In this chapter, our focus is on stock repurchase as a substitute for cash dividends.

Employee Stock Options and Share Repurchase Stock repurchases often occur in conjunction with stock options granted to employees as part of a total compensation package. Some companies, like Microsoft, roughly match share repurchases with the number of options awarded to employees.

In this way the number of shares outstanding remains relatively constant over time. Share repurchase in this context is not so much a means for distributing excess cash as it is a means to compensate employees.

When the choice is one of distributing excess cash either by dividends or by share repurchase, management and employees with existing stock options prefer the latter. All other things being the same, cash dividends reduce the value of a stock option for the reasons discussed in Chapter