Share repurchases and the dilutive effect of stock options

Diluted earnings per share formula — AccountingTools

 

share repurchases and the dilutive effect of stock options

Feb 16,  · Anti-dilutive shares. If there are any contingent stock issuances that would have an anti-dilutive impact on earnings per share, do not include them in the calculation. This situation arises when a business experiences a loss, because including the dilutive shares in the calculation would reduce the loss per share. Dilutive shares. If there is potential dilutive common stock, add all of it to the denominator of the diluted earnings . earnings. In many circumstances, EPS will be boosted when a firm repurchases stock. Thus, an ongoing share buyback program can at least partially undo the dilution that results from stock option grants, making the real costs firms are incurring from stock options less apparent. This. Stock Repurchases are Linked to Executive Stock Options. So stock options are more valuable after a repurchase than after a dividend. Indeed, Jolls finds that the average executive in her sample of firms with repurchase activity enjoyed a $, increase in stock option value as a result of the repurchase activity.


The impact of share repurchases


Now extremely popular across a wide range of firms, stock options give the holder the right to purchase stock at a specified price. Unlike holdings of actual stock, though, stock options do not pay managers any dividends. While a dividend transfers cash from a firm to its outside owners without any reduction in the number of outstanding shares of stock, a repurchase uses the same corporate cash to reduce the number of shares outstanding.

Therefore, the value of a share of stock is diluted by the payment of a dividend but is not diluted by a share repurchase. So stock options are more valuable after a repurchase than after a dividend. Thus there appears to be a strong incentive to neglect dividends in favor of share repurchases. Jolls also observes that when executives are awarded restricted stock, a form of compensation that accrues dividends in contrast to stock optionsthere is no observable preference for repurchases over dividends, share repurchases and the dilutive effect of stock options.

Nor is the drive to repurchase shares a result of expanded employee stock option programs, she finds; it is executive options, not employee options generally, that are related to repurchase behavior, share repurchases and the dilutive effect of stock options. All in all, if "the average number of stock options held by top executives increases 50 percent from its mean value of , while the number of outstanding shares remains constant, then the probability of observing a repurchase increases by approximately 4 percentage points," Jolls estimates.

In other share repurchases and the dilutive effect of stock options, there is a " percent increase over the proportion of firms engaging in repurchases in the original sample. However, as Jolls points out, tax differentials have been around for decades, while "the increase in repurchase activity occurred relatively recently. The results in the paper come from an initial group of firms eventually reduced to a sample of firms covered by SEC disclosure requirements whose fiscal years ended between December 31, and May 31, To be included, the firms must have been U.

All firms that announced dividend increases or repurchases or both, as reported by The Wall Street Journal, were included in the sample assembled from this group. A comparison group of firms that announced neither repurchases nor dividend increases was randomly selected from the remaining firms and used as a control group.

Data was ultimately collected for a total of firms.

 

 

share repurchases and the dilutive effect of stock options

 

That gives every remaining investor a slightly bigger proportionate stake in the company. With a lower share count, earnings per share increase. Stock repurchases reduce the number of shares outstanding and mitigate the dilutive effect of exercising stock options. earnings. In many circumstances, EPS will be boosted when a firm repurchases stock. Thus, an ongoing share buyback program can at least partially undo the dilution that results from stock option grants, making the real costs firms are incurring from stock options less apparent. This. Share Repurchases Versus Dividends. If the company proceeded with the buyback and you subsequently sold the shares at year-end at $, the tax payable on your capital gains would still be lower at $18, (15% x , shares x $). Note that $ represents your capital gain of $ minus $10 at year-end.