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.Employee Compensation Still Impacts 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.Strategic Repurchases and Equity Sales: Evidence from Equity Vesting Schedules
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 causal relation between executive equity sales and share repurchases. I identify the relation using the vesting schedule of equity grants as an instrument for equity sales. This behavior is persistent across firm, executive, and governance characteristics. Both CFO and CEO vesting schedules impact repurchases, suggesting the CFO may also have influence over the execution of the repurchase program. There is minimal evidence of long-term value destruction. The results indicate executive contracts impact the execution of share repurchase programs.
In statistics, samples are drawn from a population in a data-generating process (DGP). Standard errors measure the uncertainty in sample estimates of population parameters. In science, evidence is generated to test hypotheses in an evidence-generating process (EGP). We claim that EGP variation across researchers adds uncertainty: non-standard errors. To study them, we let 164 teams test six hypotheses on the same sample. We find that non-standard errors are sizeable, on par with standard errors. Their size (i) co-varies only weakly with team merits, reproducibility, or peer rating, (ii) declines significantly after peer-feedback, and (iii) is underestimated by participants.
Rule 10b5-1 repurchase and accelerated share repurchase (ASR) announcements from 2001 to 2014. Please cite the following study when referring to this data: