We study how stock option grants are funded through share repurchases under conditions of option exercisability and moneyness. Using daily repurchase disclosures by U.K. firms, we corroborate our hypothesis that driven by flexibility, firms repurchase early in an option schedule while options are out-of-money and before becoming exercisable. Our findings show that when daily stock prices are below weighted average option exercise price and when options are not immediatelyexercisable, firms(a)increasedailyrepurchasevolume(value), (b)increase repurchase frequency, and (c) have lower relative repurchase prices. We further evidence this by examining the change in treasury regulation that enabled firms to hold on to repurchased shares rather than cancelling them. Our findings show a strong support for option funding motives in the post-treasury regulation period when repurchase flexibility is greater.
This is the author’s version of a work that was accepted for publication in Journal of Banking and Finance. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Banking and Finance, ?, ?, 2020 DOI: 10.1016/j.jbankfin.2020.105800
