Share Repurchases and Pay-Performance Sensitivity of Employee Compensation Contracts

53 Pages Posted: 8 Dec 2008

Date Written: December 7, 2008

Abstract

I show that share repurchases increase pay-performance sensitivity of employee compensation and lead to greater employee effort and higher stock prices. Consistent with the model, I find that after repurchases employees and managers receive fewer stock option and equity grants, and that the market reacts favorably to repurchase announcements when employees have many unvested stock options. Managers are more likely to initiate share repurchases when employees hold a large stake in the firm. Moreover, since employees are forced to bear more risk in firms that repurchase shares, they exercise their stock options earlier and receive higher compensation.

Keywords: pay-performance sensitivity, share repurchases, stock options

JEL Classification: G30

Suggested Citation

Babenko, Ilona, Share Repurchases and Pay-Performance Sensitivity of Employee Compensation Contracts (December 7, 2008). Journal of Finance, Vol. 64, pp. 117-151, 2009 . Available at SSRN: https://ssrn.com/abstract=1312937

Ilona Babenko (Contact Author)

Arizona State University ( email )

Department of Finance
W.P. Carey School of Business
Tempe, AZ 85287
United States

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