The Causes and Consequences of Accelerated Stock Repurchases

Abstract:     
This study examines the choice between accelerated share repurchase (ASR) and open market repurchase (OMR) as repurchase mechanisms between 2004-2007. For a sample of ASRs and OMRs that actually buy shares in the announcement quarter, we find that ASR firms have lower market to book ratios, lower cash, but higher managerial entrenchment. Prior to repurchase a similar proportion of ASR and OMR actually receive takeover bids, although ASR firms are subject to more takeover rumors. This latent likelihood of a takeover along with entrenchment and undervaluation affects the choice to use ASRs. ASR firms experience positive average abnormal returns both around and after the announcement. Subsequently however neither type experiences improved operating performance. Compared with pre-announcement activity, a significantly higher proportion of ASR and OMR firms continue to be subject to takeover rumors and bids. Our results suggest that choosing ASR over OMR and the resulting positive market reactions does little to decrease a firm’s attractiveness as a potential takeover target.

Number of Pages in PDF File: 39

Keywords: Stock Repurchase, Takeovers, Firm Performance, Signaling

JEL Classification: G30, G35

working papers series