Stock Repurchases Associated with Stock Options Do Represent Dollars Out of Shareholders' Wallets

32 Pages Posted: 28 May 2001

See all articles by Kenneth J. Klassen

Kenneth J. Klassen

University of Waterloo - School of Accounting and Finance

Ranjini Jha

University of Waterloo - School of Accounting and Finance

Date Written: May 2001

Abstract

This paper explores the repurchase activity and employee and executive option activity for nonfinancial firms for the period 1995-1999. We find that the value of both firm-level options outstanding and executive-level options outstanding are strong predictors of repurchase activity. When option grants are considered, only executive-level grants provide incremental explanatory power. Our results suggest that firms repurchase shares to avoid dilution from a stock option program. We also examine market reactions to repurchase authorizations. We find that the returns preceding the announcement are less negative for firms that are active executive option users, and that investors react less enthusiastically to stock repurchases when firms grant executive (but not employee) options during the repurchase year. The evidence indicates that markets recognize that particularly executive option grants represent a real cost to the firm ex post in the form of stock buybacks, possibly representing a wealth transfer from the shareholders to employees.

Suggested Citation

Klassen, Kenneth and Jha, Ranjini, Stock Repurchases Associated with Stock Options Do Represent Dollars Out of Shareholders' Wallets (May 2001). EFMA 2001 Lugano Meetings. Available at SSRN: https://ssrn.com/abstract=271478 or http://dx.doi.org/10.2139/ssrn.271478

Kenneth Klassen (Contact Author)

University of Waterloo - School of Accounting and Finance ( email )

Waterloo, Ontario N2L 3G1
Canada
519-888-4567 x38550 (Phone)
519-888-7562 (Fax)

Ranjini Jha

University of Waterloo - School of Accounting and Finance ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1 N2L 3G1
Canada

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