59 Pages Posted: 10 Nov 2006
Date Written: November 2006
We provide evidence suggesting that both the post-repurchase long-term abnormal returns and the reported improvement in operating performance documented in prior studies are driven, at least partly, by pre-repurchase downward earnings management, rather than genuine growth in profitability. The average firm reports significantly negative abnormal accruals prior to open-market repurchases. The extent of the downward earnings management increases with the percentage of the company that managers repurchase and CEO ownership. The pre-repurchase abnormal accruals are also significantly negatively associated with both future operating performance and future stock performance, and the negative associations are driven almost exclusively by those firms that report the largest income-decreasing abnormal accruals prior to the repurchases. The study suggests that one reason firms experience post-repurchase abnormal returns is that the post-repurchase realized earnings growth exceeds expectations formed on the basis of the pre-repurchase deflated earnings numbers.
Keywords: Share repurchase, Earnings management, Operating performance, Stock performance
JEL Classification: G35, G14, M41, M43
Suggested Citation: Suggested Citation
Gong, Guojin and Louis, Henock and Sun, Amy X., Earnings Management and Firm Performance Following Open-Market Repurchases (November 2006). Available at SSRN: https://ssrn.com/abstract=943887 or http://dx.doi.org/10.2139/ssrn.943887
By Ron Kasznik