Accelerated Share Repurchases Research Articles

Examining share repurchase executions: insights and synthesis from the existing literature

This literature review aims to address the critical knowledge gap in the field of share repurchase executions, a financial activity involving companies repurchasing trillions of dollars' worth of their own shares. The significance of understanding these mechanisms and their impact is underscored by their potential influence on the global economy. The paper employs a comprehensive analysis of existing literature, focusing on share repurchase mechanisms and motivations. It scrutinizes both open-market repurchases and Accelerated Share Repurchase contracts. Methodological approaches in current research, such as the use of partial differential equations and tree methods, are also evaluated. The review reveals that the execution phase of share repurchases remains largely unexplored. Unanswered questions persist about trading schedules, implications, costs, broker and corporate performance, and psychological effects of beating a buyback benchmark. Additionally, the review identifies significant limitations in current research methodologies. The paper advocates for the application and development of more advanced tools like machine learning and artificial intelligence to address these gaps. It also suggests potential areas for future research, including the role of technology in share repurchase execution, psychological factors influencing corporate buybacks, and the development of performance metrics for brokers and corporations. The review serves not only to highlight existing gaps in literature but also to suggest avenues for future research that could fundamentally enhance our understanding of share repurchase executions.JEL classificationG1, G12, G14, G02, G4.

Accelerated Share Repurchases Under Stochastic Volatility

Accelerated share repurchases (ASRs) are a type of stock buyback wherein the repurchasing firm contracts a financial intermediary to acquire the shares on its behalf. The intermediary purchases the shares from the open market and is compensated by the firm according to the average of the stock price over the repurchasing interval, whose end can be chosen by the intermediary. Hence, the intermediary needs to decide both how to minimize the cost of acquiring the shares, and when to exercise its contract to maximize its payment. Studies of ASRs typically assume a constant volatility, but the longer time horizon of ASRs, on the order of months, indicates that the variation of the volatility should be considered. We analyze the optimal strategy of the intermediary within the continuous-time framework of the Heston model for the evolution of the stock price and volatility, which is described by a free-boundary problem which we derive here. To solve this system numerically, we make use of deep learning. Through simulations, we find that the intermediary can acquire shares at lower cost and lower risk if it takes into account the stochasticity of the volatility.

Accelerated share repurchases: value creation or extraction

Accelerated share repurchases: value creation or extraction

Press Release Management around Accelerated Share Repurchases

ABSTRACT Accelerated share repurchases (ASRs) have gained popularity in recent years. At the inception of an ASR, a firm receives most of the shares that would be repurchased at the current stock price. At the completion of the ASR, the repurchase price is adjusted to the average stock price during the ASR contract period. I find that managers increase the media coverage of negative press releases before the inception date but not during the contract period. While prior research has documented that managers deflate stock prices before open market repurchase announcements to reduce subsequent repurchase prices, this paper suggests that, in ASRs, managers rank accelerating share delivery higher than reducing the repurchase price.

Accelerated share repurchase and other buyback programs: what neural networks can bring

When firms want to buy back their own shares, they have a choice between several alternatives. If they often carry out open market repurchase, they also increasingly rely on banks through complex buyback contracts involving option components, e.g. accelerated share repurchase contracts, VWAP-minus profit-sharing contracts, etc. The entanglement between the execution problem and the option hedging problem makes the management of these contracts a difficult task that should not boil down to simple Greek-based risk hedging, contrary to what happens with classical books of options. In this paper, we propose a machine learning method to optimally manage several types of buyback contract. In particular, we recover strategies similar to those obtained in the literature with partial differential equation and recombinant tree methods and show that our new method, which does not suffer from the curse of dimensionality, enables to address types of contract that could not be addressed with grid or tree methods.

Optimal accelerated share repurchases

ABSTRACTAn accelerated share repurchase allows a firm to repurchase a significant portion of its shares immediately, while shifting the burden of reducing the impact and uncertainty in the trade to an intermediary. The intermediary must then purchase the shares from the market over several days, weeks or as much as several months. Some contracts allow the intermediary to specify when the repurchase ends, at which point the firm and the intermediary exchange the difference between the arrival price and the TWAP over the trading period plus a spread. Hence, the intermediary effectively has an American option embedded within an optimal execution problem. As a result, the firm receives a discounted spread relative to the no early exercise case. Here, we address the intermediary’s optimal execution and exit strategy taking into account the impact that trading has on the market. We demonstrate that it is optimal to exercise when the TWAP exceeds where is the midprice of the asset and is a deterministic function of time and inventory. Moreover, we develop a dimensional reduction of the stochastic control and stopping problem and implement an efficient numerical scheme to compute the optimal trading and exit strategies. We also provide bounds on the optimal strategy and characterize the convexity and monotonicity of the optimal strategies in addition to exploring its behaviour numerically and through simulation studies.

