Anatomy of Aborted Stock Repurchases

26 Pages Posted: 23 Aug 2012

See all articles by Hamid Rahman

Hamid Rahman

Alliant International University

Qian Sun

Kutztown University

Kenneth Yung

Old Dominion University - Finance

Date Written: August 22, 2012

Abstract

The motivation and characteristics of firms that announce stock repurchase programs but do not carry them out are poorly understood. We conjecture that the long-term earnings quality of such firms is low, which makes them poor candidates for subsequent stock purchase. Their announcement is just a bluff, possibly to get a short-term bounce in their stock price. We find evidence of poor long-term earnings quality in these firms in the pre-purchase period with further deterioration in the post-purchase period. A probit model confirms that poor long-term quality of accruals, a proxy for earnings quality, increases the chance of not carrying through on the repurchase announcement. We find a significant relationship between long-term earnings quality and subsequent performance for firms that carry through on their purchase plans but no such evidence for firms that do not.

Keywords: corporate finance, stock repurchase, earning quality

JEL Classification: G3

Suggested Citation

Rahman, Hamid and Sun, Qian and Yung, Kenneth, Anatomy of Aborted Stock Repurchases (August 22, 2012). Available at SSRN: https://ssrn.com/abstract=2134206 or http://dx.doi.org/10.2139/ssrn.2134206

Hamid Rahman (Contact Author)

Alliant International University ( email )

10455 Pomerado Road
San Diego, CA 92131-1799
United States
8586354529 (Phone)

Qian Sun

Kutztown University

Kutztown, PA 19530
United States

Kenneth Yung

Old Dominion University - Finance ( email )

School of Business and Public Administration
Norfolk, VA 23529-0222
United States
757-683-3573 (Phone)

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