Accounting Rules? Stock Buybacks and Stock Options: Additional Evidence

This paper finds that CEO stock options influence the choice, amount, and timing of funds distributed as a buyback. These results support two research expectations–that buybacks impose option-induced agency costs on outside shareholders, and that managers benefit from weak governance and unclear accounting in this choice. Increased CEO insider selling following a buyback also supports this agency cost perspective. Once we control for these option-related factors, we find no evidence that buyback activity associates reliably with EPS accretion from the reduction in common shares. We conclude that the popular use of buybacks as a form of cash distribution derives significantly from a strong contemporaneous relation between stock buybacks and CEOs’ use of stock options as compensation.

Paul A. Griffin and Ning Zhu

UC Davis, Graduate School of Management

June 2, 2011

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