Share Repurchases and Employee Stock Options and their Implications for S&P 500 Share Retirements and Expected Returns

Board of Governors of the Federal Reserve System Finance and Economics Working Paper No. 99-59

20 Pages Posted: 1 Mar 2000  

Nellie Liang

Federal Reserve Board

Steven A. Sharpe

Federal Reserve Board - Research & Statistics

Date Written: November 9, 1999

Abstract

We estimate the effects of share repurchases and employee stock option exercises on net share retirements for large S&P 500 companies. We find that, over the past five years, gross
repurchases have reduced shares outstanding 2 percent annually; but, owing to the exercise of employee stock options, only about half of those shares were actually retired. Given the recent pace of employee stock option grants, and assuming that equities continue to be priced at about 30 times earnings, our analysis suggests that the pace of net share retirements will fall well below the pace of the last few years, unless corporations use nearly all their earnings to fund shareholder payouts. Moreover, over the long haul, assuming corporations need to retain 40 to 50 percent of their earnings to invest and grow at historical rates, the long-run average pace of net share retirements is likely to fall to 1/2 percent or less.

Keywords: Share repurchases, stock options, expected returns

JEL Classification: G10, G35

Suggested Citation

Liang, Nellie and Sharpe, Steven A., Share Repurchases and Employee Stock Options and their Implications for S&P 500 Share Retirements and Expected Returns (November 9, 1999). Board of Governors of the Federal Reserve System Finance and Economics Working Paper No. 99-59. Available at SSRN: https://ssrn.com/abstract=205015 or http://dx.doi.org/10.2139/ssrn.205015

Nellie Liang (Contact Author)

Federal Reserve Board ( email )

Capital Markets Section
20th & C. St., N.W.
Washington, DC 20551
United States
202-452-2918 (Phone)
202-452-3819 (Fax)

Steven A. Sharpe

Federal Reserve Board - Research & Statistics ( email )

20th & C. St., N.W.
Washington, DC 20551
United States
202-452-2875 (Phone)
202-452-3819 (Fax)

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