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

September 26, 2013


Abstract:     
We use a sharp discontinuity in the likelihood of share repurchases around the level of zero earnings surprise to identify the real effects of repurchases on other firm outcomes. The probability of share repurchases that increase EPS is sharply higher for firms that would have just missed the EPS forecast in the absence of the repurchase, when compared to firms that “just beat” the EPS forecast. This discontinuity allows us to measure the causal effect of repurchases on other corporate policies in a fuzzy regression discontinuity (RD) framework. EPS-motivated repurchases are associated with reductions in employment and investment, and a decrease in financial slack in the four quarters following the repurchase. Our evidence suggests that managers are willing to trade-off investments and employment for stock repurchases that allow them to meet analyst EPS forecasts. Nevertheless, this behavior does not appear to hurt shareholders, or firm performance. Firms that change the sign of their earnings surprise using repurchases observe a virtually identical (positive) stock market reaction to their earnings announcements, as firms that surprise without conducting share repurchases. Firms that repurchase shares to meet EPS forecasts also show future profitability that is similar to that of firms that just beat the forecast.

Number of Pages in PDF File: 40

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

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Date posted: June 8, 2013 ; Last revised: September 30, 2013

Suggested Citation

Almeida, Heitor and Fos, Vyacheslav and Kronlund, Mathias, The Real Effects of Share Repurchases (September 26, 2013). 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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