Buyback Behaviour and the Anti-Dilution of Dilutive Stock Options

Abstract

We study how dilutive board-level stock options impact anti-dilutive daily buybacks in the UK. We show that buyback behaviour and stock option holdings positively influence cumulative post-buyback returns. Buybacks, however, have anti-dilutive implications and are thus linked to the level and nature of dilutive stock options outstanding. We find increases in aggregate stock options to escalate buyback implementation. This is driven largely by unvested stock options that significantly enhance anti-dilutive benefits. Robustness tests using “overconfident” board classification and treasury share regulation confirm the anti-dilutive motive behind buybacks when stock options are unvested.