Share Repurchases and Pay-Performance Sensitivity

Abstract: I show that share repurchases increase pay-performance sensitivity of employee compensation and lead to greater employee effort and higher stock prices. Consistent with the model, I find that after repurchases, employees and managers receive fewer stock opiton and equity grants, and that the market reacts favorably to repurchase announcements when employees have many unvested stock options. Managers are more likely to initiate share repurchases when employee hold a large stake in the firm. Moreover, since employees are forced to bear more risk in firms that repurchase shares, they exercise their stock options earlier and receive higher compensation.

Author: ILONA BABENKO

Share Repurchases and Pay-Performance Sensitivity of Employee Compensation Contracts.PDF