Accelerated Share Repurchases

Abstract

Between 2004 and 2008, $131 billion of stock was repurchased via accelerated share repurchases (ASRs), and in 2007, ASR announcements represented about 26% of the total number of repurchase program announcements. ASRs are credible commitments by firms to repurchase shares immediately. Including an ASR in a repurchase program reduces the flexibility that firms have to alter an announced program in response to subsequent changes in the price and liquidity of its stock, unexpected shocks to cash flow and/or investment, etc. Thus, we investigate whether firms’ decisions to include ASRs in their repurchase programs are associated with factors expected to influence the costs of lost flexibility and the benefits of enhanced credibility and immediacy. Consistent with the costs of lost flexibility being important determinants of ASR adoption, we find that the choice to undertake an ASR is significantly negatively (positively) associated with the variability of the firm’s share price and the stock market illiquidity of the firm’s shares (the size of the repurchase authorization). We also find that firms are more likely to undertake ASRs in situations where the benefits of credibility and immediacy are larger, e.g., as defenses against unwanted takeover attempts and as distributions of the proceeds of asset sales. Additionally, we document that ASR announcements are associated with positive average abnormal stock returns.

Keywords: Payout Policy, Accelerated Share Repurchase, Liquidity

JEL Classification: G35, G32