Optimal execution of accelerated share repurchase contracts with fixed notional

Whether it be to take advantage of stock undervaluation or in order to distribute part of their profits to shareholders, firms may buy back their own shares. One of the ways they do this is by including accelerated share repurchases as part of their repurchase programs. We study the pricing and optimal execution strategy of an accelerated share repurchase contract with a fixed notional. In such a contract the firm pays a fixed notional F to the bank and receives in exchange a number of shares corresponding to the ratio of F to the average stock price over the purchase period (the duration of this period being decided upon by the bank). From a mathematical point of view, the problem is related to both optimal execution and exotic option pricing.

Share Repurchase Choice and Executive Pension Compensation

ABSTRACT Shareholders and regulators have increasingly been calling upon firms to reign in executive compensation. Most of this discussion has focused on bonuses and stock options, the more observable portions of an executive compensation package. More difficult for investors to assess, however, is long-term incentive pay, such as supplemental executive retirement plans (SERPs), which has become a significant portion of executive compensation. Our study examines whether managers use accelerated share repurchases (ASRs) to increase total compensation through this under-emphasized form of pay. Managers wishing to increase their total compensation through an increase in earnings per share (EPS) should prefer ASRs, which generally have a more immediate and significant impact on EPS relative to open market repurchases (OMRs). For a sample of repurchase firms, we find evidence that managers who have performance-contingent SERPs in place (i.e., a SERP based on salary and bonus or on average earnings), together with EPS-based bonuses and a share repurchase that results in a higher EPS number, are significantly more likely to choose an ASR versus an OMR. JEL Classifications: G34; G35; M4; M41; M52. Data Availability: The data are available from public sources identified in this study.

ACCELERATED SHARE REPURCHASE: PRICING AND EXECUTION STRATEGY

In this paper, we consider the optimal execution problem associated to accelerated share repurchase (ASR) contracts. When firms want to repurchase their own shares, they often enter such a contract with a bank. The bank buys the shares for the firm and is paid the average market price over the execution period, the length of the period being decided upon by the bank during the buying process. Mathematically, the problem is new and related to both option pricing (Asian and Bermudan options) and optimal execution. We provide a model, along with associated numerical methods, to determine the optimal stopping time and the optimal buying strategy of the bank.

Do firms manipulate earnings before accelerated share repurchases?

This paper investigates whether firms engaging in accelerated share repurchases (ASRs) conduct downward earnings management prior to repurchase announcements. The ‘commitment’ and high ‘speed’ of share repurchases in ASRs appear to give ASR firms stronger incentive to deflate the pre-repurchase earnings than open market repurchase (OMR) firms, in order to reduce repurchase costs. However, in contrast to the OMRs of Gong, Louis, and Sun (2008), we do not find such earnings management for ASR firms. We conjecture that the Sarbanes–Oxley Act and greater public attention to financial reporting after financial scandals reduce the likelihood that ASR firms adopt accrual-based earnings management.

Informed Trading in Option Markets around Accelerated Share Repurchase Announcements

We find that the informed trading measures “abnormal O/S ratio”, “abnormal option volume” and “abnormal implied volatility skew” are negatively related to event period abnormal returns for accelerated share repurchases (ASRs) announcements. This effect is stronger for call options and with more liquid options. The abnormal implied volatility spread has information content only for firms with the more liquid options. Further, we show that abnormal returns are positively (negatively) related to the abnormal call (put) volatility surface for options with longer terms to maturity. Overall, our study provides strong evidence of informed trading around ASR announcements.

The Causes and Consequences of Accelerated Stock Repurchases

We examine the choice between accelerated share repurchase (ASR) and open market repurchase (OMR) as repurchase mechanisms between 2004 and 2007. For a sample of ASRs and OMRs that actually buy shares in the announcement quarter, we find that ASR firms have lower market-to-book ratios, less cash, but greater managerial entrenchment. Prior to repurchase, ASR firms are subject to significantly more takeover rumors than OMR firms are, and this, along with entrenchment and undervaluation, affects the choice to use ASRs. ASR firms experience positive average abnormal returns both before and after the announcement. Moreover, the latent takeover probability is significantly lower for both ASR and OMR firms (when compared with pre-announcement levels), but the reduction for ASR firms is more pronounced. Our results suggest that repurchases, and especially ASRs, indeed make a firm a less attractive prospect for takeover. © 2014 International Review of Finance Ltd. 2014.

Optimal Accelerated Share Repurchase

An accelerated share repurchase (ASR) allows a firm to repurchase a significant portion of its shares immediately, while shifting the burden of reducing the impact and uncertainty in the trade to an intermediary. The intermediary must then purchase the shares from the market over several days, weeks, or as much as several months. Some contracts allow the intermediary to specify when the repurchase ends, at which point the corporation and the intermediary exchange the difference between the arrival price and the TWAP over the trading period plus a spread. Hence, the intermediary effectively has an American option embedded within an optimal execution problem. As a result, the firm receives a discounted spread relative to the no early exercise case. In this work, we address the intermediary's optimal execution and exit strategy taking into account the impact that trading has on the market. We demonstrate that it is optimal to exercise when the TWAP exceeds &#918(t) St where St is the fundamental price of the asset and &#918(t) is deterministic. Moreover, we develop a dimensional reduction of the stochastic control and stopping problem and implement an efficient numerical scheme to compute the optimal trading and exit strategies.

