Are stock buybacks in hospitality firms associated with outstanding executive stock options?

Abstract

Purpose Outstanding unexercised stock options can motivate managers to engage in actions that increase the value of their company’s stock, including buying back their firm’s stock. The objective of granting stock options to managers is to align their interests with stockholders by tying a portion of their compensation to the company’s stock performance. However, unexercised stock options may have unintended consequences by providing managers with a vested interest in artificially boosting stock prices via stock buybacks. The primary objective of this research is to study the main factors that influence firms' buyback decisions amongst hospitality firms at a time when these firms were clamoring for taxpayer bailouts. Results from logistic regression seem to suggest that outstanding executive stock options are a major contributory factor in a firm’s buyback decision. Estimates also indicate that larger, more profitable firms will likely engage in stock buybacks. These findings survive a battery of tests.Design/methodology/approach The authors use logistic regression to predict the probability of a firm’s buyback decision based on a given set of exogenous explanatory variables.Findings The paper supports the hypothesis that buyback decisions are guided by the motive to prop support stock prices in the presence of outstanding restricted stock options/warrants granted to firms' executives.Research limitations/implications The paper focuses on the buyback decision of U.S. hospitality firms. The results, therefore, might not be generalizable to firms in other industries or countries.Practical implications U.S. share repurchase corporate policy and government regulation needs to be revisited given the economic imperative for firms to invest in activities to restore employment and put them in a position for economic recovery.Social implications Public criticism of the size, structure and form (i.e. loan vs grant) of COVID-19 bailouts warrants an examination of whether the factors that drive hospitality and tourism firms to repurchase shares support economic recovery.Originality/value Consistent with agency theory, the authors find a significant positive association between outstanding restricted stocks and a firm’s decision to support the stock prices by buying back shares.