Share Repurchases as a Tool to Mislead Investors: Evidence from Earnings Quality and Stock Performance
Several studies find that share repurchases are associated with positive wealth effects, both in the short- and long-run. By the same token, the credibility of buyback announcements as quality signals, particularly those to be executed on the open market, has been questioned. In this paper, we consider whether a sub-set of repurchase programs are perhaps motivated by an intent to mislead the market. Although intentions are not observable, we indirectly accomplish this by separating firms by their earnings quality. Firms which aggressively employ discretionary accruals, particularly those which also show lagging stock price performance, exhibit traits which suggest that executives may have been under pressure to boost stock prices. In the short-term, these programs are effectual as the market does not appear to initially distinguish firms on the basis of earnings quality. Over longer horizons, firms with poor earnings quality suffer from poor operating performance and tend to repurchase relatively fewer shares. More importantly, unlike the positive return drift generally observed after a repurchase announcement, long-horizon stock performance for poor earnings quality firms is not significant. The evidence is consistent with the notion that in some cases, company executives may be using repurchase programs to manipulate market opinion. The fact that some buyback programs, ex-ante, may be manipulative in intent provides some insight into why market underreaction is often observed in the empirical literature. The evidence here provides some justification for investor skepticism when open market buyback programs are initially announced.
Share repurchases Earnings quality Discretionary accruals Price manipulation
Konan Chana David Ikenberry Inmoo Leed Yanzhi Wang
Department of Finance, National Taiwan University, Taipei 106, Taiwan,School of Economics and Financ Department of Finance, University of Illinois at Urbana-Champaign, Champaign, Illinois 61821, USA National University of Singapore, Singapore 117592 Department of Finance, National Taiwan University, Taipei 106, Taiwan
国际会议
西安
英文
2006-07-17（万方平台首次上网日期，不代表论文的发表时间）