This paper examines how corporate payout policy is influenced by managerial stock incentives using data from over 1100 nonfinancial firms between 1993 and 1997. The study finds that management share ownership encourages higher payouts by firms with the most severe agency problems—those with low market-to-book ratios and low management ownership. However, higher levels of share ownership do not consistently lead to higher payouts for high market-to-book firms or firms with high management ownership. The study also finds that management stock options significantly affect the composition of payouts, with a strong negative relationship between dividends and stock options, and a positive relationship between repurchases and stock options. These findings suggest that the growth in stock options may explain the rise in repurchases at the expense of dividends. The study uses data from Standard & Poor's Compustat and Execucomp databases to analyze the determinants of open market share repurchases and dividends. It finds that repurchases and dividends are strongly related to firm characteristics, such as net operating cash flow, size, and market-to-book ratio. The study also finds that stock options tilt payout policy away from dividends and towards repurchases. Additionally, the study finds that firms with higher financial flexibility, as indicated by higher market-to-book ratios and volatility of operating income, are more likely to use repurchases rather than dividends to distribute cash flow. The study concludes that managerial stock incentives mitigate agency costs at firms with the most severe cash flow problems, but payouts at other firms are largely unaffected. The results suggest that stock options may help explain the rise in repurchases at the expense of dividends. The study also finds that the relationship between dividends and repurchases is similar, suggesting that they are regarded as close substitutes. The study highlights the importance of stock incentives in explaining the surge in repurchases at the expense of dividends in recent years. The findings suggest that the growth in managerial stock incentives and the increased use of employee stock options have contributed to the shift in payout policy.This paper examines how corporate payout policy is influenced by managerial stock incentives using data from over 1100 nonfinancial firms between 1993 and 1997. The study finds that management share ownership encourages higher payouts by firms with the most severe agency problems—those with low market-to-book ratios and low management ownership. However, higher levels of share ownership do not consistently lead to higher payouts for high market-to-book firms or firms with high management ownership. The study also finds that management stock options significantly affect the composition of payouts, with a strong negative relationship between dividends and stock options, and a positive relationship between repurchases and stock options. These findings suggest that the growth in stock options may explain the rise in repurchases at the expense of dividends. The study uses data from Standard & Poor's Compustat and Execucomp databases to analyze the determinants of open market share repurchases and dividends. It finds that repurchases and dividends are strongly related to firm characteristics, such as net operating cash flow, size, and market-to-book ratio. The study also finds that stock options tilt payout policy away from dividends and towards repurchases. Additionally, the study finds that firms with higher financial flexibility, as indicated by higher market-to-book ratios and volatility of operating income, are more likely to use repurchases rather than dividends to distribute cash flow. The study concludes that managerial stock incentives mitigate agency costs at firms with the most severe cash flow problems, but payouts at other firms are largely unaffected. The results suggest that stock options may help explain the rise in repurchases at the expense of dividends. The study also finds that the relationship between dividends and repurchases is similar, suggesting that they are regarded as close substitutes. The study highlights the importance of stock incentives in explaining the surge in repurchases at the expense of dividends in recent years. The findings suggest that the growth in managerial stock incentives and the increased use of employee stock options have contributed to the shift in payout policy.