Research

Stealth Compensation: Scrutinizing Stock Buybacks

In the midst of the financial crisis and taxpayer-funded bailouts of the likes of AIG, public outrage and government scrutiny over the pay packages of executives at companies receiving federal aid has reached new heights. Largely missing from the debate over executive compensation is the unintended consequence that accounting rules have on rewards in the form of stock buybacks.

Professor Griffin and Assistant Professor Ning Zhu recently teamed up to investigate the relation between open market stock repurchases and stock option compensation for executives. In their paper, “Accounting Rules? Stock Buybacks and Stock Options: Additional Evidence,” Griffin and Zhu examined four specific issues: the choice to repurchase shares versus pay additional dividends; the determinants of the dollar amount of shares repurchased (buyback outlay); the timing of the link between buybacks and stock option exercise; and testing for factors that explain investor reaction to a buyback announcement.

Their research shows that company executives with stock options have strong incentives to monetize and top-up the value of their options using share buybacks Griffin and Zhu conclude that this form of stealth compensation for executives continues to grow unabated. Complex and opaque accounting rules for stock options and buybacks only make matters worse, creating a kind of regulatory arbitrage, which imposes significant agency costs on outside shareholders.

“The evidence on the option compensation motivation for buybacks in partnership with accounting rules seems more persuasive than ever,” Griffin and Zhu wrote.

In March, Griffin presented this research at the School of Business at the University of Otago in New Zealand. He participated in three days of lectures and seminars and presented to a group of academics, graduate students, and professionals. Griffin’s paper also has been accepted for presentation at the National Meetings of the American Accounting Association in New York in August.

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