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Share Repurchases and Employee Stock Options and their Implications for S&P 500 Share Retirements and Expected Returns


Nellie Liang


Federal Reserve Board

Steven A. Sharpe


Federal Reserve Board - Research & Statistics

November 9, 1999

Board of Governors of the Federal Reserve System Finance and Economics Working Paper No. 99-59

Abstract:     
We estimate the effects of share repurchases and employee stock option exercises on net share retirements for large S&P 500 companies. We find that, over the past five years, gross
repurchases have reduced shares outstanding 2 percent annually; but, owing to the exercise of employee stock options, only about half of those shares were actually retired. Given the recent pace of employee stock option grants, and assuming that equities continue to be priced at about 30 times earnings, our analysis suggests that the pace of net share retirements will fall well below the pace of the last few years, unless corporations use nearly all their earnings to fund shareholder payouts. Moreover, over the long haul, assuming corporations need to retain 40 to 50 percent of their earnings to invest and grow at historical rates, the long-run average pace of net share retirements is likely to fall to 1/2 percent or less.

Number of Pages in PDF File: 20

Keywords: Share repurchases, stock options, expected returns

JEL Classification: G10, G35

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Date posted: March 1, 2000  

Suggested Citation

Liang, Nellie and Sharpe, Steven A., Share Repurchases and Employee Stock Options and their Implications for S&P 500 Share Retirements and Expected Returns (November 9, 1999). Board of Governors of the Federal Reserve System Finance and Economics Working Paper No. 99-59. Available at SSRN: http://ssrn.com/abstract=205015 or http://dx.doi.org/10.2139/ssrn.205015

Contact Information

Nellie Liang (Contact Author)
Federal Reserve Board ( email )
Capital Markets Section
20th & C. St., N.W.
Washington, DC 20551
United States
202-452-2918 (Phone)
202-452-3819 (Fax)
Steven A. Sharpe
Federal Reserve Board - Research & Statistics ( email )
20th & C. St., N.W.
Washington, DC 20551
United States
202-452-2875 (Phone)
202-452-3819 (Fax)
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