The effect of shareholder rights and information asymmetry on option-related repurchase activity

I investigate the effect of shareholder rights and information asymmetry on
option-related repurchase activity. Prior research shows that the dilution effect of the
exercise of the employee stock options on earnings per share (EPS) decreases the value of
stock options. Thus, managers tend to use stock repurchases rather than dividends to
return cash to shareholders (the dividend substitution effect). I document that the
executive stock option incentives to repurchase stock as a substitute for dividends are
stronger when firms have weak shareholder rights and the level of information
asymmetry positively influences managerial stock option incentives to repurchase stock.
Furthermore, prior research indicates that information asymmetry is positively associated
with stock repurchases. I also provide evidence indicating that the relationship between
information asymmetry and stock repurchases is stronger when firms have weaker shareholder rights.