Repurchases, Employee Stock Option Grants, and Hedging
47 Pages Posted: 10 Feb 2004
Date Written: September 1, 2006
In addition to accomplishing traditional objectives, repurchases of stock may serve to hedge existing shareholders' price risk exposure associated with future expected obligations to make shares available to employees exercising stock options. This paper analyzes such a possibility by exploring the relation between repurchases and stock option grants. For a sample of firms that, on average, are active repurchasers, I document an economically significant relation between option grants and repurchases, after controlling for other possible effects. Firms that are more likely hedging option grant price risk exposure by repurchasing stock are larger, have lower leverage ratios, and spend more on research and development. Overall, the results suggest that repurchasing stock in conjunction with granting options may be indicative of optimal hedging as in Froot, Scharfstein, and Stein (1993).
Keywords: Employee stock option grants, stock repurchases, corporate risk management
JEL Classification: G35, G39, M52
Suggested Citation: Suggested Citation