Accounting Rules? Stock Buybacks and Stock Options: Additional Evidence

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