Mandatory Repurchase Disclosure, Opportunistic Repurchases, and Their Real Effects

Abstract

In 2003, the SEC amended Rule 10b-18, significantly increasing the disclosure requirements for and transparency of share repurchases with the intention to curb false signaling by management. Bonaime (2015) finds that the 2003 SEC amendment reduced firms’ open market repurchase announcements and increased repurchase announcement completion rates, resulting in a decline in false signaling. In this paper, we examine the effect of the 2003 SEC amendment on firms’ opportunistic use of stock repurchases to meet or beat analyst earnings per share (EPS) forecasts and the resultant negative real effects. We find that the 2003 SEC amendment curtails opportunistic repurchases, enables the market to recognize and discount opportunistic repurchases, and eliminates the employment and investment reductions following opportunistic repurchases. Our evidence suggests that the increased transparency of share repurchases mandated by the 2003 SEC amendment has significantly altered both the corporate use of repurchases as an earnings management device and the negative real consequences of opportunistic repurchases.