Why do Firms Undertake Accelerated Share Repurchase Programs?

Forthcoming, Review of Corporate Finance

52 Pages Posted: 26 Mar 2008 Last revised: 2 Mar 2022

See all articles by Thomas J. Chemmanur

Thomas J. Chemmanur

Boston College - Carroll School of Management

Yingmei Cheng

Florida State University - College of Business

Yuxin Wu

Boston College

Tianming Zhang

Florida State University - Department of Accounting

Date Written: February 28, 2022

Abstract

Using a sample of accelerated share repurchase (ASR) program announcements from 2004 to 2020, we analyze firms’ rationale for undertaking ASR programs rather than the more traditional open market share repurchase (OMR) programs. Based on the notion that ASR programs are faster but more costly for the firm to execute and involve a greater commitment by the firm to complete the repurchase of the entire number of shares announced, we develop and test several hypotheses regarding firms’ choice between ASR and OMR programs. The three most prominent of these hypotheses are the signaling or undervaluation hypothesis, whereby firms with more severely undervalued equity (relative to intrinsic value) are more likely to undertake ASR rather than OMR programs; the EPS manipulation hypothesis, where firms with CEO compensation more closely tied to EPS are more likely to choose ASR over OMR programs; and the liquidity reduction hypothesis, where the reduction in stock liquidity following the repurchase announcement is expected to be smaller for firms announcing ASR rather than OMR programs. Our multivariate analysis results show that, compared to those announcing OMR programs, firms announcing ASR programs have lower market-to-book ratios, have larger positive abnormal stock returns upon repurchase announcement, and have better post-announcement operating performance, thus providing strong support for the signaling or undervaluation hypothesis. Our results are also consistent with the EPS manipulation hypothesis but inconsistent with the liquidity reduction hypothesis. Finally, we do not find any support for the predictions of several other hypotheses that have been advanced to rationalize stock repurchases, such as the takeover avoidance, employee stock option dilution, and managerial opportunism hypotheses.

Keywords: Accelerated Stock Repurchase (ASR), Open Market Stock Repurchase (OMR), Signalling, Undervaluation, EPS Manipulation

JEL Classification: G32; G35; G14

Suggested Citation

Chemmanur, Thomas J. and Cheng, Yingmei and Wu, Yuxin and Zhang, Tianming (Tim), Why do Firms Undertake Accelerated Share Repurchase Programs? (February 28, 2022). Forthcoming, Review of Corporate Finance, Available at SSRN: https://ssrn.com/abstract=1107217 or http://dx.doi.org/10.2139/ssrn.1107217

Thomas J. Chemmanur (Contact Author)

Boston College - Carroll School of Management ( email )

Finance Department, 436 Fulton Hall
Carroll School of Management, Boston College
Chestnut Hill, MA 02467-3808
United States
617-552-3980 (Phone)
617-552-0431 (Fax)

HOME PAGE: http://https://www2.bc.edu/thomas-chemmanur/

Yingmei Cheng

Florida State University - College of Business ( email )

423 Rovetta Business Building
Tallahassee, FL 32306-1110
United States
850-644-7869 (Phone)

Yuxin Wu

Boston College ( email )

140 Commonwealth Avenue
Fulton Hall, Room 330
Chestnut Hill, MA MA 02467
United States

Tianming (Tim) Zhang

Florida State University - Department of Accounting ( email )

Rovetta Business Bldg. (RBA)
College of Business
Tallahassee, FL 32306-1110
United States

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