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http://ssrn.com/abstract=226212
 
 

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Stock Repurchases and Incentive Compensation


Christine Jolls


Yale Law School; National Bureau of Economic Research (NBER)

March 1998

NBER Working Paper No. w6467

Abstract:     
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.

Number of Pages in PDF File: 39

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Date posted: July 1, 2000  

Suggested Citation

Jolls, Christine, Stock Repurchases and Incentive Compensation (March 1998). NBER Working Paper No. w6467. Available at SSRN: http://ssrn.com/abstract=226212

Contact Information

Christine Jolls (Contact Author)
Yale Law School ( email )
127 Wall Street
New Haven, CT 06520
United States
203.432.1958 (Phone)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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