Employee Stock Options, EPS Dilution, and Stock Repurchases

Posted: 28 Nov 2003  

Daniel A. Bens

INSEAD

Venky Nagar

University of Michigan, Stephen M. Ross School of Business

Douglas J. Skinner

The University of Chicago - Booth School of Business

M.H. Franco Wong

University of Toronto - Rotman School of Management

Abstract

We investigate whether corporate managers' stock repurchase decisions are affected by their incentives to manage diluted earning-per-share (EPS). We find that managers increase the level of their firms' stock repurchases when: (1) the dilutive effect of outstanding employee stock options (ESOs) on diluted EPS increases, and (2) earnings are below the level required to achieve the desired rate of EPS growth. We also find that managers' repurchase decisions are not associated with actual ESO exercises, suggesting that they are driven by incentives to manage diluted but not basic EPS, and strengthening our earnings management interpretation.

Keywords: earnings dilution, earnings management, earnings-per-share (EPS), employee stock options, stock buybacks, stock repurchases

JEL Classification: G14, G35, M41, M43, M52, J33

Suggested Citation

Bens, Daniel A. and Nagar, Venky and Skinner, Douglas J. and Wong, M.H. Franco, Employee Stock Options, EPS Dilution, and Stock Repurchases. Journal of Accounting & Economics, Vol. 36, No. 1-3, pp. 51-90, December 2003. Available at SSRN: https://ssrn.com/abstract=472968

Daniel A. Bens

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

Venky Nagar

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-647-3292 (Phone)
734-764-3146 (Fax)

Douglas J. Skinner (Contact Author)

The University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-7137 (Phone)

M.H. Franco Wong

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6
Canada
416-946-0729 (Phone)

HOME PAGE: http://www.rotman.utoronto.ca/FacultyAndResearch/Faculty/FacultyBios/Wong.aspx

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