The Effect of Stock Option Holdings on the Wealth Change in Share Repurchases (The Effect of Stock Option Holdings on the Wealth Change in Share Repurchases)

서지정보

· 발행기관 : 한국증권학회
· 수록지 정보 : Asia-Pacific Journal of Financial Studies / 37권 / 3호 / 425 ~ 464페이지
· 저자명 : 정무권

초록

of share repurchases have been reported in the area of Corporate Finance (Dann, 1981;
Vermaelen, 1981). Explanations for these abnormal returns that have been attempted
through many studies include signaling, wealth transfer, and free cash flow hypotheses.
Two papers readdress this topic from the unexplored viewpoint. Kahle (2002) found that
firms often repurchase their shares in preparation for stock option exercises and that managers
who hold stock options tend to prefer share repurchases to dividend payments as
a way to maximize their wealth. Maxwell and Stephens (2003) examined changes in both
stockholders’ and bondholders’ wealth around the time of share repurchases.
Recently, many firms have started to offer stock options to managers as an incentive
for them to align their personal gain with firm value maximization. However, it has been
also pointed out that such company-wide option plans can cause firms to take risky investments
and to pursue short-term profits, which may deepen the possible conflict of interest
between stockholders and bondholders. Defusco et al. (1990) tested that the introduction
of stock options increases managers’ risk-taking incentive and thus transfers wealth from
bondholders to stockholders.
The signaling hypothesis on share repurchases posits that both equity and bond returns
at the repurchase announcement are positive and, at the same time, their correlation is
positive, while the wealth transfer hypothesis is associated with the positive equity, negative
bond returns, and a negative correlation. However, considering that stock option
holdings provide managers with the incentives to take high-risk projects, I speculate that the announcement of share repurchases in the firm whose managers hold stock options
may have different wealth effects on shareholders, bondholders, and managers.
To the best of my knowledge, no research has been conducted to study the relation of
share repurchases with both stock option holdings and bondholders’ wealth change.
Therefore, using the sample of 312 Korean firms, I investigate the effect of executive stock
option holdings on the wealth change (of stockholders and bondholders) at the announcement
of open market stock repurchases.
Specifically, this study is based on the following three researches: (1) Kahle (2002)
showed that abnormal stock returns at the repurchase announcement are less positive
in the firms in which managers hold stock options, but she didn’t measure bondholders’
wealth change; (2) Defusco et al. (2003) demonstrated that managers who hold stock options
prefer risk-taking activities that transfer wealth from bondholders to stockholders,
but they didn’t include a specific corporate event such as share repurchases; (3) Maxwell
and Stephens (2003) examined the wealth change of both shareholders and bondholders
at the announcement of share repurchases, but they didn’t consider stock option holdings.
Furthermore, as in Eberhart and Siddique (2002) and Elliott et al. (2005), this study focuses
on the correlation between stock and bond returns.
First, I divide the total sample into two groups according to whether managers hold
stock options or not. Then, I test the signaling and wealth transfer hypotheses associated
with share repurchases by measuring the abnormal stock and bond returns and their
correlation. And then, controlling for percentage of shares authorized for repurchases, firm
size, leverage ratio, market to book ratio, free cash flow, percentage of shares owned by
the largest shareholder, and credit rating, I test if the correlation between stock and bond
returns still differs by stock option holdings.
The empirical analyses show that in the firm whose managers hold stock options, the
stockholders’ wealth increases less and bondholders’ wealth even decreases. The correlation
between stock and bond returns is positive in the firm whose managers do not hold stock
options, which supports the signaling hypothesis. On the other hand, the correlation is
negative in the case that managers hold stock options, which is consistent with the wealth
transfer hypothesis. These results support the notion that the market recognizes managers’
motive to maximize their own wealth. In addition, the results imply that since the increase
in leverage ratio, as a result of share repurchases along with option-holding managers’
risk-taking activities, escalates the risk of firms, the share repurchases may do good to
both shareholders and managers but do harm to bondholders.

영어초록

of share repurchases have been reported in the area of Corporate Finance (Dann, 1981;
Vermaelen, 1981). Explanations for these abnormal returns that have been attempted
through many studies include signaling, wealth transfer, and free cash flow hypotheses.
Two papers readdress this topic from the unexplored viewpoint. Kahle (2002) found that
firms often repurchase their shares in preparation for stock option exercises and that managers
who hold stock options tend to prefer share repurchases to dividend payments as
a way to maximize their wealth. Maxwell and Stephens (2003) examined changes in both
stockholders’ and bondholders’ wealth around the time of share repurchases.
Recently, many firms have started to offer stock options to managers as an incentive
for them to align their personal gain with firm value maximization. However, it has been
also pointed out that such company-wide option plans can cause firms to take risky investments
and to pursue short-term profits, which may deepen the possible conflict of interest
between stockholders and bondholders. Defusco et al. (1990) tested that the introduction
of stock options increases managers’ risk-taking incentive and thus transfers wealth from
bondholders to stockholders.
The signaling hypothesis on share repurchases posits that both equity and bond returns
at the repurchase announcement are positive and, at the same time, their correlation is
positive, while the wealth transfer hypothesis is associated with the positive equity, negative
bond returns, and a negative correlation. However, considering that stock option
holdings provide managers with the incentives to take high-risk projects, I speculate that the announcement of share repurchases in the firm whose managers hold stock options
may have different wealth effects on shareholders, bondholders, and managers.
To the best of my knowledge, no research has been conducted to study the relation of
share repurchases with both stock option holdings and bondholders’ wealth change.
Therefore, using the sample of 312 Korean firms, I investigate the effect of executive stock
option holdings on the wealth change (of stockholders and bondholders) at the announcement
of open market stock repurchases.
Specifically, this study is based on the following three researches: (1) Kahle (2002)
showed that abnormal stock returns at the repurchase announcement are less positive
in the firms in which managers hold stock options, but she didn’t measure bondholders’
wealth change; (2) Defusco et al. (2003) demonstrated that managers who hold stock options
prefer risk-taking activities that transfer wealth from bondholders to stockholders,
but they didn’t include a specific corporate event such as share repurchases; (3) Maxwell
and Stephens (2003) examined the wealth change of both shareholders and bondholders
at the announcement of share repurchases, but they didn’t consider stock option holdings.
Furthermore, as in Eberhart and Siddique (2002) and Elliott et al. (2005), this study focuses
on the correlation between stock and bond returns.
First, I divide the total sample into two groups according to whether managers hold
stock options or not. Then, I test the signaling and wealth transfer hypotheses associated
with share repurchases by measuring the abnormal stock and bond returns and their
correlation. And then, controlling for percentage of shares authorized for repurchases, firm
size, leverage ratio, market to book ratio, free cash flow, percentage of shares owned by
the largest shareholder, and credit rating, I test if the correlation between stock and bond
returns still differs by stock option holdings.
The empirical analyses show that in the firm whose managers hold stock options, the
stockholders’ wealth increases less and bondholders’ wealth even decreases. The correlation
between stock and bond returns is positive in the firm whose managers do not hold stock
options, which supports the signaling hypothesis. On the other hand, the correlation is
negative in the case that managers hold stock options, which is consistent with the wealth
transfer hypothesis. These results support the notion that the market recognizes managers’
motive to maximize their own wealth. In addition, the results imply that since the increase
in leverage ratio, as a result of share repurchases along with option-holding managers’
risk-taking activities, escalates the risk of firms, the share repurchases may do good to
both shareholders and managers but do harm to bondholders.

참고자료

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