David Moore joined Loyola Marymount University in 2018 after graduating with a Ph.D. in finance from the Gatton College of Business & Economics at the University of Kentucky. His research interests are in corporate finance, payout policy, equity compensation, and dilution. He currently teaches Valuation and Financial Modeling as well as Introduction to Corporate Finance. David's interests outside of academia include cycling and traveling.
We are the first to document and study the use of Rule 10b5 1 preset repurchase plans. Though the Rule's original intent was to clarify conditions for enforcing insider trading laws, generally thought to apply to individuals classified as firm insiders, we find strong use of the Rule at the firm level to repurchase company stock. We exploit this new and widespread form of payout to examine an issue at the core of payout decisions — the tradeoff between commitment and financial flexibility. Relative to open market repurchases, preset plans provide an expanded repurchase window and increased legal cover, albeit at the cost of reducing repurchase flexibility and the option to time repurchases. These costs and benefits are significantly associated with Rule 10b5-1 adoption: Firms with alternative sources of financial flexibility are more likely to pre-commit to a repurchase plan, as are firms with a history of poor repurchase timing and firms constrained by blackout windows. Consistent with preset plans signaling commitment, Rule 10b5-1 repurchase announcements are associated with greater and faster completion rates, with more positive market reactions, and with more dividend substitution than open market repurchases. Lastly, we find that preset repurchase plans represent a unique payout tool whose introduction encouraged a different set of firms to buy back stock and significantly altered the payout landscape.
This paper studies the strategic use and timing of share repurchases by insiders for personal gain. Using grant level compensation data and a hand-collected sample of monthly repurchases, I find a positive relation between CEO equity sales and share repurchases. I identify the relationship by instrumenting equity sales with equity grant vesting schedules. This relation is persistent across firm characteristics and does not appear to be destroying shareholder value. The results indicate managerial self-interest motivates a subset of share repurchases.Does Employee Compensation Still Impact Payout Policy? (Previously titled: The Evolution of Employee Compensation, Dilution, and Payout Policy) (with Alice Bonaime, Kathleen Kahle, and Alok Nemani)
Employee compensation may impact payout policy (i) by incentivizing managers with non-dividend-protected options to favor repurchases over dividends and (ii) by diluting earnings, which firms can neutralize through share repurchases. Both the dividend-protection and dilution channels imply a positive relation between stock options and repurchases, but recent studies and trends suggest no decline in repurchases when option grants fall around mandatory option expensing, casting doubt upon a causal relation between equity compensation and payout. We examine this relation in light of the shift from options to restricted stock. Our results strongly support a positive relation between compensation and share repurchases through the dilution channel; dividend protection no longer has first-order effects on payout. Difference-in-differences analyses using a shock to compensation around mandatory option expensing and an instrumental variable approach suggest that the relation between dilution and payout is likely causal. Further, as the dilution channel predicts, equity compensation positively relates to repurchase frequency and thus repurchase timing.
Rule 10b5-1 repurchase and accelerated share repurchase (ASR) announcements from 2001 to 2014. Please cite the following study when referring to this data: