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Stock Buybacks and Their Association with Stock Options Exercised in the IT Industry

Stock Buybacks and Their Association with Stock Options Exercised in the IT Industry One of the most complex and controversial issues confronting the Financial Accounting Standards Board (FASB) over the last several years has been the accounting and financial reporting of stock options. In December 2004, the FASB issued Statement 123R, Share‐Based Payment, in the hope that the long process of revising the accounting and financial reporting for stock options will be put to rest. FASB Statement 123R requires the fair‐value‐based method of accounting for share‐based payments. In order to offset the dilutive effects of generous stock option compensation packages for employees, companies are seemingly participating in stock repurchase plans. In the past, stock buyback programs were viewed as a means of distributing excess cash flow to investors; however, it appears now that many companies are financing stock repurchases through the issuance of debt, which can significantly impact the financial flexibility of a company. So, why do companies engage in this behavior? One possible reason for stock buybacks is to reduce the dilutive effect of stock option plans. Companies have, however, disputed that there is a direct relationship between exercised stock options and stock buyback transactions. Nevertheless, several articles and studies have found that there is a relationship and the FASB seems to believe that there is an association between stock buybacks and stock options, as Statement 123R requires that companies disclose the relationship between stock buybacks and stock payment programs. Using a sample of technology firms, we find evidence of an association between exercised stock options and repurchase of stock. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Journal of Business Emerald Publishing

Stock Buybacks and Their Association with Stock Options Exercised in the IT Industry

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Publisher
Emerald Publishing
Copyright
Copyright © 2008 Emerald Group Publishing Limited. All rights reserved.
ISSN
1935-5181
DOI
10.1108/19355181200800001
Publisher site
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Abstract

One of the most complex and controversial issues confronting the Financial Accounting Standards Board (FASB) over the last several years has been the accounting and financial reporting of stock options. In December 2004, the FASB issued Statement 123R, Share‐Based Payment, in the hope that the long process of revising the accounting and financial reporting for stock options will be put to rest. FASB Statement 123R requires the fair‐value‐based method of accounting for share‐based payments. In order to offset the dilutive effects of generous stock option compensation packages for employees, companies are seemingly participating in stock repurchase plans. In the past, stock buyback programs were viewed as a means of distributing excess cash flow to investors; however, it appears now that many companies are financing stock repurchases through the issuance of debt, which can significantly impact the financial flexibility of a company. So, why do companies engage in this behavior? One possible reason for stock buybacks is to reduce the dilutive effect of stock option plans. Companies have, however, disputed that there is a direct relationship between exercised stock options and stock buyback transactions. Nevertheless, several articles and studies have found that there is a relationship and the FASB seems to believe that there is an association between stock buybacks and stock options, as Statement 123R requires that companies disclose the relationship between stock buybacks and stock payment programs. Using a sample of technology firms, we find evidence of an association between exercised stock options and repurchase of stock.

Journal

American Journal of Business – Emerald Publishing

Published: Jan 1, 2008

Keywords: Share repurchase; Executive stock options; Employee stock options

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