Incentive compensation and the stock price response to dividend increase announcements

Robert L. Lippert, Terry D. Nixon, Eugene A. Pilotte

Research output: Contribution to journalArticlepeer-review

12 Scopus citations


Linking executive compensation to stock price performance is predicted to decrease the usual positive price response to dividend increases for two reasons. One, increasing pay-performance sensitivity (PPS) exacerbates managers’ optimistic bias regarding future firm performance, reducing the credibility of dividend signals. Two, increasing pay-performance sensitivity reduces the need for dividends as a means of reducing agency costs. Consistent with behavioral and agency theories of corporate finance, we find that price response does decrease as pay-performance sensitivity increases and that this effect is concentrated in firms with low market-to-book ratios. Additional findings are most consistent with the agency cost explanation.

Original languageEnglish (US)
Pages (from-to)69-94
Number of pages26
JournalFinancial Review
Issue number4
StatePublished - Nov 2000

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics


  • Agency
  • Compensation
  • Dividends
  • Signaling


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