Managerial Self-Interest and Strategic Repurchases: Evidence from Equity Vesting Schedules

Abstract

This paper studies the strategic use and timing of share repurchases by insiders for personal gain. Specifically I examine whether firms increase repurchase activity to support stock prices around CEO personal equity sales. Because equity sales are endogenously determined with repurchases, I instrument for equity sales using equity vesting schedules. Using grant level compensation data and a hand-collected sample of monthly repurchases, I find a positive, plausibly causal relationship between CEO equity sales and share repurchases. Equity vesting is strongly positively correlated with equity sales but vesting schedules are established well in advance and thus unrelated to current market and firm conditions. However, executives do not appear to be destroying shareholder value. The results indicate managerial self-interest motivates a subset of share repurchases.

Keywords: Share repurchase; share buyback; payout policy; option and stock grants; equity vesting; CEO incentives; managerial self interest

JEL Classification: G14, G30, G35, M12