Abstract
Payout flexibility from share repurchases enables firms to reduce dilution and funding cost of stock option grants. Using daily repurchase disclosures, we show that U.K. firms use this flexibility to implement (a) large repurchase payouts, (b) with increased frequency, and (c) with lower daily average cost to fund stock options before they are exercisable. This repurchase behaviour is more evident after the adoption of treasury regulation that enabled firms to hold repurchased shares instead of cancelling them. We conclude that repurchase flexibility benefits in funding executive stock options are realised conditional on the option exercisable state.
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