Share repurchases and market signaling: Evidence from earnings management

Chen, Ni-Yun; Liu, Chi‐Chun

doi:10.1111/irfi.12321

Cited by 10 publications

(5 citation statements)

References 97 publications

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“…Gong et al (2008) find that companies manipulate their required disclosures preceding stock repurchases by managing their reported earnings downward through income-decreasing discretionary accruals. Chen and Liu (2020) show that earnings management is negatively related to the probability and frequency of share repurchase announcements. Their findings support the prediction that the magnitude of earnings management can serve as a reliable indicator of managers' mindsets regarding the valuation of firms.…”

Section: Literature Reviewmentioning

confidence: 96%

Incomplete Share Repurchase Programs in Vietnam: Completion Rates and Short-Term Returns

Cao

Nguyễn

Nguyen

et al. 2020

IJFS

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Stock repurchases have become a preferred method of distributing cash to stockholders. However, given the high level of information asymmetry and weak corporate governance as well as poor investor protection in Vietnam, many Vietnamese firms use stock repurchases as a tool to manipulate stock prices in the market. Using event study methodology and Tobit regression models, this study examines the stock price behaviors surrounding the event dates and the impact of earnings management activities prior to the stock repurchases on the completion of repurchase announcements in Vietnam. The results show that earnings management practices prior to stock repurchase programs, the percentage of intended buyback shares, and CEO characteristics have a significant impact on the completion of these repurchase programs. Moreover, most of the windows surrounding the event dates do not have any significant abnormal movement of the stock prices. A plausible explanation is that, due to weak corporate governance and poor investor protection, Vietnamese firms send lots of misleading signals through various corporate activities, especially stock repurchase programs. Thus, these signals have less meaning to investors.

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Section: Literature Reviewmentioning

confidence: 96%

Incomplete Share Repurchase Programs in Vietnam: Completion Rates and Short-Term Returns

Cao

Nguyễn

Nguyen

et al. 2020

IJFS

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“…Studies on the relationship between earnings management and post-repurchase stock performance report conflicting results. Some state that firms who practice more earnings management suffer a greater decline in the two-year post-repurchase operating performance and stock returns (Louis, 2004;Chen and Liu, 2020). In contrast, other studies report either that high-earnings-management firms obtain a higher excess return than low-earningsmanagement firms, or that the difference in excess return between the two is not statistically significant (Billett and Yu, 2016;Chen and Huang, 2013).…”

Section: Hypothesis Developmentmentioning

confidence: 99%

“…4.4.2 Control of discretionary accruals. Previous studies report that share repurchasing firms have an incentive to lower their stock prices through earnings management, to thereby lower the repurchase costs (Louis, 2004;Chen and Liu, 2020). While not reported, we conducted an analysis of the combined effect of earnings timeliness and the repurchase method after controlling for the effect of earnings management, one year prior to a repurchase.…”

Section: Regression Analysismentioning

confidence: 99%

Long-term performance following share repurchase, signaling costs and accounting transparency: Korean evidence

Kim

Park

2021

RAF

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Purpose Existing studies show that firms may have an incentive to use share repurchases opportunistically, thereby taking advantage of market participants’ confirmation bias that share repurchase is a signal of undervaluation. This study aims to investigate whether signaling costs and accounting transparency can serve as tools to identify opportunistic share repurchases. Design/methodology/approach The authors measure signaling costs by using two share repurchase methods (direct and indirect share repurchase) with different share repurchase costs, and measure accounting transparency using the history of earnings timeliness. The authors further measure long-term performance following share repurchases using operating performance and stock returns. Lastly, the authors compare the long-term performances between the groups defined by share repurchase method and earnings timeliness level. Findings The authors find that indirect share repurchase firms with a history of poor earnings timeliness experience unfavorable long-term performance, while other share repurchase firms do not. This finding reinforces the view that some share repurchases may be driven by managerial opportunism. In particular, when firms with a history of poor earnings-reporting behavior choose a low-cost repurchase method, their share repurchases may be motivated by managerial opportunism. Originality/value The findings suggest that past earnings timeliness and the signaling costs of a repurchase together are useful predictors of false signaling. Moreover, they suggest that investors can – at least in part – predict opportunistic share repurchases by using signaling costs and accounting transparency.

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“…Thus, the EPS can be adjusted to meet performance targets that would trigger employee performance-related compensation or offset the effect of an earlier issuance of shares to fulfil the covenants of the employee compensation scheme. This is important as earnings management intentions can be detected by tracking repurchase decisions (Chen and Liu 2021), as the payout's usage for enhancing CEO compensation is reaching peak levels (Shilon 2021). However, there is also evidence that the value creation executives seek via repurchases is not significant (Oded and Michel 2018).…”

Section: Literature Reviewmentioning

confidence: 99%

The Market Reaction to Repurchase Announcements

Sodhi,

Mateus,

Mateus

et al. 2023

JRFM

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This paper investigates the drivers of the market’s reaction to share repurchase announcements in the UK and the related abnormality in stock performance. It uniquely captures the impact of globalisation in tandem with a variety of firm-level and macro-level determinants. We undertake multivariate OLS regression to test the determinants of the market’s reaction and find a negative influence when repurchases are tax-friendlier than dividends if there is high debt exposure and economic globalisation is rising, with a positive influence when the company has a history of distributing above average dividends. To quantify the short-term price abnormality, we employ event study analysis, and the findings compute positive (insignificant) stock price abnormality for nonfinancial (financial) firms. For long-term stock price abnormality, we compare against the FTSE 100 by computing annual geometric stock performances. The findings indicate a negative (insignificant) stock price abnormality for nonfinancial (financial) firms. The results can aid corporate management in improving repurchase timing, aid in the decision making of financial practitioners when trading or investing in repurchasing firms, and assist policymakers in mapping more efficient fiscal and cross-market trade frameworks.

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Share repurchases and market signaling: Evidence from earnings management

Cited by 10 publications

References 97 publications

Incomplete Share Repurchase Programs in Vietnam: Completion Rates and Short-Term Returns

Incomplete Share Repurchase Programs in Vietnam: Completion Rates and Short-Term Returns

Long-term performance following share repurchase, signaling costs and accounting transparency: Korean evidence

The Market Reaction to Repurchase Announcements

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