The Effect of FASB Statement No. 123R on Stock Repurchases: An Empirical Examination of Management Incentives
Review of Pacific Basin Financial Markets and Policies 20(2), June 2017
42 Pages Posted: 31 Oct 2014 Last revised: 14 Nov 2020
Date Written: January 6, 2016
This study examines management’s response to the change in accounting for stock option-based compensation imposed by SFAS No. 123R, whose implementation is expected to reduce reported income. To cope with this impact, management may be motivated to decrease the use of stock options as part of compensating employees and engage in stock repurchases in an attempt to increase the value of outstanding employee stock options. Our findings demonstrate a significant negative relation between stock options granted and shares repurchased in the aftermath of SFAS No. 123R, particularly for the S&P 500 firms known for their heavy use of employee stock options. Furthermore, evidence of a contemporaneous increase in repurchases and leverage in the post SFAS 123R period may suggest that some of the buybacks may have been funded with debt. Our findings are robust to the inclusion of traditional determinants of share repurchases.
Keywords: SFAS 123R; share repurchases; employee stock options; management incentives
JEL Classification: G30, G32, G35
Suggested Citation: Suggested Citation