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Share repurchases and employee stock options and their implications for S&P 500 share retirements and expected returns

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  • J. Nellie Liang
  • Steven A. Sharpe

Abstract

We estimate the effects of share repurchases and employee stock option exercises on net share retirements for large S&P 500 companies. We find that, over the past five years, gross repurchases have reduced shares outstanding 2 percent annually; but, owing to the exercise of employee stock options, only about half of those shares were actually retired. Given the recent pace of employee stock option grants, and assuming that equities continue to be priced at about 30 times earnings, our analysis suggests that the pace of net share retirements will fall well below the pace of the last few years, unless corporations use nearly all their earnings to fund shareholder payouts. Moreover, over the long haul, assuming corporations need to retain 40 to 50 percent of their earnings to invest and grow at historical rates, the long-run average pace of net share retirements is likely to fall to 1/2 percent or less.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 1999-59.

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Date of creation: 1999
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Handle: RePEc:fip:fedgfe:1999-59

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Keywords: Stock - Prices ; Stocks;

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References

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  1. Morck, Randall & Shleifer, Andrei & Vishny, Robert W., 1988. "Management ownership and market valuation : An empirical analysis," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 293-315, January.
  2. Lambert, Richard A. & Lanen, William N. & Larcker, David F., 1989. "Executive Stock Option Plans and Corporate Dividend Policy," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(04), pages 409-425, December.
  3. Mehran, Hamid, 1995. "Executive compensation structure, ownership, and firm performance," Journal of Financial Economics, Elsevier, vol. 38(2), pages 163-184, June.
  4. Jennifer N. Carpenter, 1997. "The Exercise and Valuation of Executive Stock Options," New York University, Leonard N. Stern School Finance Department Working Paper Seires 98-017, New York University, Leonard N. Stern School of Business-.
  5. Huddart, Steven & Lang, Mark, 1996. "Employee stock option exercises an empirical analysis," Journal of Accounting and Economics, Elsevier, vol. 21(1), pages 5-43, February.
  6. Jennifer Carpenter, 1997. "The Exercise and Valuation of Executive Stock Options," New York University, Leonard N. Stern School Finance Department Working Paper Seires 97-10, New York University, Leonard N. Stern School of Business-.
  7. Jagannathan, Murali & Stephens, Clifford P. & Weisbach, Michael S., 2000. "Financial flexibility and the choice between dividends and stock repurchases," Journal of Financial Economics, Elsevier, vol. 57(3), pages 355-384, September.
  8. George W. Fenn & Nellie Liang, 1999. "Corporate payout policy and managerial stock incentives," Finance and Economics Discussion Series 1999-23, Board of Governors of the Federal Reserve System (U.S.).
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Citations

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Cited by:
  1. John Y. Campbell & Robert J. Shiller, 2001. "Valuation Ratios and the Long-Run Stock Market Outlook: An Update," NBER Working Papers 8221, National Bureau of Economic Research, Inc.
  2. Scott J. Weisbenner, 2000. "Corporate share repurchases in the 1990s: what role do stock options play?," Finance and Economics Discussion Series 2000-29, Board of Governors of the Federal Reserve System (U.S.).
  3. Robert E. Hall, 2000. "The stock market and capital accumulation," Proceedings, Federal Reserve Bank of San Francisco, issue Apr.
  4. Ozgür Orhangazi, 2008. "Financialisation and capital accumulation in the non-financial corporate sector:," Cambridge Journal of Economics, Oxford University Press, vol. 32(6), pages 863-886, November.
  5. Nellie Liang & Scott Weisbenner, 2001. "Who benefits from a bull market? an analysis of employee stock option grants and stock prices," Finance and Economics Discussion Series 2001-57, Board of Governors of the Federal Reserve System (U.S.).
  6. Gene D'Avolio & Efi Gildor & Andrei Shleifer, 2001. "Technology, Information Production, and Market Efficiency," Harvard Institute of Economic Research Working Papers 1929, Harvard - Institute of Economic Research.
  7. Longstaff, Francis & Piazzesi, Monika, 2002. "Corporate Earnings and the Equity Premium," University of California at Los Angeles, Anderson Graduate School of Management qt3qn115m4, Anderson Graduate School of Management, UCLA.
  8. Weston, J. Fred & Siu, Juan A., 2003. "Changing Motives for Share Repurchases," University of California at Los Angeles, Anderson Graduate School of Management qt9146588t, Anderson Graduate School of Management, UCLA.
  9. John B. Carlson & Eduard A. Pelz & Mark Wohar, 2001. "Will the valuation ratios revert to their historical means? Some evidence from breakpoint tests," Working Paper 0113, Federal Reserve Bank of Cleveland.
  10. Longstaff, Francis A. & Piazzesi, Monika, 2004. "Corporate earnings and the equity premium," Journal of Financial Economics, Elsevier, vol. 74(3), pages 401-421, December.
  11. Hess, Dieter E. & Lüders, Erik, 2000. "New economy accounting : why are broad-based stock option plans so attractive?," ZEW Discussion Papers 00-39, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  12. Orhangazi, Ozgur, 2007. "Financialization and Capital Accumulation in the Nonfinancial Corporate Sector: A Theoretical and Empirical Investigation on the US Economy, 1973-2004," MPRA Paper 7724, University Library of Munich, Germany.

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