Real Earnings Management and Supplemental Executive Retirement Plans

Increasingly, shareholders and regulators have been calling for a reigning in of executive salaries. Most of this discussion has focused on bonuses and stock options, the more observable portions of an executive compensation package. However long term incentive pay, such as supplemental executive retirement plans (SERPs), has become a significant portion of executive compensation and is more difficult to monitor. This paper examines whether managers use real earnings management in the form of Accelerated Share repurchases (ASR) to increase total compensation through this more obscure or ‘stealth’, area of pay. This is because ASRs tend to have a more immediate and significant impact on EPS versus open market repurchases (OMRs). While SERPs provide an opportunity for CEOs to hide compensation, stronger managerial power may enhance this opportunity. We find evidence that managers who have SERPs in place are significantly more likely to choose ASRs versus OMRs. We also find that as executives’ horizon shorten, they are also more likely to use this stronger form of earnings management (ASR). Additionally, we find that, on average, ASR firms have higher managerial power than OMR firms. Finally, we are able to provide direct evidence of the economic significance of SERP programs. Additional analyses provide further support for the link between SERPs and real earnings management in the form of share repurchase choice.

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

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.

Market Micrsotructure Changes around Accelerated Share Repurchase Announcements

We investigate the impact on trading characteristics of firms when they announce share repurchases using a relatively new buyback method - Accelerated Share Repurchases (ASRs). We find that trading costs decrease and market quality improves following an ASR announcement. The improvement in liquidity is not accompanied by significant changes in information asymmetry or price volatility. Multivariate tests show that the change in volatility and the presence of price constraints in the ASR agreement are significant in explaining the changes in spreads, but the reasons given by firms for conducting the ASRs are not. Thus, in the case of ASRs, the announced involvement of an investment bank buying shares on behalf of the firm improves liquidity without significantly affect the level of information asymmetry.

MARKET MICRSOTRUCTURE CHANGES AROUND ACCELERATED SHARE REPURCHASE ANNOUNCEMENTS

AbstractI investigate the impact on trading characteristics of firms announcing share repurchases using a relatively new buyback method—accelerated share repurchases (ASRs). I find that trading costs decrease and market quality improves following an ASR announcement. The improvement in liquidity is not accompanied by significant changes in information asymmetry or price volatility. Multivariate tests show that the change in volatility and the presence of price constraints in the ASR agreement are significant in explaining the changes in spreads, but the reasons given by firms for conducting the ASRs are not. Thus, in the case of ASRs, the announced involvement of an investment bank buying shares on behalf of the firm improves liquidity without significantly affecting the level of information asymmetry.

Repurchases, Reputation, and Returns

AbstractThis paper examines whether a firm’s reputation is a determinant of repurchase completion rates (the ratio of actual to announced repurchases) and whether the stock market discounts announcements made by less reputable firms. Prior completion rates are positively correlated with current completion rates and announcement returns, suggesting consistency in repurchases and implying a reputational effect. Further, a nascent literature regarding accelerated share repurchases (ASRs) finds them to be more credible than open market repurchases. I show that the probability of announcing an ASR is greater for firms likely to be concerned about reputation because of low past completion rates.

The accounting and market consequences of accelerated share repurchases

We evaluate the representational faithfulness of the accounting treatment of a recent and well-established type of structured transaction - accelerated share repurchases (ASRs). ASRs are popular because accretive earnings per share benefits are recognized immediately, while any gains or losses on the forward contract used to execute an ASR bypass income, and are reported directly in equity. We document lower value relevance for the liabilities of ASR companies compared with a size- and industry-matched sample. ERC tests also indicate a market discount for the earnings of ASR companies compared with the control sample. Finally, we document significant abnormal returns to a trading strategy based on unrealized gains or losses on ASR transactions. Our results indicate that the current accounting for ASRs does not result in representative reporting of these transactions. As a result, financial statement users might benefit from recognition of ASR elements in financial statements.

Conflicting Managerial Incentives and Financial Reporting: The Case of Accelerated Share Repurchases

Prior studies suggest that managers of repurchasing firms use their financial reporting discretion to either reinforce the undervaluation signal (via positive discretionary accruals) or reduce the repurchasing price (via negative discretionary accruals). This study examines whether managers of firms undertaking accelerated share repurchases (ASRs), a recent and important innovation in repurchase methods, use their reporting discretion around the repurchase and if so, what is the motivation behind their reporting behavior. I find that ASR firms report positive discretionary accruals in the quarter of the announcement and that the upward earnings management increases with both the percentage of equity repurchased and CEO’s bonus compensation as a fraction of total compensation. However, there is a negative association between positive discretionary accruals and ASR announcement returns, suggesting that investors perceive positive discretionary accruals as the result of managerial opportunism (i.e., increasing EPS) rather than managerial optimism (i.e., signaling undervaluation). Accordingly, investors discount positive earnings surprises reported in the quarter of and the quarter following the ASR announcement.