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Managing EPS through Accelerated Share Repurchases: Compensation Versus Capital Market Incentives
Carol Marquardt, Baruch College CUNY
Christine Tan,
Susan Young,
ABSTRACT. This paper empirically examines the determinants of firms’ decisions to undertake accelerated share repurchases (ASRs). In an ASR, the firm repurchases a large block of shares through an underwriter, which allows for immediate recognition of a decrease in shareholders’ equity and a corresponding increase in reported EPS. We argue that the financial reporting effects associated with ASRs suggest that the incentives behind these transactions are fundamentally different from those associated with open market repurchases. Consistent with our predictions, we find that ASRs 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. The paper provides new evidence that firms are willing to incur costs to secure perceived financial accounting and compensation benefits.
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