A longstanding puzzle in corporate finance is the rise of stock repurchases as a means of distributing earnings to shareholders. While most attempts to explain repurchase behavior focus on the incentives of firms, this paper focuses on the incentives of the agents who run firms, as determined by those agents' compensation packages. The increased use of repurchases coincided with an increasing reliance on stock options to compensate top managers, and stock options encourage managers to choose repurchases over conventional dividend payments because repurchases, unlike dividends, do not dilute the per-share value of the stock. Consistent with the stock option hypothesis, I find that firms which rely heavily on stock-option-based compensation are significantly more likely to repurchase their stock than firms which rely less heavily on stock options to compensate their top executives. I find no such relationship between repurchases and restricted stock, an alternative form of stock-based compensation that, unlike stock options, is not diluted by dividend payments. These findings have implications for the study of other puzzles concerning firms' payout behavior, and for the study of the effects of executive compensation packages on managerial incentives.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
6467.
Length: Date of creation: Mar 1998 Date of revision: Handle: RePEc:nbr:nberwo:6467
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Find related papers by JEL classification: G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy G30 - Financial Economics - - Corporate Finance and Governance - - - General
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Jong, A. de & Dijk, R. van & Veld, C.H., 2001.
"The Dividend and Share Repurchase Policies of Canadian Firms,"
Research Paper
ERS-2001-88-F&A Revision_, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni.
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