The Accounting and Market Consequences of Accelerated Share Repurchases

53 Pages Posted: 29 Oct 2008 Last revised: 16 Feb 2012

See all articles by Victoria Dickinson

Victoria Dickinson

University of Mississippi - Patterson School of Accountancy

Paul Kimmel

University of Wisconsin - Wisconsin School of Business

Terry Warfield

University of Wisconsin - Wisconsin School of Business

Date Written: May 27, 2011

Abstract

We evaluate the representational faithfulness of the accounting treatment of a recent and well-established type of structured transaction - accelerated share repurchases (ASRs). ASRs are popular because accretive earnings per share benefits are recognized immediately, while any gains or losses on the forward contract used to execute an ASR bypass income, and are reported directly in equity. We document lower value relevance for the liabilities of ASR companies compared with a size- and industry-matched sample. ERC tests also indicate a market discount for the earnings of ASR companies compared with the control sample. Finally, we document significant abnormal returns to a trading strategy based on unrealized gains or losses on ASR transactions. Our results indicate that the current accounting for ASRs does not result in representative reporting of these transactions. As a result, financial statement users might benefit from recognition of ASR elements in financial statements.

Keywords: Share repurchases, Derivative accounting, Off-balance sheet accounting

JEL Classification: G12, G35, M41, M43, M44

Suggested Citation

Dickinson, Victoria and Kimmel, Paul David and Warfield, Terry D., The Accounting and Market Consequences of Accelerated Share Repurchases (May 27, 2011). Review of Accounting Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1291339

Victoria Dickinson

University of Mississippi - Patterson School of Accountancy ( email )

Conner 204C
University, MS 38677
United States
662-915-5448 (Phone)
662-915-7483 (Fax)

Paul David Kimmel

University of Wisconsin - Wisconsin School of Business ( email )

P.O. Box 742
3202 N. Maryland Ave.
Milwaukee, WI 53201-0742
United States

Terry D. Warfield (Contact Author)

University of Wisconsin - Wisconsin School of Business ( email )

716 Langdon Street
Madison, WI 53706-1481
United States

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