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Conference Paper: Share Repurchases as a Tool to Mislead Investors: Evidence From Earnings Quality and Stock Performance

TitleShare Repurchases as a Tool to Mislead Investors: Evidence From Earnings Quality and Stock Performance
Authors
KeywordsShare repurchases
Earnings quality
Discretionary accruals
Price manipulation
Issue Date2006
Citation
2006 China International Conference in Finance, Xi'an, China, 17-20 July 2006 How to Cite?
AbstractSeveral studies find that share repurchases are associated with positive wealth effects, both in the shortand 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.
Persistent Identifierhttp://hdl.handle.net/10722/114946

 

DC FieldValueLanguage
dc.contributor.authorChan, Ken_HK
dc.contributor.authorIkenberry, Den_HK
dc.contributor.authorLee, Ien_HK
dc.contributor.authorWang, Yen_HK
dc.date.accessioned2010-09-26T05:23:09Z-
dc.date.available2010-09-26T05:23:09Z-
dc.date.issued2006en_HK
dc.identifier.citation2006 China International Conference in Finance, Xi'an, China, 17-20 July 2006-
dc.identifier.urihttp://hdl.handle.net/10722/114946-
dc.description.abstractSeveral studies find that share repurchases are associated with positive wealth effects, both in the shortand 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.-
dc.languageengen_HK
dc.relation.ispartofChina International Conference in Financeen_HK
dc.rightsThis work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.-
dc.subjectShare repurchases-
dc.subjectEarnings quality-
dc.subjectDiscretionary accruals-
dc.subjectPrice manipulation-
dc.titleShare Repurchases as a Tool to Mislead Investors: Evidence From Earnings Quality and Stock Performanceen_HK
dc.typeConference_Paperen_HK
dc.identifier.emailChan, K: konan@business.hku.hken_HK
dc.identifier.authorityChan, K=rp01047en_HK
dc.description.naturepublished_or_final_version-
dc.identifier.hkuros125634en_HK

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