Stock Repurchases as an Earnings Management Device
University of Iowa - Henry B. Tippie College of Business
Nicole Thorne Jenkins
University of Kentucky - Von Allmen School of Accountancy, Gatton College of Business and Economics
W. Bruce Johnson
University of Iowa - Department of Accounting
Journal of Accounting and Economics, Forthcoming
We investigate whether firms use stock repurchases to meet or beat analysts' EPS forecasts. We identify conditions under which repurchases increase EPS and document the frequency of accretive repurchases from 1988 to 2001. We find a disproportionately large number accretive stock repurchases among firms that would have missed analysts' forecasts without the repurchase. The repurchase-induced component of earnings surprises appears to be discounted by the market, and this discount is larger when the repurchase seems motivated by EPS management, although using the repurchase to avoid missing analyst forecasts appears to mitigate some of the negative stock price response.
Keywords: Stock repurchases, earnings management
JEL Classification: G34, M43
Date posted: November 7, 2005
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