Repurchasing wealth: Executive stock options and opportunism in the Brazilian market

Abstract

This paper investigates the relationship between executive stock option-based compensation and share repurchases among publicly traded firms in Brazil. This study contributes to the literature by shedding light on an underexplored dimension of share repurchase activity in the Brazilian market, highlighting its relationship with governance mechanisms. While traditional finance theory predicts investor indifference between dividends and share repurchases, prior research shows that firms frequently favor repurchases due to considerations such as capital structure management, signaling effects, and managerial incentives. In particular, executives with stock option-based compensation may have strong personal incentives to initiate repurchase programs, as buybacks can support stock prices and directly increase the value of their holdings. Although stock repurchases remain relatively modest in Brazil compared to the United States of America, our evidence shows that they have meaningful implications for corporate governance, particularly executive compensation schemes. The results suggest that repurchases are not merely an alternative payout mechanism but also a channel through which managers may increase the private benefits extracted from the firm. The empirical analysis employs panel data regression models with firm and year fixed effects to assess the link between executive compensation structures and the magnitude of share repurchases. Additionally, we apply a panel logistic regression model to investigate whether firms with stock-based executive incentives are more likely to undertake repurchases above the mean level. We also conduct a series of robustness checks to ensure the consistency of results across specifications. We show that firms incorporating stock option-based compensation into executive pay packages engage in significantly larger share repurchases. This evidence suggests that managers may strategically use repurchase programs to amplify personal wealth, calling into question the extent to which stock-based incentives truly align managerial and shareholder interests. These findings are pertinent not only for investors seeking to interpret firms’ payout decisions but also for regulators and policymakers concerned with the effectiveness of corporate governance mechanisms governing executive compensation and payout policies.