Abstract
We examine the market efficiency in processing manipulated accounting statements, and provide an explanation for the long-run performance anomaly associated with open market share repurchases. We find strong evidence that repurchasing firms understate their earnings report around repurchases announcements. Furthermore, we find that the market does not identify the earnings manipulation when the repurchase is announced, and that discretionary accruals can explain a significant part of long-term positive returns following repurchases. This study also suggests that analysts are misled by the use of discretionary accruals. Analysts are more pessimistic for companies reporting low discretionary accruals. Further investigation indicates that discretionary accruals are related to the economic benefits at stake to the managers. Our analysis indicates that managers with higher ownership in the firm are more likely to manage earnings down. Altogether the evidence is consistent with the managerial opportunism hypothesis.
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