Earnings Management and Firm Performance Following Open-Market Repurchases




  • AMY X. SUN

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      The authors are at the Smeal College of Business at Penn State University. This paper has benefited from comments by an anonymous referee, an anonymous associate editor, Daniel Collins, Charles Enis, Paul Fisher, Dan Givoly, James McKeown, Robert Stambaugh (the editor), Hal White, and participants at the second Penn State Summer Research Conference. We thank Walid Al-Issa, Christine Cheng, and Sung Chung for their valuable assistance in collecting CEO ownership data from proxy statements.


Both post-repurchase abnormal returns and reported improvement in operating performance are driven, at least in part, by pre-repurchase downward earnings management rather than genuine growth in profitability. The downward earnings management increases with both the percentage of the company that managers repurchase and CEO ownership. Pre-repurchase abnormal accruals are also negatively associated with future performance, with the association driven mainly by those firms that report the largest income-decreasing abnormal accruals. The study suggests that one reason firms experience post-repurchase abnormal returns is that post-repurchase realized earnings growth exceeds expectations formed on the basis of pre-repurchase deflated earnings numbers.