This paper studies the long-term consequences of actions induced by vesting equity, a measure of short-term concerns. Vesting equity is positively associated with the probability of a firm repurchasing shares, the amount of shares repurchased, and the probability of the firm announcing a merger or acquisition (M&A). However, it is also associated with more negative long-term returns over the 2-3 years following repurchases and 4 years following M&A. A potential driver of the negative M&A returns is subsequent goodwill impairment. These results are inconsistent with CEOs buying underpriced stock or companies to maximize long-run shareholder value, but consistent with these actions being used to boost the short-term stock price and thus equity sale proceeds. CEOs sell their own stock shortly after using company money to buy the firm’s stock, also inconsistent with repurchases being motivated by undervaluation.

The Long-Term Consequences of Short-Term Incentives

This paper shows for major equity markets that the proportion of index values attributable to the first five years of dividends dropped substantially in the first quarter of 2020 and that this drop has not been reversed by the end of the year. In the cross-section, this breakdown of dividend smoothing due to COVID-19 was less severe for firms with higher operating cash flows and more positively co-skewed stock returns and more pronounced for those with higher leverage and in the financial sector. Heavy dividend cutters also experienced a substantial increase in exposure to systematic risk. © 2021 Cambridge University Press. All rights reserved.

The COVID-19 pandemic and corporate dividend policy

We use variation in real estate prices as exogenous shocks to firms’ debt capacity to study the causal effect of financial flexibility on payout policy. We show that an increase in financial flexibility results in higher dividends, share repurchases, and payout flexibility. We find that a 1-standard-deviation increase in a firms’ collateral value results in 0.26- and 0.55-percentage-point increases in nondiscretionary and discretionary payouts, respectively. This effect is stronger for firms with few investment opportunities. Moreover, highly leveraged firms are more likely to cut dividends in response to a sharp decrease in their financial flexibility.

https://www.cambridge.org/core/services/aop-cambridge-core/content/view/13CBCA174DD3ADCDFD62CCB524298B6B/S002210901800114Xa.pdf/div-class-title-the-effect-of-financial-flexibility-on-payout-policy-div.pdf

The Effect of Financial Flexibility on Payout Policy

Leaning for the Tape: Evidence of Gaming Behavior in Equity Mutual Funds

https://www.nber.org/system/files/working_papers/w26958/w26958.pdf

Why are corporate payouts so high in the 2000s

This paper studies the strategic use and timing of share repurchases by insiders for personal gain. Using grant level compensation data and a hand-collected sample of monthly repurchases, I find a positive causal relation between CEO equity sales and share repurchases. I identify the relation using the vesting schedule of equity grants as an instrument for equity sales. This behavior is stronger when the CEO is chairman of the board but otherwise is persistent across firm characteristics. However, these repurchases do not appear to destroy shareholder value. The results indicate CEO contracts motivate the timing of share repurchases.

Managerial Self-Interest and Strategic Repurchases: Evidence from Equity Vesting Schedules

We exploit a new and growing form of payout — Rule 10b5-1 preset repurchase plans — to examine the tradeoff between commitment and financial flexibility in payout decisions. Relative to open market repurchases, preset plans provide an expanded repurchase window and increase legal cover, albeit at the cost of reducing repurchase flexibility and the option to time repurchases. These costs and benefits are significantly associated with Rule 10b5-1 adoption. Consistent with preset plans signaling commitment, Rule 10b5-1 repurchase announcements are associated with greater and faster completion rates and with more positive market reactions than matched open market repurchases.

Payout Policy Tradeoffs and the Rise of 10b5-1 Preset Repurchase Plans

Employee compensation may impact payout policy by (i) incentivizing managers with non-dividend-protected options to favor repurchases over dividends and (ii) diluting earnings, which firms can neutralize through share repurchases. Both the dividend-protection and dilution channels imply a positive relation between stock options and repurchases. Yet, recent studies and trends suggest repurchases do not decline when option usage falls around mandatory option expensing, casting doubt upon a causal relation between equity compensation and payout. We examine this relation in light of the shift from options to restricted stock. Our results strongly support a positive relation between compensation and share repurchases via the dilution channel; dividend protection has no first-order effect on payout. Difference-in-differences analyses using a shock to compensation around mandatory option expensing and an instrumental variable approach suggest that the relation between dilution and payout is likely causal. Further, as the dilution channel predicts, equity compensation positively relates to repurchase frequency and timing.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID3412260_code1091216.pdf?abstractid=3180292&mirid=1&type=2

Does Employee Compensation Still Impact Payout Policy

We are the first to document and study the use of Rule 10b5-1 preset repurchase plans. Though the rule’s original intent was to clarify conditions for enforcing insider trading laws, generally thou...

Payout Policy Trade-Offs and the Rise of 10b5-1 Preset Repurchase Plans

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Managerial Self-Interest and Strategic Repurchases: Evidence from Equity Vesting Schedules

Payout Policy Tradeoffs and the Rise of 10b5-1 Preset Repurchase Plans

Does Employee Compensation Still Impact Payout Policy

Payout Policy Trade-Offs and the Rise of 10b5-1 Preset Repurchase Plans