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.