The asymmetric distribution between stock bonus and stock dividends: net incentives or entrenchments?

Authors: Audrey Wen-hsin Hsu, Yi-Hsuan Huang

Journal: Chia Da Management Review. Dec. 2013, 33(2): 1-30.

Keywords: Profit sharing bonus; Firm performance; Dividends; Incentives; Entrenchment

Abstract:
Employee profit sharing stock bonus has always been regarded as the main contributor to the success of the high-tech industry in Taiwan. As profit sharing bonus and shareholder dividends are determined at the same time at the shareholder meeting under the Corporation Law in Taiwan, and can be distributed in either cash or shares, many investors question the fairness to distribute profit sharing bonus (dividends) more (less) in stocks than in cash (Chung, 2004). This study examines whether the high stock/cash proportion in employee bonus, relative to the proportion in shareholder dividends (i.e., asymmetric distribution) represents management's net incentive or entrenchment effects. Consistent with net incentive theory, the result show that firm performance, as measured by Tobin's Q and ROA, can increase with the asymmetric distribution. The results infer that the incentive effect in the asymmetric distribution dominates the entrenchment effect.