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Short term real earnings management prior to stock repurchases

Review of quantitative finance and accounting, 2018, Vol.50 (1), p.95-128 [Peer Reviewed Journal]

Springer Science+Business Media New York 2017 ;Review of Quantitative Finance and Accounting is a copyright of Springer, (2017). All Rights Reserved. ;ISSN: 0924-865X ;EISSN: 1573-7179 ;DOI: 10.1007/s11156-017-0624-2

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  • Title:
    Short term real earnings management prior to stock repurchases
  • Author: Cooper, Lauren A. ; Downes, Jimmy F. ; Rao, Ramesh P.
  • Subjects: Accounting/Auditing ; Companies ; Corporate Finance ; Disclosure ; Earnings ; Earnings management ; Econometrics ; Economic models ; Economics and Finance ; Expenditures ; Finance ; Operations Research/Decision Theory ; Original Research ; Securities buybacks ; Tax rates ; Taxation
  • Is Part Of: Review of quantitative finance and accounting, 2018, Vol.50 (1), p.95-128
  • Description: This study examines whether firms engage in income-decreasing real earnings management before open market stock repurchases to reduce the cost of stock buybacks. In the short run, managers have the ability to underproduce inventory and increase discretionary expenditures, thus decreasing current period earnings. We find that managers engage in both of these activities before repurchasing their firms’ shares, especially the latter. Also, companies increase their discretionary spending before making repurchases to a greater extent following the passage of the Sarbanes–Oxley Act of 2002 as well as when they are financially healthy and have high marginal tax rates. Finally, we document that firms with the most income-decreasing real earnings management experience the largest positive abnormal returns during the subsequent period. Our findings highlight the importance of considering firms’ use of real operating decisions, as opposed to just opportunistic disclosure practices, around significant corporate events, such as the repurchase of their own stock.
  • Publisher: New York: Springer US
  • Language: English
  • Identifier: ISSN: 0924-865X
    EISSN: 1573-7179
    DOI: 10.1007/s11156-017-0624-2
  • Source: AUTh Library subscriptions: ProQuest Central
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