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Accounting Rules? Stock Buybacks and Stock Options: Additional EvidencePaul A. GriffinUniversity of California, Davis - Graduate School of Management Ning ZhuChina Academy of Financial Research (CAFR); Yale School of Management; University of California, Davis - Graduate School of Management December 31, 2009 UC Davis Graduate School of Management Research Paper No. 08-09 Abstract: This paper finds that CEO stock options influence the choice, amount, and timing of funds distributed as a buyback. These results support two research expectations - that buybacks impose option-induced agency costs on outside shareholders, and that managers benefit from weak governance and unclear accounting in this choice. Increased CEO insider selling following a buyback also supports this agency cost perspective. Once we control for these option-related factors, we find no evidence that buyback activity associates reliably with EPS accretion from the reduction in common shares. We conclude that the popular use of buybacks as a form of cash distribution derives significantly from a strong contemporaneous relation between stock buybacks and CEOs’ use of stock options as compensation.
Number of Pages in PDF File: 44 Keywords: Stock buybacks, stock options, accounting rules, corporate governance, agency costs, management compensation, market reaction JEL Classification: G12, G30, G32, G34, G35, J33, M41, M43, M44 working papers seriesDate posted: December 17, 2008 ; Last revised: December 20, 2009Suggested CitationContact Information
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