Anatomy of Aborted Stock Repurchases

Abstract

The motivation and characteristics of firms that announce stock repurchase programs but do not carry them out are poorly understood. We conjecture that the long-term earnings quality of such firms is low, which makes them poor candidates for subsequent stock purchase. Their announcement is just a bluff, possibly to get a short-term bounce in their stock price. We find evidence of poor long-term earnings quality in these firms in the pre-purchase period with further deterioration in the post-purchase period. A probit model confirms that poor long-term quality of accruals, a proxy for earnings quality, increases the chance of not carrying through on the repurchase announcement. We find a significant relationship between long-term earnings quality and subsequent performance for firms that carry through on their purchase plans but no such evidence for firms that do not.