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The Effect of Shareholder Rights and Information Asymmetry on Stock-Option-Related Repurchase Activity

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  • Joanna Golden

    (School of Accountancy, Fogelman College, University of Memphis, 219 Fogelman College Admin. Bldg., Memphis, TN 38152, USA)

Abstract

As stock-option holdings increase, managers alter their firms’ payout composition, choosing stock repurchases rather than dividends to return cash to shareholders. Prior research presents two competing explanations for this behavior: the flexibility hypothesis and the shareholder power hypothesis. In support of the flexibility hypothesis, I document that this executive stock-option incentive to repurchase stock as a substitute for dividends is stronger when firms have weak shareholder rights and when information asymmetry is severe. In addition, I find that option-induced repurchases are associated with lower shareholder wealth when shareholder rights are weak or when information asymmetry is high. These firms also perform worse in the following year but show higher total payouts to shareholders. Overall, this paper provides a comprehensive picture of managers’ option-driven repurchase behavior.

Suggested Citation

  • Joanna Golden, 2018. "The Effect of Shareholder Rights and Information Asymmetry on Stock-Option-Related Repurchase Activity," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 21(02), pages 1-41, June.
    • Handle: RePEc:wsi:rpbfmp:v:21:y:2018:i:02:n:s0219091518500133
    DOI: 10.1142/S0219091518500133
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    Cited by:

    1. Jian Cao & Yun Cheng & Joanna Golden & Joseph H. Zhang, 2019. "Managerial ability, forecasting quality, and open-market repurchase program completion," Review of Quantitative Finance and Accounting, Springer, vol. 53(3), pages 871-894, October.

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