Corporate Share Repurchases in the 1990s: What Role Do Stock Options Play?

By Scott J. Weisbenner. 2000

138 citations recorded by the source corpus.

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.

Subfields: Accounting, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/1150402a1d57c8d62bd64859624f4da9ad1da7c6

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Citations in the corpus

Employee Stock Options, EPS Dilution, and Stock Repurchases (2003, background): “Several recent empirical studies examine the association between ESOs and stock repurchases (Bens, Nagar, and Wong 2002; Dittmar 2000; Kahle 2001; Weisbenner 2000).”
Managerial Entrenchment and Payout Policy (2004, background): “Thus, other things held equal, executives with large stock options awards have an incentive to shift payout composition toward share repurchases, and stock options and share repurchases can be positively linked (e.g., Weisbenner (2000)).”
Why do Firms Repurchase Stock (2012, unknown): “Weisbenner (1998) reports that in his sample of 799 companies that granted stock options in 1994, only two offered dividend protection.”
Payout Policy in the 21st Century (2003, unknown): “Our results are, thus, inconsistent with those in Fenn and Liang (2001) and Weisbenner (2000).”
Share Repurchases as a Potential Tool to Mislead Investors (2010, unknown): “Several studies find that a general desire to avoid “earnings dilution” is an important factor (Jolls, 1998; Fenn and Liang, 2001; Weisbenner, 2000).”
Economic Sources of Gain in Stock Repurchases (2004, unknown): “Thus, it is not surprising to see repurchase activity associated with either option grants, option exercises or an increase in stock price as options move into the money (Kahle (2002) and Weisbenner (2000)).”
Executive Financial Incentives and Payout Policy: Firm Responses to the 2003 Dividend Tax Cut (2007, unknown): “…by pension funds, whose dividend income is not subject to tax.18 Further, options held by nonexecutives, as well as those held by top executives, have been shown to influence payout policy (Lambert, Lanen, and Larcker (1989), Jolls (1998), Weisbenner (2000), Fenn and Liang (2001), Kahle (2002)).”