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Corporate share repurchases in the 1990s: what role do stock options play?

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  • Scott Weisbenner

Abstract

This paper investigates how the growth of stock option programs has affected corporate payout policy. Given that earnings per share (EPS) is widely used in equity valuation, some corporations may opt to repurchase shares to avoid the dilution of EPS that results from past stock option grants. Executives may also prefer distributing cash by repurchasing shares or retaining more earnings, as opposed to increasing dividends, to enhance the value of their own stock options. This paper tests the importance of these two hypotheses using cross-sectional and panel data on stock option programs. I find that stock options granted to top executives affect payout policy differently than do stock options granted to other employees. Option grants in general are associated with increased share repurchases and increased total payouts. However, the larger is the executives' holding of stock options, the more apt the firm is to retain more earnings and curtail cash distributions. Analysis of panel data for a sample of large firms suggests that firms conduct an ongoing repurchase of shares over the life of an option that undoes much of the dilution to EPS that results from past stock option grants.

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  • Scott 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.).
    • Handle: RePEc:fip:fedgfe:2000-29
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    Cited by:

    1. Sonika, Rohit & Shackleton, Mark B., 2020. "Buyback behaviour and the option funding hypothesis," Journal of Banking & Finance, Elsevier, vol. 114(C).
    2. Eva Liljeblom & Daniel Pasternack, 2006. "Share Repurchases, Dividends and Executive Options: the Effect of Dividend Protection," European Financial Management, European Financial Management Association, vol. 12(1), pages 7-28, January.
    3. Steven Hegemann & Iuliana Ismailescu, 2017. "The Effect of FASB Statement No. 123R on Stock Repurchases: An Empirical Examination of Management Incentives," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 20(02), pages 1-31, June.
    4. Griffin, Paul A. & Zhu, Ning, 2010. "Accounting rules? Stock buybacks and stock options: Additional evidence," Journal of Contemporary Accounting and Economics, Elsevier, vol. 6(1), pages 1-17.
    5. Bergman, Nittai K. & Jenter, Dirk, 2007. "Employee sentiment and stock option compensation," Journal of Financial Economics, Elsevier, vol. 84(3), pages 667-712, June.
    6. Geiler, P.H.M. & Renneboog, L.D.R., 2014. "Executive Remuneration and the Payout Decision," Other publications TiSEM d9ae7344-0a29-4aa0-a016-8, Tilburg University, School of Economics and Management.
    7. Canil, Jean, 2017. "Non-dividend protected executive options and dividend policy: Evidence from SFAS 123R," Journal of Corporate Finance, Elsevier, vol. 44(C), pages 15-33.
    8. Xiao, MingFang & Cao, June & Chiang, Yao-Min, 2022. "Kiss the baby for the nurse's sake? - Guaranteeing employees' stock purchase against loss program," International Review of Financial Analysis, Elsevier, vol. 81(C).
    9. Chuo-Hsuan Lee & Chengo Hsieh & Xiaofeng Peng, 2005. "Why do reits engage in open-market repurchases?," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 29(3), pages 313-320, September.
    10. Rim El Houcine & Adel Boubaker, 2014. "Share Repurchasing and the Policies of Stock-Options," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 4(1), pages 175-187, January.
    11. Ndayisaba, Gilbert A. & Ahmed, Abdullahi D., 2021. "Demystifying the paradoxical popularity of stock buybacks in a market environment characterised by high stock prices," International Review of Financial Analysis, Elsevier, vol. 78(C).
    12. Christine Brown & Daniel Norman, 2010. "Management choice of buyback method: Australian evidence," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 50(4), pages 767-782, December.
    13. Bolko Hohaus, 2016. "Share Buybacks and Employee Stock Options," CESifo Forum, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 16(04), pages 79-81, January.
    14. Nalinaksha Bhattacharyya & Amin Mawani & Cameron Morrill, 2008. "Dividend payout and executive compensation: theory and evidence," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 48(4), pages 521-541, December.
    15. Don M. Chance & Tung-Hsiao Yang, 2011. "The Tradeoff Between Compensation and Incentives in Executive Stock Options," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 1(04), pages 733-766.
    16. Bolko Hohaus, 2016. "Share Buybacks and Employee Stock Options," CESifo Forum, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 16(4), pages 79-81, January.
    17. Warwick Anderson & Nalinaksha Bhattacharyya & Cameron Morrill & Helen Roberts, 2020. "Dividend payout and executive compensation: theory and evidence from New Zealand," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(S1), pages 1007-1022, April.
    18. J. 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.).
    19. Joanna Golden, 2018. "The Effect of Shareholder Rights and Information Asymmetry on Stock-Option-Related Repurchase Activity," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 21(02), pages 1-41, June.
    20. Jaemin Kim, 2007. "Buyback trading of open market share repurchase firms and the return volatility decline," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 3(4), pages 316-337, October.
    21. Boudry, Walter I. & Kallberg, Jarl G. & Liu, Crocker H., 2013. "Investment opportunities and share repurchases," Journal of Corporate Finance, Elsevier, vol. 23(C), pages 23-38.

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