Corporate Share Repurchases in the 1990s: What Role Do Stock Options Play?

43 Pages Posted: 17 Aug 2000

See all articles by Scott J. Weisbenner

Scott J. Weisbenner

University of Illinois at Urbana-Champaign - Department of Finance; National Bureau of Economic Research (NBER)

Date Written: May 2000

Abstract

This paper investigates how the growth of stock option programs has affected corporate payout policy. Given that earnings per share (EPS) is widely used in equity valuation, some corporations may opt to repurchase shares to avoid the dilution of EPS that results from past stock option grants. Executives may also prefer distributing cash by repurchasing shares or retaining more earnings, as opposed to increasing dividends, to enhance the value of their own stock options. This paper tests the importance of these two hypotheses using cross-sectional and panel data on stock option programs. I find that stock options granted to top executives affect payout policy differently than do stock options granted to other employees. Option grants in general are associated with increased share repurchases and increased total payouts. However, the larger is the executives' holding of stock options, the more apt the firm is to retain more earnings and curtail cash distributions. Analysis of panel data for a sample of large firms suggests that firms conduct an ongoing repurchase of shares over the life of an option that undoes much of the dilution to EPS that results from past stock option grants.

Keywords: Share Repurchase, Stock Option, Payout Policy

JEL Classification: G30, G35

Suggested Citation

Weisbenner, Scott J., Corporate Share Repurchases in the 1990s: What Role Do Stock Options Play? (May 2000). Available at SSRN: https://ssrn.com/abstract=234164 or http://dx.doi.org/10.2139/ssrn.234164

Scott J. Weisbenner (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

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