What are the Characteristics of Firms that Engage in Earnings Per Share Management Through Share Repurchases?

17 Pages Posted: 8 Jun 2013

See all articles by Kathleen A. Farrell

Kathleen A. Farrell

University of Nebraska-Lincoln

Jin Yu

Saint Cloud State University - G. R. Herberger College of Business

Yi Zhang

Prairie View A&M University

Date Written: July 2013

Abstract

Manuscript Type. Empirical. Research Question/Issue. This study examines US firms' share repurchases during 1997–2006 to determine what factors are associated with firms that use share repurchases to manage earnings per share (EPS). Specifically, we analyze firm and governance characteristics associated with firms that engage in share repurchases that increase annual EPS by at least one cent in a given year and that had EPS less than or equal to annual EPS forecast prior to the share repurchase. Research Findings/Insights. We find that growth firms are less likely to use share repurchases to increase EPS for earnings management purposes. We also provide evidence that firms with a more independent board, a separation of the roles of CEO and chairman of the board, or a low entrenchment index (E‐Index) are less likely to engage in earnings management through share repurchases. Finally, we find evidence that high CEO share ownership restrains managers from using share repurchases as a mechanism to manage EPS. Theoretical/Academic Implications. Our empirical results support some of the best practices advocated by various shareholders groups regarding corporate governance. Also, strong shareholder rights can mitigate incentives to manage earnings, highlighting the importance of corporate governance mechanisms/provisions in ensuring the integrity of the financial reporting system. Practitioner/Policy Implications. This research is important to investors in the face of the growing popularity of share repurchases. In particular, our study suggests strong corporate governance, strong shareholder rights, and high percentage CEO stock ownership discourages repurchase‐based earnings management.

Keywords: Corporate Governance, Share Repurchase, Earnings Management, CEO Stock Ownership and Option Holdings

Suggested Citation

Farrell, Kathleen A. and Yu, Jin and Zhang, Yi, What are the Characteristics of Firms that Engage in Earnings Per Share Management Through Share Repurchases? (July 2013). Corporate Governance: An International Review, Vol. 21, Issue 4, pp. 334-350, 2013, Available at SSRN: https://ssrn.com/abstract=2276323 or http://dx.doi.org/10.1111/corg.12029

Kathleen A. Farrell (Contact Author)

University of Nebraska-Lincoln ( email )

730 N. 14th Street
301 Hawks Hall
Lincoln, NE 68588-0405
United States
402-472-9500 (Phone)
402-472-5140 (Fax)

Jin Yu

Saint Cloud State University - G. R. Herberger College of Business

St. Cloud, MN 56301
United States

Yi Zhang

Prairie View A&M University ( email )

PO Box 519
MS2310
Prairie View, TX 77446
United States

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