Accelerated Share Repurchases Research Articles

Accelerated share repurchases

Accelerated share repurchases (ASRs) are credible commitments by firms to repurchase shares immediately. Including an ASR in a repurchase program reduces the flexibility that firms have to alter an announced program in response to subsequent changes in the price and liquidity of its shares, unexpected shocks to cash flow and/or investment, etc. Thus, we investigate whether firms' decisions to include ASRs in their repurchase programs are associated with factors expected to influence the costs of lost flexibility and the benefits of enhanced credibility and immediacy. We find robust evidence consistent with the costs of lost flexibility and the benefits of credibility and immediacy being important determinants of ASR adoption. Additionally, we find that ASR announcements are associated with positive average abnormal stock returns.

Not All Buybacks Are Created Equal: The Case of Accelerated Stock Repurchases

The authors documented the characteristics and market performance of ASR (accelerated share repurchase) stock. They found that post-announcement ASR stock performance is poor, unlike that documented in the literature for other repurchase methods, which implies that ASRs do not signal undervaluation, a frequently suggested motivation for repurchases.

Accelerated Share Repurchases

Between 2004 and 2008, $131 billion of stock was repurchased via accelerated share repurchases (ASRs), and in 2007, ASR announcements represented about 26% of the total number of repurchase program announcements. ASRs are credible commitments by firms to repurchase shares immediately. Including an ASR in a repurchase program reduces the flexibility that firms have to alter an announced program in response to subsequent changes in the price and liquidity of its stock, unexpected shocks to cash flow and/or investment, etc. Thus, we investigate whether firms’ decisions to include ASRs in their repurchase programs are associated with factors expected to influence the costs of lost flexibility and the benefits of enhanced credibility and immediacy. Consistent with the costs of lost flexibility being important determinants of ASR adoption, we find that the choice to undertake an ASR is significantly negatively (positively) associated with the variability of the firm’s share price and the stock market illiquidity of the firm’s shares (the size of the repurchase authorization). We also find that firms are more likely to undertake ASRs in situations where the benefits of credibility and immediacy are larger, e.g., as defenses against unwanted takeover attempts and as distributions of the proceeds of asset sales. Additionally, we document that ASR announcements are associated with positive average abnormal stock returns.

Earnings Management Around Accelerated Share Repurchases

Earnings Management Around Accelerated Share Repurchases

Why Do Firms Undertake Accelerated Share Repurchase Programs?

Why Do Firms Undertake Accelerated Share Repurchase Programs?

Repurchases, Reputation, and Returns

This 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 finds them to be more credible than open market repurchases. I show that the probability of announcing an accelerated share repurchase is greater for firms likely to be concerned about reputation because of low past completion rates.

Accelerated Share Repurchases, Bonus Compensation, and CEO Horizons

We examine whether short-term financial reporting objectives related to executive compensation and employment horizons affect managers’ decisions to undertake accelerated share repurchases (ASRs) versus open market repurchases (OMRs). In an ASR, the firm repurchases borrowed shares and simultaneously enters into a forward contract with an investment bank. This structure provides potential financial reporting advantages over OMRs in that earnings per share (EPS) benefits are recorded immediately (i.e., the reporting effects are “accelerated”) while the actual share repurchases and potential costs associated with the forward contract are deferred to a future date. Consistent with this short-term focus, we find that firms are more likely to choose ASRs over OMRs when the repurchase is accretive to EPS, when annual bonus compensation is explicitly tied to EPS performance, when CEO horizons are short, and when CEOs are more entrenched. These results are robust to controlling for endogeneity in the decision to repurchase shares. In addition, we find no evidence that compensation committees adjust executive pay for the effects of the ASR. Overall, our results suggest that short-term financial reporting benefits are a significant determinant of decisions to undertake ASRs, consistent with theories of managerial myopia.

