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An Analysis of Dilutive Effects of Long-Term Incentive Plans on Shares

Josis, Raphaël
(2021)

Files

JOSIS_66261000_2021.pdf
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Details

Supervisors
Cornuel, Eric
Faculty
Louvain School of Management
Degree label
Master [60] en sciences de gestion (horaire décalé)
Abstract
In this paper, we discuss the problematic of equity-based compensation induced dilution. We first give a comprehensive definition for dilution. Then we revisit the Modigliani-Miller theorem and distribution neutrality theory. Thanks to the understanding brought by those theories, we challenge the narrative that share repurchases mitigate dilution. Using information reported by companies, we show that buybacks, on the contrary, may exacerbate dilution by increasing the number securities vesting from plans by inflating performance measure results. To address this issue and realign LTIPs with shareholders’ interests, we propose to adjust performance metrics for dilution and repurchased shares.