Managing EPS and Signaling Undervaluation as a Motivation for Repurchases: The Case of Accelerated Share Repurchases

Abstract

Although executives often mention signaling undervaluation as a motivation for accelerated share repurchases (ASRs), managing earnings per share (EPS) has been argued as a key alternative motivation in the financial press. The results reveal that 29 percent of ASR firms (i.e., EPS-suspect firms) would have missed the consensus EPS forecasts had they not implemented the repurchase. Managerial incentives—securing bonuses and maintaining reputation by avoiding EPS misses—appear to lie behind this opportunistic use of ASRs. Upward revision observed in analysts’ EPS forecasts upon the announcement of ASRs is short-lived, indirectly facilitating firms’ use of ASRs to meet or beat consensus forecasts. Investors, however, are not fooled by managers’ use of ASRs as an earnings management device. Unlike EPS-suspect firms, non-EPS-suspect firms exhibit positive abnormal operating performance during the post-ASR period, suggesting that these firms use ASRs as a signaling device rather than as an earnings management device.

Keywords: Corporate Payout Policy, Accelerated Share Repurchase, Managerial Opportunism, Earnings Management, Signaling

JEL Classification: M41, G35