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CEO option incentives and corporate share repurchases

Author

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  • Cook, Douglas O.
  • Zhang, Weiwei
Abstract
In this paper, we study the effects of CEOs option incentives on firms' payout and investment policies. On the company's payout side, we find strong evidence that high CEO option sensitivity to stock prices causes more share buybacks and fewer cash dividends. Furthermore, the impact of option incentives on share repurchases is more pronounced when the stock is undervalued. On the investment side, we find that higher exercisable option-delta CEOs direct fewer resources to R&D investments and employment. We use instrument variables two-stage least square regressions and simultaneous system equations regressions to address remaining endogeneity concerns and establish causality. Further analyses reveal that firms in the top exercisable option-delta quintile experience deterioration in performance following buybacks, suggesting that CEOs' repurchasing decisions are significantly influenced by stock price concerns and that they may not act in the best interest of shareholders in the long-term.

Suggested Citation

  • Cook, Douglas O. & Zhang, Weiwei, 2022. "CEO option incentives and corporate share repurchases," International Review of Economics & Finance, Elsevier, vol. 78(C), pages 355-376.
    • Handle: RePEc:eee:reveco:v:78:y:2022:i:c:p:355-376
    DOI: 10.1016/j.iref.2021.12.002
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    References listed on IDEAS

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    Cited by:

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    2. Dmytro Osiichuk, 2022. "The Driver of Workplace Alienation or the Cost of Effective Stewardship? The Consequences of Wage Gap for Corporate Performance," Sustainability, MDPI, vol. 14(13), pages 1-26, June.
    3. Gretha Steenkamp & Nicolene Wesson & Eon v. d. M. Smit, 2023. "Camouflaged Compensation: Do South African Executives Increase Their Pay through Share Repurchases?," JRFM, MDPI, vol. 16(3), pages 1-17, March.

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    More about this item

    Keywords

    CEO Option incentives; Share repurchases; Dividend payout; Undervaluation; Investments;
    All these keywords.

    JEL classification:

    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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