Managerial Optimism Versus Opportunism as a Motivation for Repurchases: The Case of Accelerated Share Repurchases

Abstract

Accelerated share repurchases (ASRs) represent an important recent innovation in repurchase methods. While corporate managers and investment bankers often cite signaling undervaluation as a motivation for ASRs, the financial press highlights managing earnings per share (EPS) as an alternative motivation. I find that 29 percent of ASR firms (“EPS-suspect” firms) would have missed the consensus EPS forecasts had they not implemented the repurchase. Managerial incentives — securing bonuses and maintaining reputation by avoiding EPS misses — appear to lie behind this opportunistic use of ASRs. Upward revision observed in analysts’ EPS forecasts upon the announcement of ASRs is short-lived, indirectly facilitating firms’ use of ASRs to meet or beat consensus forecasts. Unlike EPS-suspect firms, non-EPS-suspect firms exhibit positive abnormal operating performance during the post-ASR period, suggesting that these firms use ASRs as a signaling device rather than as an earnings management device. I also find evidence that investors see through both motives. Evidence also suggests that, despite being prone to managerial opportunism, ASRs have an edge over regular open market repurchases with respect to sending a more credible signal of undervaluation to investors.