On-Market Share Buybacks, Exercisable Share Options and Earnings Management

25 Pages Posted: 29 Feb 2008

See all articles by Balasingham Balachandran

Balasingham Balachandran

La Trobe University - School of Economics and Finance; Financial Research Network (FIRN)

Keryn Chalmers

Monash University - Department of Accounting

Janto Haman

Monash University

Date Written: 2007-04-04

Abstract

Chan et al. (2006b) suggest that managers might announce a share buyback to manipulate investors perceptions and capitalize on the positive price reaction usually associated with the announcement. The incentive to do so is greater when managers have exercisable options. Prior studies document that managers engage in upwards earnings management for opportunistic reasons related to option holdings (Bergstresser and Philippon, 2006). We examine the association between earnings management and exercisable option holdings for buyback firms to investigate if earnings management in the pre-buyback period is greater for firms with equity incentives to increase share price. Our results, using 138 buybacks over the period 1996-2003, support our prediction. We find that buyback firms with both exercisable options that are in-the-money prior to the buyback announcement as well as options that are exercised in the buyback period have higher discretionary current accruals than buyback firms with no exercisable options, unexercised options or with out-of-the-money options. Overall, our results are consistent with buyback firms with exercisable options using earnings management and buyback announcements to maximize option payoffs, and buyback firms without exercisable options signaling undervaluation.

Suggested Citation

Balachandran, Balasingham and Chalmers, Keryn and Haman, Janto, On-Market Share Buybacks, Exercisable Share Options and Earnings Management (2007-04-04). Accounting & Finance, Vol. 48, Issue 1, pp. 25-49, March 2008. Available at SSRN: https://ssrn.com/abstract=1100191 or http://dx.doi.org/10.1111/j.1467-629X.2007.00230.x

Balasingham Balachandran (Contact Author)

La Trobe University - School of Economics and Finance ( email )

La Trobe University
Bundoora, Vic, 3086
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Keryn Chalmers

Monash University - Department of Accounting ( email )

900 Dandenong Road
Caulfield East, Victoria 3145
Australia
+61-3-9903-2867 (Phone)
+61-3-9903-2422 (Fax)

Janto Haman

Monash University ( email )

Caulfield, Victoria 3145
Australia

Register to save articles to
your library

Register

Paper statistics

Downloads
10
Abstract Views
1,339
PlumX Metrics