The Impact of Employee Stock Options Issued by Companies on Stock Repurchases

Abstract

This study presents significant factors that affect firms' decision whether to repurchase shares or not. Empirical results show that when the debt ratio is lower, the stock price is seriously underpriced and the firm size is larger, firms tend to buyback their own shares. Regarding employee stock options, managers seem to buy more treasury stocks when the levels of these stock options are high. This includes total options outstanding, executive options outstanding, executive options exercisable and unexercisable. Furthermore, firms have a significantly positive effect on the announcement return of stock repurchases prior to companies issuing stock options. This result holds for both long-run and short-run periods. But the long-run return turns to be significantly negative after companies issued stock options. This shows that the signaling hypothesis may be replaced by the option-funding hypothesis. This also implies that employee stock options have a great impact on the decision to stock repurchases.