1. Introduction Bens, Nagar, and Wong [BNW, 2001] investigate how employee stock option plans inï¬uence corporate payout policy and investing decisions. BNW hypothesize that ï¬rms divert cash from proï¬table investment expenditures to fund share repurchases in an attempt to mitigate earnings-pershare (EPS) dilution from stock option exercises. The relation between corporate ï¬nance, managerial incentives and investing decisions is a rich and important area of academic research. In recent years, the widespread growth in employee stock option plans has spurred increased interest on the part of shareholders, regulators and academics as to the effects of these plans on ï¬nancing activities, incentives and equity valuation. Further, there is growing evidence that managers are concerned with the ï¬nancial accounting implications of stock options plans (e.g., Carter and Lynch ). BNW motivate their study with four assumptions about managerial behavior. The ï¬rst assumption is that managers believe employee stock option exercises âdiluteâ EPS. Second, BNW assert that managers believe share repurchases mechanically increase EPS. Third, BNW assume that managers and/or investors myopically focus on short-term EPS. The fourth critical assertion is that BNWâs sample of S&P 500 ï¬rms have severe cash constraints and high ï¬nancing costs (e.g., low free cash ï¬ow, small
Journal of Accounting Research – Wiley
Published: May 1, 2002
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