The Effect of FASB Statement No. 123R on Stock Repurchases: An Empirical Examination of Management Incentives

42 Pages Posted: 31 Oct 2014 Last revised: 27 Aug 2019

See all articles by Steve Hegemann

Steve Hegemann

Nebraska Wesleyan University

Iuliana Ismailescu

Pace University - Lubin School of Business

Date Written: January 6, 2016

Abstract

This study examines management’s response to the change in accounting for stock option-based compensation imposed by SFAS No. 123R, whose implementation is expected to reduce reported income. To cope with this impact, management may be motivated to decrease the use of stock options as part of compensating employees and engage in stock repurchases in an attempt to increase the value of outstanding employee stock options. Our findings demonstrate a significant negative relation between stock options granted and shares repurchased in the aftermath of SFAS No. 123R, particularly for the S&P 500 firms known for their heavy use of employee stock options. Furthermore, evidence of a contemporaneous increase in repurchases and leverage in the post SFAS 123R period may suggest that some of the buybacks may have been funded with debt. Our findings are robust to the inclusion of traditional determinants of share repurchases.

Keywords: SFAS 123R; share repurchases; employee stock options; management incentives

JEL Classification: G30, G32, G35

Suggested Citation

Hegemann, Steve and Ismailescu, Iuliana, The Effect of FASB Statement No. 123R on Stock Repurchases: An Empirical Examination of Management Incentives (January 6, 2016). Pace University Finance Research Paper No. 2014/04, Available at SSRN: https://ssrn.com/abstract=2516357 or http://dx.doi.org/10.2139/ssrn.2516357

Steve Hegemann

Nebraska Wesleyan University ( email )

5000 St Paul Ave
Lincoln, 68504
United States

Iuliana Ismailescu (Contact Author)

Pace University - Lubin School of Business ( email )

One Pace Plaza
New York, NY 10038
United States
212-618-6524 (Phone)

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