The Effect of CEO Equity Incentives on Payout Policy : An emperical analysis of the relationship between CEO equity incentives and payout decisions by firms listed on Oslo Stock Exchange from 2015-2020.

Abstract

In this thesis, we have studied the role of CEO equity incentives in a payout decision, with a focus on agency cost, among firms listed on the Oslo Stock Exchange from 2015 to 2020. Firstly, we investigated the relationship between wealth performance sensitivity and total payout among firms with high agency cost, before analysing the effect of CEO stock options as a determinant of payout method, both in terms of propensity and level. Our first finding indicates that CEO wealth-performance sensitivity significantly affects the propensity and level of payouts for firms with high agency costs when agency cost is measured by low ownership and investment opportunities. Thus, there is evidence suggesting that CEO ownership incentives reduce agency costs. The effect is strongest for dividend payouts. We fail to find supporting evidence for the effect of CEO options on the level or propensity of any of the payout methods in contrast with other studies, especially from the US. The key findings in the study are that the effect of CEO ownership incentive on payout decisions depends on how you measure agency costs. Our study suggests that investment opportunities are an accurate measure. Our research does not find an effect of CEO options on payout policy and suggests that this relationship is dependent on conditions such as tax rate and other market characteristics. In addition, it is challenging to distinguish the effect of the different equity incentives from each other, which might contribute to lack of supporting evidence.