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Accounting Rules? Stock Buybacks and Stock Options: Additional Evidence

44 Pages Posted: 17 Dec 2008 Last revised: 20 Dec 2009

Paul A. Griffin

University of California, Davis - Graduate School of Management; University of California, Davis

Ning Zhu

China Academy of Financial Research (CAFR); Yale School of Management; University of California, Davis - Graduate School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: December 31, 2009

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.

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

Suggested Citation

Griffin, Paul A. and Zhu, Ning, Accounting Rules? Stock Buybacks and Stock Options: Additional Evidence (December 31, 2009). UC Davis Graduate School of Management Research Paper No. 08-09. Available at SSRN: https://ssrn.com/abstract=1316623 or http://dx.doi.org/10.2139/ssrn.1316623

Paul A. Griffin (Contact Author)

University of California, Davis - Graduate School of Management ( email )

3102 Gallahger Hall
Davis, CA 95616
United States
(530) 752-7372 (Phone)
(425) 799-4143 (Fax)

HOME PAGE: http://www.gsm.ucdavis.edu/griffin/

University of California, Davis ( email )

3102 Gallahger Hall
Davis, CA 95616
United States
(530) 752-7372 (Phone)
(425) 799-4143 (Fax)

HOME PAGE: http://www.gsm.ucdavis.edu/griffin/

Ning Zhu

China Academy of Financial Research (CAFR)

1954 Huashan Road
Shanghai P.R.China, 200030
China

Yale School of Management ( email )

135 Prospect Street
Box 208200
New Haven, CT 06520-8200
United States

HOME PAGE: http://pantheon.yale.edu/~nz26/

University of California, Davis - Graduate School of Management ( email )

One Shields Avenue
Davis, CA 95616
United States
530-752-3871 (Phone)
530-752-2924 (Fax)

HOME PAGE: http://www.gsm.ucdavis.edu/Faculty/Zhu/

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