Dividends on Unearned Shares and Corporate Payout Policy : An Analysis of Dividend Equivalent Rights

We investigate a little-known executive compensation device called dividend equivalent rights (DERs), which are provisions on some options and performance-based equity awards that permit executives to receive dividends on shares they do not own and may ultimately never own. To our knowledge, this device is the only instance in the financial world where dividends are paid to entities who are not shareholders. We find that as many as 30 percent of our sample firms have had this policy in place. In this paper we address two principal questions: Do DERs affect dividend policy and do they influence the holding of excess cash? After controlling for factors that affect dividend policy in general, we find that firms with DERs are more likely to pay dividends and to pay higher dividends. We also find a negative relationship between DERs and excess cash. Thus, DERs clearly have an impact on corporate policy