Buyback behaviour and the option funding hypothesis

Rohit Sonika and Mark Shackleton

Journal of Banking & Finance, 2020, vol. 114, issue C

Abstract: We study how stock option grants are funded through share repurchases under conditions of option exercisability and moneyness. Using daily repurchase disclosures by U.K. firms, we corroborate our hypothesis that driven by flexibility, firms repurchase early in an option schedule while options are out-of-money and before becoming exercisable. Our findings show that when daily stock prices are below weighted average option exercise price and when options are not immediately exercisable, firms (a) increase daily repurchase volume (value), (b) increase repurchase frequency, and (c) have lower relative repurchase prices. We further evidence this by examining the change in treasury regulation that enabled firms to hold on to repurchased shares rather than cancelling them. Our findings show a strong support for option funding motives in the post-treasury regulation period when repurchase flexibility is greater.

Keywords: Repurchase; Stock options; Treasury shares (search for similar items in EconPapers)
JEL-codes: G30 G35 J33 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:114:y:2020:i:c:s0378426620300686

DOI: 10.1016/j.jbankfin.2020.105800

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