On-market share buybacks, exercisable share options and earnings management
Article first published online: 2 JAN 2008
© The Authors
Accounting & Finance
Volume 48, Issue 1, pages 25–49, March 2008
How to Cite
Balachandran, B., Chalmers, K. and Haman, J. (2008), On-market share buybacks, exercisable share options and earnings management. Accounting & Finance, 48: 25–49. doi: 10.1111/j.1467-629X.2007.00230.x
The authors gratefully acknowledge the comments and suggestions from Ian Zimmer, an anonymous referee, workshop participants at Monash University and participants at the 2006 European Accounting Association conference in Dublin, the 2005 Accounting & Finance Association of Australia and New Zealand Conference in Melbourne, and the 2004 Australasian Finance and Banking Conference in Sydney.
- Issue published online: 2 JAN 2008
- Article first published online: 2 JAN 2008
- Received 21 March 2005; accepted 4 April 2007 by Ian Zimmer (Deputy Editor).
- On-market share buybacks;
- Share options;
- Earnings management
Chan et al. (2006b) suggest that managers might announce a share buyback to manipulate investors’ perceptions and capitalize on the positive price reaction usually associated with the announcement. The incentive to do so is greater when managers have exercisable options. Prior studies document that managers engage in upwards earnings management for opportunistic reasons related to option holdings (Bergstresser and Philippon, 2006). We examine the association between earnings management and exercisable option holdings for buyback firms to investigate if earnings management in the pre-buyback period is greater for firms with equity incentives to increase share price. Our results, using 138 buybacks over the period 1996–2003, support our prediction. We find that buyback firms with both exercisable options that are in-the-money prior to the buyback announcement as well as options that are exercised in the buyback period have higher discretionary current accruals than buyback firms with no exercisable options, unexercised options or with out-of-the-money options. Overall, our results are consistent with buyback firms with exercisable options using earnings management and buyback announcements to maximize option payoffs, and buyback firms without exercisable options signalling undervaluation.