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Share Repurchases and Pay‐Performance Sensitivity of Employee Compensation Contracts
Author(s) -
BABENKO ILONA
Publication year - 2009
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2008.01430.x
Subject(s) - business , share repurchase , equity (law) , stock (firearms) , stock options , compensation of employees , executive compensation , compensation (psychology) , finance , corporate governance , shareholder , psychology , law , engineering , mechanical engineering , political science , psychoanalysis
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 option 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 employees 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.