Why do Firms Undertake Accelerated Share Repurchase Programs?

57 Pages Posted: 26 Mar 2008 Last revised: 26 May 2010

See all articles by Thomas J. Chemmanur

Thomas J. Chemmanur

Boston College - Carroll School of Management

Yingmei Cheng

Florida State University - College of Business

Tianming Zhang

Florida State University - Department of Accounting

Date Written: Feburary 25, 2010

Abstract

Accelerated share repurchase (ASR) programs, an innovative way of repurchasing shares, have become increasingly popular in recent years. In this paper, we analyze firms’ rationale for undertaking ASRs rather than the traditional open market repurchase (OMR) programs. Using a hand-collected sample of ASR announcements, we test eight hypotheses regarding firms’ rationale for conducting ASR programs: the distribution of excess cash hypothesis, the target leverage-ratio hypothesis, the takeover avoidance hypothesis, the employee stock option dilution hypothesis, the managerial opportunism hypothesis, the liquidity reduction hypothesis, the EPS manipulation hypothesis, and the signaling or undervaluation hypothesis. We find that firms undertaking ASR programs are significantly larger than those undertaking OMR programs, and that ASR programs have a larger median dollar amount of deal values than OMR programs. Further, ASR firms have significantly smaller cash holdings, higher dividend payout ratios, higher pre-announcement industry-adjusted leverage ratios, and similar probabilities of being takeover targets compared to OMR firms, and ASR firms grant fewer stock options (scaled by sales) to their employees than OMR firms. Option exercise by executives does not increase following buyback announcements in either ASRs or OMRs. Stock liquidity increases following both ASRs and OMRs. Although our univariate tests reveal that ASR firms are more likely to tie the CEO bonus to EPS, our multivariate analysis does not find that EPS manipulation is a significant factor in firms choosing an ASR over an OMR program. Finally, firms undertaking ASR programs have lower pre-announcement market valuations, greater positive announcement effects, and better post-announcement operating and stock return performance, compared to those announcing OMR programs. Overall, our results are consistent with the predictions of the signaling/undervaluation hypothesis but inconsistent with those of the other seven hypotheses.

Keywords: Accelerated Share Repurchase, Open Market Repurchase, Signalling

JEL Classification: G35, G14

Suggested Citation

Chemmanur, Thomas J. and Cheng, Yingmei and Zhang, Tianming (Tim), Why do Firms Undertake Accelerated Share Repurchase Programs? (Feburary 25, 2010). Available at SSRN: https://ssrn.com/abstract=1107217 or http://dx.doi.org/10.2139/ssrn.1107217

Thomas J. Chemmanur

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 (Contact Author)

Florida State University - College of Business ( email )

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

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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