Accounting Rules? Stock Buybacks and Stock Options: Additional Evidence

Journal of Contemporary Accounting & Economics (JCAE), Vol. 6, No. 1, pp. 1-17, June 2010

UC Davis Graduate School of Management Research Paper

Posted: 2 Jul 2010

See all articles by Paul A. Griffin

Paul A. Griffin

University of California, Davis - Graduate School of Management

Ning Zhu

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

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Abstract

This paper finds that CEO stock options influence the choice, amount, and timing of funds distributed as a buyback. These results favor a managerial opportunism motive for buybacks over other theories and support two key 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. CEOs increase their insider selling following a buyback, which also supports a managerial opportunism perspective. Once we control for these agency 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 stock buybacks as a form of cash distribution derives significantly from a strong contemporaneous relation between buybacks and CEOs’ use of stock options as additional compensation.

Keywords: Stock buybacks, stock options, unclear accounting rules, corporate governance, agency costs, management compensation, managerial opportunism, market reaction

JEL Classification: G12, G30, G32, G34, G35, J33, M41

Suggested Citation

Griffin, Paul A. and Zhu, Ning, Accounting Rules? Stock Buybacks and Stock Options: Additional Evidence. Journal of Contemporary Accounting & Economics (JCAE), Vol. 6, No. 1, pp. 1-17, June 2010, UC Davis Graduate School of Management Research Paper, Available at SSRN: https://ssrn.com/abstract=1633552

Paul A. Griffin (Contact Author)

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

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

Ning Zhu

China Academy of Financial Research (CAFR)

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Shanghai P.R.China, 200030
China

Yale School of Management ( email )

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

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

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