Stock Repurchases Associated with Stock Options Do Represent Dollars Out of Shareholders' Wallets
32 Pages Posted: 28 May 2001
Date Written: May 2001
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.
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