Stock Repurchases and the Components of Equity Compensation: The Impact of SFAS 123R

This paper uses an exogenous change in accounting regulations to test the extent to which previously documented associations between stock repurchases and equity compensation practices are driven by the transitory regulatory environment rather than fundamental economic motivations. We show that the pre-SFAS 123R positive association between repurchases and stock option compensation was context specific and no longer holds in the post-SFAS 123R period. Our results suggest that the associations reported between option compensation, long-term equity compensation and repurchases in the pre-SFAS 123R period are sensitive to model specification arising from multi-collinearity, sample period and option compensation measurement. Overall, any substitution effect that may have existed between compensation components is substantially diminished in the post-SFAS 123R period.