Not All Buybacks are Created Equal: The Case of Accelerated Stock Repurchases

This paper investigates the new and growing practice of accelerated share repurchases (ASRs). In an ASR a firm hires an investment bank to borrow shares from existing investors. The investment bank delivers these shares to the firm, and the firm eliminates the shares immediately. The bank then repurchases shares in the open market over a period of several months and returns them back to the lenders. We document the characteristics and market performance of ASR stock. ASRs are primarily used to accelerate existing open-market repurchase programs. While the announcement return on ASRs is positive, it is very small when compared to other repurchase methods. Interestingly, the post-announcement performance of ASR stock is poor, unlike that documented in the literature for other repurchase methods. Our findings suggest that ASRs do not signal undervaluation, a motivation frequently suggested by analysts and academics for repurchases. The firm is getting the shares today but only will pay tomorrow's price.

Accelerated Share Repurchases, Bonus Compensation, and CEO Horizons

Accelerated Share Repurchases, Bonus Compensation, and CEO Horizons

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.

Why do Firms Undertake Accelerated Share Repurchase Programs?

Accelerated share repurchase (ASR) programs, an innovative way of repurchasing shares, have become increasingly popular in recent years. In this paper, we analyze firms’ rationale for undertaking ASRs rather than the traditional open market repurchase (OMR) programs. Using a hand-collected sample of ASR announcements, we test eight hypotheses regarding firms’ rationale for conducting ASR programs: the distribution of excess cash hypothesis, the target leverage-ratio hypothesis, the takeover avoidance hypothesis, the employee stock option dilution hypothesis, the managerial opportunism hypothesis, the liquidity reduction hypothesis, the EPS manipulation hypothesis, and the signaling or undervaluation hypothesis. We find that firms undertaking ASR programs are significantly larger than those undertaking OMR programs, and that ASR programs have a larger median dollar amount of deal values than OMR programs. Further, ASR firms have significantly smaller cash holdings, higher dividend payout ratios, higher pre-announcement industry-adjusted leverage ratios, and similar probabilities of being takeover targets compared to OMR firms, and ASR firms grant fewer stock options (scaled by sales) to their employees than OMR firms. Option exercise by executives does not increase following buyback announcements in either ASRs or OMRs. Stock liquidity increases following both ASRs and OMRs. Although our univariate tests reveal that ASR firms are more likely to tie the CEO bonus to EPS, our multivariate analysis does not find that EPS manipulation is a significant factor in firms choosing an ASR over an OMR program. Finally, firms undertaking ASR programs have lower pre-announcement market valuations, greater positive announcement effects, and better post-announcement operating and stock return performance, compared to those announcing OMR programs. Overall, our results are consistent with the predictions of the signaling/undervaluation hypothesis but inconsistent with those of the other seven hypotheses.

Accelerating Corporate Performance: Stock Buybacks with Zip

Like many companies, Caravan International occasionally repurchases its shares in the open market. With a traditional stock repurchase program, Caravan and other companies sometimes are unable to maximize the financial reporting benefits of stock buybacks. However, the “Accelerated Share Repurchase” (ASR) agreement, recently introduced by the investment banking industry, allows companies to execute their treasury stock programs and take some of the uncertainty out of share repurchase transactions. This case provides a context for examining the specific benefits of these plans as well as the potential risks. It will help you understand earnings per share (EPS) calculations and the accounting for financial instruments used in ASRs. The case illustrates how managers sometimes structure transactions to take advantage of favorable accounting treatment, and thus achieve EPS targets.

Valspar enters into accelerated share repurchase agreement

Valspar enters into accelerated share repurchase agreement

Managing EPS Through Accelerated Share Repurchases: Compensation Versus Capital Market Incentives

This paper empirically examines the determinants of firms’ decisions to undertake accelerated share repurchases (ASRs). In an ASR, the firm repurchases its own shares of stock through an investment bank rather than on the open market, allowing the company to acquire a targeted number of shares and record its effects on earnings per share (EPS) immediately. Consistent with our predictions, we find that ASR firms are more likely to compensate their managers explicitly on reported EPS figures and are less likely to beat earnings benchmarks than are OMR firms. These results are robust to controlling for signaling effects, as well as other known determinants of stock repurchase decisions. Additional evidence on ASR settlement costs suggests that firms are willing to incur costs to secure perceived financial accounting and compensation benefits. Our results have implications for standard setting, public policy, and corporate governance.