The Role of Executive Stock Options in On‐Market Share Buybacks*

Abstract

ABSTRACTThe increasing use of on‐market buyback programs in Australia may not be fully explained by the typical motivations of information signaling and free cash flows offered by previous researchers. For some firms at least, management may believe the shares are overvalued. It is in this context that we examine whether managers of firms with high levels of executive stock options have an incentive to initiate buyback programs. It has been argued that managers may be motivated to undertake on‐market buyback programs in order to neutralize the dilution of earnings per share caused by their stock options, rather than for signaling purposes. Our findings are consistent with this argument because we find that the higher the proportion of executive stock options outstanding the more likely it is for firms to undertake larger on‐market buyback programs. Overall our results indicate that the existence of executive stock options influences managers' decision to implement on‐market buyback programs but that it is not the only factor that managers take into consideration.