The Effects of Executive Stock Options and Stock Bonuses on Payout Policies in Taiwan


Corresponding author: Chia-Ying Chan, College of Management, Yuan Ze University, No. 135 Yuan Tong Rd. Chung Li. Taoyuan, 320 Taiwan, R.O.C. Tel: +886-3-463-8800 ext. 2670, Fax: +886-3-463-3824, email:


This study investigates how executive stock-based compensation affects the payout policies of a company. Stock bonuses, which are dividend-protected, induce executives to pay out cash dividends. Conversely, stock options, which are not dividend-protected, discourage the payment of dividends. We posit that the structure of executive stock-based compensation plays a crucial role in determining the payout policies of a firm, particularly for those firms with higher percentages of institutional investors and shareholders with ultimate controlling power. We further examine the effects of the 2008 stock option expensing policy reform in Taiwan as well as the repercussions, if any, that this policy had on payout choices in 2009. The empirical results not only indicate that executive stock-based compensation has a conspicuous influence on the payout policies of a firm, but also that there is a positive relation between stock bonuses and cash dividends. Furthermore, in the case of Taiwan, which has a relatively low corporate income tax rate, firms with higher percentages of shareholders with ultimate controlling power have less preference to pay cash dividends and greater preference to retain profits within the company.