Share Repurchases and Accounting Conservatism

Lobo, G. J., Robin, A., & Wu, K. (2019). Share repurchases and accounting conservatism. Review of Quantitative Finance and Accounting, 1-35.

Posted: 22 Jan 2019 Last revised: 5 Sep 2019

See all articles by Gerald J. Lobo

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business

Ashok Robin

Rochester Institute of Technology (RIT) - E. Philip Saunders College of Business

Kean Wu

Rochester Institute of Technology

Date Written: January 18, 2019

Abstract

The prior literature indicates that financial policy (e.g., payout policy) as well as accounting policy (e.g., conservatism) can be used to address incentive problems in firms but finds mixed evidence. We conjecture that stock repurchases, an increasingly popular form of payout, and conservatism are potential mechanisms to counter managerial propensity to engage in overinvestment using free cash flows. Consequently, we expect a negative relation between repurchases and conservatism as well as a stronger negative relation between these two mechanisms in firms with high levels of free cash flows. We find results consistent with these expectations. By contrast, we find a weaker negative relation between repurchases and conservatism when CEO tenure is higher, which confirms that more entrenched CEOs have less incentives to solve the overinvestment problem.

Keywords: Share repurchase, Accounting conservatism, Agency problem, Corporate governance

JEL Classification: D82, G14, G35, M41

Suggested Citation

Lobo, Gerald J. and Robin, Ashok and Wu, Kean, Share Repurchases and Accounting Conservatism (January 18, 2019). Lobo, G. J., Robin, A., & Wu, K. (2019). Share repurchases and accounting conservatism. Review of Quantitative Finance and Accounting, 1-35.. Available at SSRN: https://ssrn.com/abstract=3318747 or http://dx.doi.org/10.2139/ssrn.3318747

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States
713-743-4838 (Phone)
713-743-4828 (Fax)

HOME PAGE: http://www.bauer.uh.edu/acct/acctprofile.asp?search=Gerald%20Lobo

Ashok Robin

Rochester Institute of Technology (RIT) - E. Philip Saunders College of Business ( email )

105 Lomb Memorial Dr.
Rochester, NY 14623
United States

Kean Wu (Contact Author)

Rochester Institute of Technology ( email )

Saunders College of Business
105 Lomb Memorial Drive
Rochester, NY 14623-5608
United States

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