Abstract

http://ssrn.com/abstract=2276156
 


 



The Real Effects of Share Repurchases


Heitor Almeida


University of Illinois at Urbana-Champaign; National Bureau of Economic Research (NBER)

Vyacheslav Fos


University of Illinois at Urbana-Champaign

Mathias Kronlund


University of Illinois at Urbana-Champaign

October 22, 2014


Abstract:     
We employ a regression discontinuity design to identify the real effects of share repurchases on other firm outcomes. The probability of share repurchases that increase earnings per share (EPS) is sharply higher for firms that would have just missed the EPS forecast in the absence of the repurchase, when compared with firms that “just beat” the EPS forecast. We use this discontinuity to show that EPS-motivated repurchases are associated with reductions in employment and investment, and a decrease in cash holdings in the four quarters following the repurchase. Stock returns and future profitability of firms that change the sign of their earnings surprises from negative to positive using repurchases are on average similar to those of firms that surprise positively without conducting repurchases. However, valuation and performance consequences of EPS-motivated repurchases are more negative for firms that cut real variables, in particular R&D and employment. Our evidence suggests that managers are willing to trade off investments and employment for stock repurchases that allow them to meet analyst EPS forecasts.

Number of Pages in PDF File: 55

Keywords: Share repurchases, investment, employment, regression discontinuity, earnings management, analyst forecasts, cash, leverage

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Date posted: June 8, 2013 ; Last revised: October 30, 2014

Suggested Citation

Almeida, Heitor and Fos, Vyacheslav and Kronlund, Mathias, The Real Effects of Share Repurchases (October 22, 2014). Available at SSRN: http://ssrn.com/abstract=2276156 or http://dx.doi.org/10.2139/ssrn.2276156

Contact Information

Heitor Almeida
University of Illinois at Urbana-Champaign ( email )
515 East Gregory Drive
4037 BIF
Champaign, IL 61820
United States
217-3332704 (Phone)
HOME PAGE: http://www.business.illinois.edu/FacultyProfile/faculty_profile.aspx?ID=11357
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Vyacheslav Fos
University of Illinois at Urbana-Champaign ( email )
1206 South Sixth Street
Champaign, IL 61820
United States
(217) 333 5734 (Phone)
HOME PAGE: http://www.business.illinois.edu/facultyprofile/faculty_profile.aspx?ID=13796
Mathias Kronlund (Contact Author)
University of Illinois at Urbana-Champaign ( email )
1206 South Sixth Street
Champaign, IL 61820
United States
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