Share Repurchases And Employee Stock Options And Their Implications For S P 500 Share Retirements And Expected Returns

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A longstanding puzzle in corporate finance is the rise of stock repurchases as a means of distributing earnings to shareholders. While most attempts to explain repurchase behavior focus on the incentives of firms, this paper focuses on the incentives of the agents who run firms, as determined by those agents' compensation packages. The increased use of repurchases coincided with an increasing reliance on stock options to compensate top managers, and stock options encourage managers to choose repurchases over conventional dividend payments because repurchases, unlike dividends, do not dilute the per-share value of the stock. Consistent with the stock option hypothesis, I find that firms which rely heavily on stock-option-based compensation are significantly more likely to repurchase their stock than firms which rely less heavily on stock options to compensate their top executives. I find no such relationship between repurchases and restricted stock, an alternative form of stock-based compensation that, unlike stock options, is not diluted by dividend payments. These findings have implications for the study of other puzzles concerning firms' payout behavior, and for the study of the effects of executive compensation packages on managerial incentives.

This study presents significant factors that affect firms' decision whether to repurchase shares or not. Empirical results show that when the debt ratio is lower, the stock price is seriously underpriced and the firm size is larger, firms tend to buyback their own shares. Regarding employee stock options, managers seem to buy more treasury stocks when the levels of these stock options are high. This includes total options outstanding, executive options outstanding, executive options exercisable and unexercisable. Furthermore, firms have a significantly positive effect on the announcement return of stock repurchases prior to companies issuing stock options. This result holds for both long-run and short-run periods. But the long-run return turns to be significantly negative after companies issued stock options. This shows that the signaling hypothesis may be replaced by the option-funding hypothesis. This also implies that employee stock options have a great impact on the decision to stock repurchases.

Several Progressive politicians have pounced on corporate share buybacks lately. They see buybacks as a major source of income and wealth inequality, subpar capital spending, and lackluster productivity. In their opinion, buybacks have contributed greatly to the stagnation of the standards of living of most Americans in recent years. So they want to limit buybacks or even ban them. Some of Wall Street's stock-market bears have been growling about buybacks as well. They've been arguing that buybacks have rigged the stock market in favor of the bulls. They claim that companies buy back their stock to boost their share prices, using debt to finance this dubious activity. As a result, corporate balance sheets have become increasingly leveraged, which makes them vulnerable to a recession. Widespread corporate leverage, in turn, would exacerbate any economic downturn. The bears therefore remain bearish and expect to be vindicated with a vengeance, eventually. In this study, Edward Yardeni and Joseph Abbott show that the facts don't support either narrative. The most common reason that S&P 500 companies buy back their shares is to offset the dilution in the number of shares outstanding that results when employee compensation takes the form of stock options and stock grants that vest over time, not just for top executives but for many employees. In effect, the ultimate source of funds for most stock buybacks is the employee compensation expense item on corporate income statements, not bond issuance as the bears contend. The authors explain that the bull market in stocks has boosted buybacks to a greater extent than buybacks have boosted the market, whereas the opposite is more widely believed. Rising stock prices increase the attractiveness of paying some of employees' compensation with stock grants. Buybacks then are necessary to offset the dilution of earnings per share. While the latest bull market, like previous ones, has been driven by rising earnings, it's a Wall Street legend that earnings per share have been boosted artificially and significantly by stock buybacks. It may seem that way only because what lift buybacks have provided to stock prices is highly visible, occurring in the open market, whereas companies' need to offset stock issuance with stock repurchases is less apparent. The authors also refute Progressives' pervasive narrative that most Americans' standards of living have stagnated in recent decades and that buybacks per se have worsened income inequality.

This completely revised and updated edition of Norman Frumkin's acclaimed work offers vital information for the urgent growing debate on the state of the nation's economy. Frumkin makes complex ideas and statistical data accessible to people without special training in economics. His goal in this book is to provide a better understanding of the performance of the American economy, and a basis for evaluating proposals intended to influence its future course. Using data current through the first half of 2003, Frumkin focuses on the meaning and use of a wide array of indicators of economic growth, employment, wages, productivity, investment, saving, and finance in assessing the current state of the U.S. economy and forecasting future developments. Equally useful for economists, students, investors, journalists, and anyone concerned with the economy, this totally revised edition includes detailed coverage of many important new topics, such as terrorism's impact on the economy, federal debt and interest rates, job openings and unemployment, government spending and taxes, the 2001 recession, and more.

