News Management and Earnings Management around Accelerated Share Repurchases

Abstract

There has been a growing trend in accelerated share repurchases (ASRs) in the last decade. ASRs are an alternative to commonly used open market repurchases (OMRs). In an ASR, a firm commits itself to repurchasing an announced number of shares through an investment bank at the average stock price during a pre-agreed period, with almost all shares immediately delivered at the inception of the ASR. I posit that firms have incentives to maximize the benefits of ASRs and offset the high opportunity costs associated with ASRs by deflating stock prices prior to ASRs. I find that firms alter news releases around the ASR initiation date and shift negative news from the post-initiation period to the pre-initiation period. Firms also report abnormally low accruals prior to ASRs to deflate reported earnings. Furthermore, I find that firms choose to use news management and earnings management in a manner that best aligns with and serves the ex ante motivations for ASRs. News management and earnings management appear to be successful in deflating stock prices prior to ASRs, and the market does not appear to see through both strategies at the ASR announcement date. However, as managed news releases and abnormal accruals reverse eventually following ASRs, I find that pre-ASR news management predicts short-term stock price performance, and that pre-ASR earnings management predicts long-term operating and stock price performance. Collectively, these findings suggest that firms strategically use their discretion in news releases and financial reporting around ASRs.