The Effect of Shareholder Rights and Information Asymmetry on Stock-Option-Related Repurchase Activity

Joanna Golden ()
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Joanna Golden: School of Accountancy, Fogelman College, University of Memphis, 219 Fogelman College Admin. Bldg., Memphis, TN 38152, USA

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2018, vol. 21, issue 02, 1-41

Abstract: As stock-option holdings increase, managers alter their firms’ payout composition, choosing stock repurchases rather than dividends to return cash to shareholders. Prior research presents two competing explanations for this behavior: the flexibility hypothesis and the shareholder power hypothesis. In support of the flexibility hypothesis, I document that this executive stock-option incentive to repurchase stock as a substitute for dividends is stronger when firms have weak shareholder rights and when information asymmetry is severe. In addition, I find that option-induced repurchases are associated with lower shareholder wealth when shareholder rights are weak or when information asymmetry is high. These firms also perform worse in the following year but show higher total payouts to shareholders. Overall, this paper provides a comprehensive picture of managers’ option-driven repurchase behavior.

Keywords: Stock repurchases; stock options; shareholder rights; information asymmetry; shareholder wealth; total payout; dividends (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1142/S0219091518500133

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