In this study, I throughly review the theoretical literature about the stock option system which is actively being introduced by many firms as one of the management compensation system to enhance their firm values. This study shows followings: First, it demonstrates that Marsh and Merton(1987) model can be used in Korean capital markets as a prediction model of dividends like the markets in other developed countries. Second, the influence of the introduction of the system on the dividend policy was empirically tested. The results show that dividends have been significantly reduced(about 90% on average) by firms after they introduced the system. Additional tests with different models support the results also, indicating that our results have statistical robustness. Although additional regression analyses significantly show the importance of the auto-regressive nature of dividends, I cannot find the evidence that the growth rate of a firm and business cycle affect dividend policy through stock option. These results imply that stock option system is an effective way to increase the firm value as many studies already find, while the introduction of the system leads a firm to reduction in dividends, implying that managers of the firms which introduce the system have strong motivation to decrease dividends to maximize both the firm value and their compensation. This fact is first found in this paper for the Korean markets, and can give important implications to the investors. Third, it is found that compensation systems for the management of a firm is one of the most influential factors affecting the dividend policy of the firm.