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Stock repurchases and executive compensation contract design: The role of earnings per share performance conditions

Research output: Contribution to journalJournal article

Published
<mark>Journal publication date</mark>2011
<mark>Journal</mark>The Accounting Review
Issue number2
Volume86
Number of pages31
Pages (from-to)703-733
Publication statusPublished
Original languageEnglish

Abstract

We examine the link between firms’ stock repurchase activity and the presence of earnings per share (EPS) performance conditions in executive compensation contracts. Findings reveal a strong positive association between repurchases and EPS-contingent compensation arrangements. Further analysis suggests net benefits to shareholders from this association. Specifically, repurchasers experience larger increases in total payouts; the positive association between repurchases and cash performance is more pronounced for firms with EPS targets in the presence of surplus cash; undervalued firms with EPS targets are more likely to signal mispricing through a repurchase; and repurchasers with EPS conditions are associated with lower abnormal accruals. We find no evidence that EPS-driven repurchases impose costs on shareholders in the form of investment myopia.