The Journal of Finance

Share Repurchases and Pay‐Performance Sensitivity of Employee Compensation Contracts

Published: 01/23/2009   |   DOI: 10.1111/j.1540-6261.2008.01430.x

ILONA BABENKO

I show that share repurchases increase pay‐performance sensitivity of employee compensation and lead to greater employee effort and higher stock prices. Consistent with the model, I find that after repurchases, employees and managers receive fewer stock option and equity grants, and that the market reacts favorably to repurchase announcements when employees have many unvested stock options. Managers are more likely to initiate share repurchases when employees hold a large stake in the firm. Moreover, since employees are forced to bear more risk in firms that repurchase shares, they exercise their stock options earlier and receive higher compensation.

Analyzing the Tax Benefits from Employee Stock Options

Published: 07/16/2009   |   DOI: 10.1111/j.1540-6261.2009.01480.x

ILONA BABENKO, YURI TSERLUKEVICH

Employees tend to exercise stock options when corporate taxable income is high, shifting corporate tax deductions to years with higher tax rates. If firms paid employees the same dollar value in wages instead of stock options, the average annual tax bill for large U.S. companies would increase by $12.6 million, or 9.8%. These direct tax benefits of options increase in the convexity of the tax function. In addition, profitable firms can realize indirect tax benefits because stock options increase debt capacity. Although tax minimization is probably not the main motive for option grants, firms with larger potential tax benefits grant more options.

Idiosyncratic Cash Flows and Systematic Risk

Published: 05/01/2015   |   DOI: 10.1111/jofi.12280

ILONA BABENKO, OLIVER BOGUTH, YURI TSERLUKEVICH

We show that unpriced cash flow shocks contain information about future priced risk. A positive idiosyncratic shock decreases the sensitivity of firm value to priced risk factors and simultaneously increases firm size and idiosyncratic risk. A simple model can therefore explain book‐to‐market and size anomalies, as well as the negative relation between idiosyncratic volatility and stock returns. Empirically, we find that anomalies are more pronounced for firms with high idiosyncratic cash flow volatility. More generally, our results imply that any economic variable correlated with the history of idiosyncratic shocks can help to explain expected stock returns.

Employee Stock Options and Investment

Published: 05/23/2011   |   DOI: 10.1111/j.1540-6261.2011.01657.x

ILONA BABENKO, MICHAEL LEMMON, YURI TSERLUKEVICH

Exercises of employee stock options generate substantial cash inflows to the firm. These cash inflows substitute for costly external finance in those states of the world in which the demand for investment is high. Using the fact that the proceeds from option exercises exhibit a distinct nonlinearity around the point where options fall out of the money, we estimate that firms increase investment by $0.34 for each dollar received from the exercise of stock options. Firms that face higher external financing costs allocate more of the proceeds from option exercises to investment.