Abstract

This paper examines the time relationship between repurchases and stock option exercises in the firms. Firms with more option exercised in the last year and current year are more likely to make repurchase decision. On the one hand, repurchase can help alleviate dilution caused by past option exercises. On the other hand, managers match the expenses on repurchases with the payment of contemporaneous option exercises to realize the stable cash flow. Total options outstanding also affect the likelihood of repurchase decision, which means managers may consider expected future option exercises in decision-making. Once the decision is made, past, concurrent option exercises and expected future stock option exercises are also positively related to actual repurchase level (dollars spent on repurchase). Contemporaneous relation is the strongest in both regressions as previous paper suggests. We also find that executive options outstanding have a positive effect on the likelihood of repurchase decision and actual repurchase level. This paper also uses propensity score matching method to test the effects of repurchase activity and high option holdings (which ranks the 1st quartile with the same industry) on firms’ profitability indicator ROA. We find that a high percentage of executive options, instead of a high holding of total stock options, has a positive effect on ROA in repurchasing firms.