The events that began with the collapse of Enron, WorldCom, Tyco, and Adelphia and continued into the financial crisis of 2008 teach us an important lesson: corporate governance matters. Although it is widely acknowledged that good corporate governance is a linchpin of good corporate performance, how can one improve corporate governance and its impact on corporate and overall economic performance. This book offers a diverse and forward-looking set of approaches from experts, covering the major areas of corporate governance reform and analyzing the full range of issues and concerns. Written to be both theoretically rigorous and grounded in the real world, the book is well suited for practicing lawyers, managers, lawmakers, and analysts, as well as academics conducting research or teaching a wide range of courses in law schools, business schools, and economics departments.

From the field's leading authority, the most authoritative and comprehensive advanced-level textbook on asset pricing In Financial Decisions and Markets, John Campbell, one of the field’s most respected authorities, provides a broad graduate-level overview of asset pricing. He introduces students to leading theories of portfolio choice, their implications for asset prices, and empirical patterns of risk and return in financial markets. Campbell emphasizes the interplay of theory and evidence, as theorists respond to empirical puzzles by developing models with new testable implications. The book shows how models make predictions not only about asset prices but also about investors’ financial positions, and how they often draw on insights from behavioral economics. After a careful introduction to single-period models, Campbell develops multiperiod models with time-varying discount rates, reviews the leading approaches to consumption-based asset pricing, and integrates the study of equities and fixed-income securities. He discusses models with heterogeneous agents who use financial markets to share their risks, but also may speculate against one another on the basis of different beliefs or private information. Campbell takes a broad view of the field, linking asset pricing to related areas, including financial econometrics, household finance, and macroeconomics. The textbook works in discrete time throughout, and does not require stochastic calculus. Problems are provided at the end of each chapter to challenge students to develop their understanding of the main issues in financial economics. The most comprehensive and balanced textbook on asset pricing available, Financial Decisions and Markets is an essential resource for all graduate students and practitioners in finance and related fields. Integrated treatment of asset pricing theory and empirical evidence Emphasis on investors’ decisions Broad view linking the field to financial econometrics, household finance, and macroeconomics Topics treated in discrete time, with no requirement for stochastic calculus Solutions manual for problems available to professors

During the lasts two decades, the employee stock option plans (ESOPs) have become more important in the global remuneration polices to first level executives. As a consequence of this, the repurchase activity has been increased to face the exercise of those options. This text is committed to give the reader a general overview of the ESOPs and share repurchases (SR), as well as analyse the current situation in some of the biggest companies in Sweden. To do this, the following report is divided in two main parts; first it will be introduced "why" and "when" ESOPs are profitable for the company and which facts could influence a company to start a buyback of own shares. The second part will introduce the data collected from the annual reports of the Swedish companies and will analyse if the fact of having an ESOP implemented influences the choice on the benefits distribution method. Considering the tightly relation between share repurchases and dividends distributions, this text includes a small summary of the impact of the ESOPs in the dividends polices. For that reason, the database also includes data regarding to the share yields and profit distribution. After having analysed all the data collected, the results point to a non-influence of the Employee Stock Option Plans on the benefits distribution method. Thus, a significant difference between the fraction of total number of shares repurchased and the dividend yield in companies with and those without outstanding stock options among their managerial group cannot be confirmed. Although having found a non-significant difference on the dividend treatment between companies with and without stock options, a weak negative relation between the magnitude of the ESOP and the dividend yield was found for those companies with stock options among their managerial group. Moreover, after having divided the sample depending on the type of stock options their managerial group held, the results show a slight difference between those companies with outstanding warrants and employee options; and those without stock options. Despite this fact, it is not possible to assert a real influence of these facts due to a not enough number of observations gathered for the sample.