CEO option incentives and corporate share repurchases

Douglas O. Cook and Weiwei Zhang

International Review of Economics & Finance, 2022, vol. 78, issue C, 355-376

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.

Keywords: CEO Option incentives; Share repurchases; Dividend payout; Undervaluation; Investments (search for similar items in EconPapers)
JEL-codes: G11 G35 J33 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:78:y:2022:i:c:p:355-376

DOI: 10.1016/j.iref.2021.12.002

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