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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.

Suggested Citation

  • 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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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Bergman, Nittai K. & Jenter, Dirk, 2007. "Employee sentiment and stock option compensation," Journal of Financial Economics, Elsevier, vol. 84(3), pages 667-712, June.
    2. 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.
    3. repec:wsi:qjfxxx:v:01:y:2011:i:04:n:s2010139211000225 is not listed on IDEAS
    4. 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.
    5. 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.).
    6. 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.
    7. repec:eee:jocaae:v:6:y:2010:i:1:p:1-17 is not listed on IDEAS
    8. repec:eee:corfin:v:44:y:2017:i:c:p:15-33 is not listed on IDEAS
    9. Jaemin Kim, 2007. "Buyback trading of open market share repurchase firms and the return volatility decline," International Journal of Managerial Finance, Emerald Group Publishing, vol. 3(4), pages 316-337, October.
    10. 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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    Keywords

    Stocks ; Corporate profits ; Options (Finance);

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