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Stock Repurchases as an Earnings Management Device

43 Pages Posted: 4 Apr 2004  

Paul Hribar

University of Iowa - Henry B. Tippie College of Business

Nicole Thorne Jenkins

University of Kentucky - Von Allmen School of Accountancy, Gatton College of Business and Economics

W. Bruce Johnson

University of Iowa - Department of Accounting

Multiple version iconThere are 2 versions of this paper

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

Hribar, Paul and Jenkins, Nicole Thorne and Johnson, W. Bruce, Stock Repurchases as an Earnings Management Device (March 2004). Available at SSRN: https://ssrn.com/abstract=524062 or http://dx.doi.org/10.2139/ssrn.524062

Paul Hribar (Contact Author)

University of Iowa - Henry B. Tippie College of Business ( email )

Dept. of Accounting
Iowa City, IA 52242-1000
United States
319-335-1008 (Phone)

Nicole Thorne Jenkins

University of Kentucky - Von Allmen School of Accountancy, Gatton College of Business and Economics ( email )

Lexington, KY 40506
United States

W. Bruce Johnson

University of Iowa - Department of Accounting ( email )

108 Pappajohn Business Building
Iowa City, IA 52242-1000
United States
319-335-1048 (Phone)
319-335-1956 (Fax)

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