Accelerated Share Repurchases, Bonus Compensation, and CEO Horizons

41 Pages Posted: 20 Feb 2009

See all articles by Carol A. Marquardt

Carol A. Marquardt

City University of New York (CUNY) – Baruch College

Christine E.L. Tan

City University of New York - Baruch College

Susan M. Young

Fordham University

Multiple version iconThere are 2 versions of this paper

Date Written: February 19, 2009

Abstract

We examine whether short-term financial reporting objectives related to executive compensation and employment horizons affect managers' decisions to undertake accelerated share repurchases (ASRs) versus open market repurchases (OMRs). In an ASR, the firm repurchases borrowed shares and simultaneously enters into a forward contract with an investment bank. This structure provides potential financial reporting advantages over OMRs in that earnings per share (EPS) benefits are recorded immediately (i.e., the reporting effects are accelerated) while the actual share repurchases and potential costs associated with the forward contract are deferred to a future date. Consistent with this short-term focus, we find that firms are more likely to choose ASRs over OMRs when the repurchase is accretive to EPS, when annual bonus compensation is explicitly tied to EPS performance, when CEO horizons are short, and when CEOs are more entrenched. These results are robust to controlling for endogeneity in the decision to repurchase shares. In addition, we find no evidence that compensation committees adjust executive pay for the effects of the ASR. Overall, our results suggest that short-term financial reporting benefits are a significant determinant of decisions to undertake ASRs, consistent with theories of managerial myopia.

Keywords: stock repurchases, executive compensation, CEO turnover, earnings per share

JEL Classification: M41, J33, G30, G34, G35

Suggested Citation

Marquardt, Carol and Tan, Christine and Young, Susan M., Accelerated Share Repurchases, Bonus Compensation, and CEO Horizons (February 19, 2009). Available at SSRN: https://ssrn.com/abstract=1346624 or http://dx.doi.org/10.2139/ssrn.1346624

Carol Marquardt

City University of New York (CUNY) – Baruch College ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States
646-312-3241 (Phone)

Christine Tan

City University of New York - Baruch College ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States
646-312-3206 (Phone)
646-312-3161 (Fax)

Susan M. Young (Contact Author)

Fordham University ( email )

1790 Broadway
Suite 11-13
New York, NY 10019
United States
646.312.8245 (Phone)
646.312.8295 (Fax)

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