jianrong, Wang Ning, Zhou Wei. Research on stock option and cash dividend smoothing——Based on the suppressing effects of Inefficient Investment[J]. Science Research Management. 2021, 42(2): 190-199

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