Stock Repurchases as an Earnings Management Device
43 Pages Posted: 4 Apr 2004
There are 2 versions of this paper
Stock Repurchases as an Earnings Management Device
Stock Repurchases as an Earnings Management Device
Date Written: March 2004
Abstract
This paper investigates the role of earnings per share management in the decision to repurchase shares. We identify the conditions under which repurchases increase EPS and document the frequency of EPS increasing and EPS decreasing repurchases among U.S. firms from 1988 to 2001. We then compare the empirical distribution of EPS increasing and EPS decreasing repurchases relative to pre-repurchase forecast errors to examine whether EPS considerations appear to affect the repurchase decision. Finally, we examine the share price response to quarterly earnings announcements to determine how investors price the repurchase-induced component of reported EPS. We find evidence that a disproportionately large number of firms have EPS increasing repurchases when they would have marginally missed analyst forecasts without the repurchase, and a disproportionately small number of firms have EPS decreasing repurchases when they are close to analyst forecasts before the repurchase. Also, the market appears to discount the repurchase induced component of earnings surprise relative to the earnings surprise attributable to operations. Finally, firms that meet or exceed expectations only because of the repurchase receive approximately a 60% lower valuation premium than firms that meet or exceed expectations without a repurchase.
Keywords: Stock repurchases, earnings management, benchmarks
JEL Classification: G34, J33, M41, M43, G12, G29, G35
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Detecting Earnings Management: A New Approach
By Patricia Dechow, Amy P. Hutton, ...
-
A Review of the Earnings Management Literature and its Implications for Standard Setting
-
Errors in Estimating Accruals: Implications for Empirical Research
By Daniel W. Collins and Paul Hribar
-
The Economic Implications of Corporate Financial Reporting
By John R. Graham, Campbell R. Harvey, ...
-
The Economic Implications of Corporate Financial Reporting
By John R. Graham, Campbell R. Harvey, ...
-
On the Association between Voluntary Disclosure and Earnings Management
By Ron Kasznik
-
Performance Matched Discretionary Accrual Measures
By S.p. Kothari, Andrew J. Leone, ...
-
The Quality of Accruals and Earnings: The Role of Accrual Estimation Errors
By Ilia D. Dichev and Patricia Dechow