Implications for S&P 500 Share Retirements and Expected Returns"
BY: NELLIE LIANG
Board of Governors of the Federal Reserve System
STEVEN A. SHARPE
Board of Governors of the Federal Reserve System
Division of Research and Statistics
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=205015
Other Electronic Document Delivery:
http://www.federalreserve.gov/pubs/workingpapers.htm
SSRN only offers technical support for papers
downloaded from the SSRN Electronic Paper Collection
location. When URLs wrap, you must copy and paste
them into your browser eliminating all spaces.
Paper ID: Board of Governors of the Federal Reserve System
Finance and Economics Working Paper No. 99-59
Date: November 9, 1999
Contact: NELLIE LIANG
Email: Mailto:nliang at frb.gov
Postal: Board of Governors of the Federal Reserve System
20th and Constitution Streets, NW
Washington, DC 20551 USA
Phone: (202)452-2918
Fax: (202)452-3819
Co-Auth: STEVEN A. SHARPE
Email: Mailto:ssharpe at frb.gov
Postal: Board of Governors of the Federal Reserve System
Division of Research and Statistics
20th and Constitution Avenue NW
Washington, DC 20551 USA
Paper Requests:
Please indicate the title and the FEDS paper number. Single
copies of FEDS papers may be obtained upon request from Ms.
Karen Blackwell, Mailto:fedspapers at frb.gov Postal: Mail Stop 77,
Federal Reserve Board, Washington, DC 20551. Phone:(202)
452-2900. Fax:(202) 452-3819.
ABSTRACT:
We estimate the effects of share repurchases and employee stock
option exercises on net share retirements for large S&P 500
companies. We find that, over the past five years, gross
repurchases have reduced shares outstanding 2 percent annually;
but, owing to the exercise of employee stock options, only about
half of those shares were actually retired. Given the recent
pace of employee stock option grants, and assuming that equities
continue to be priced at about 30 times earnings, our analysis
suggests that the pace of net share retirements will fall well
below the pace of the last few years, unless corporations use
nearly all their earnings to fund shareholder payouts. Moreover,
over the long haul, assuming corporations need to retain 40 to
50 percent of their earnings to invest and grow at historical
rates, the long-run average pace of net share retirements is
likely to fall to 1/2 percent or less.
Keywords: Share repurchases, stock options, expected returns