The Dark Side of Share Buybacks

44 Pages Posted: 23 Aug 2017

See all articles by Graeme Guthrie

Graeme Guthrie

Victoria University of Wellington - School of Economics & Finance

Date Written: August 19, 2017

Abstract

Share buybacks reduce taxes, commit managers to pay out free cash-flow, and send positive signals to investors. This paper shows that they also transfer wealth from shareholders to the owners of employee stock options and that this transfer increases the price needed to induce shareholders to sell shares back to the firm. Two costs arise: at firms with poor governance, buybacks occur that harm shareholders; at firms with good governance, some value-enhancing buybacks do not occur. These costs are greatest when the number of outstanding options is large and when the options are out-of-the-money.

Keywords: share repurchases, employee stock options, capital structure, stag-hunt game

JEL Classification: C72, G13, G32, G34, G35

Suggested Citation

Guthrie, Graeme, The Dark Side of Share Buybacks (August 19, 2017). Available at SSRN: https://ssrn.com/abstract=3022454 or http://dx.doi.org/10.2139/ssrn.3022454

Graeme Guthrie (Contact Author)

Victoria University of Wellington - School of Economics & Finance ( email )

P.O. Box 600
Wellington 6140
New Zealand
64 4 463 5763 (Phone)

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