Payout Policy and Employee Share Options

Over the last decade the importance of share repurchases in corporate payout policy increased considerably. At the same time there was a substantial growth in employee share options (ESO) issues. Under several hypotheses these two phenomena may be linked with each other in more or less direct way.
Both dividends and repurchases are major methods of returning cash to shareholders and it is a widespread opinion among executives that repurchases represent a more flexible way to do it. Traditional explanations of repurchase decisions are related to basic corporate balance sheet and share price characteristics: repurchases are thought to be motivated predominantly by a desire to signal share undervaluation or to mitigate the agency problems of cash holdings.