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Employee Stock Options, Payout Policy, and Stock Returns

Shareholders and Optionholders in Large U.S. Technology Corporations

Series:

Wojciech Grabowski

The book investigates empirically mechanisms behind the recent widespread use of employee stock options and share repurchases in corporate financial management. Exploring through econometric models a sample of large U.S. technology corporations in the period between 1997 and 2005, it documents complex links between stock option plans, payout policy and other key financial characteristics of these firms. The models highlight the interplay between the interests of long-term shareholders, optionholders and speculative investors and provide estimates of joint effects of option dynamics and repurchases on stock returns, undervaluation and option plans on payout policy as well as risk taking and revenue growth on payoffs to shareholders and optionholders.

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3 Employee Stock Options, Undervaluation, and Payout Policy

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3.1 Introduction The objective of the research in this chapter is to check the influence of the ESO plans on the repurchase activity of the technology firms in the sample. This is done by checking a number of repurchase-related hypotheses together with the hypotheses linking employee options and repurchases. The research in this Chapter extends the previous literature in several ways. First, the sample used in this research has somewhat different characteristics in comparison to those used in earlier studies. The sample is smaller, the firms in the sample come from a single industry, the scale of the ESO adoption is considerably higher than in many other samples, and the mean asset size of the companies in the sample is larger. The data are collected over a longer period of time including both significant rise and fall in stock market prices. Basic general repurchase hypotheses (undervaluation and excess cash) and standard ESO-repurchase hypotheses (option-funding, undo-dilution and dividend substitution) are tested in a panel framework. The cost of repurchases is measured with the actual average repurchase price and not with the period average share price. The effects of not only the executive options but of the total option plan are investigated. 3.2 Previous research 3.2.1 Payout policy Grullon and Michaely (2002) examine trends in the U.S. corporate payout behavior in recent decades. They provide statistics for the growth of the volume of repurchases and dividends. The amount of repurchases as the percentage of  Parts of this Section were published earlier in...

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