Share Repurchase Plans and Accounting Conservatism

• In Event: Stocks, Shares, and Investors

Abstract

We hypothesize that firms with more conservative accounting disclosure (that is, more timely recognition of bad news than good news) are less likely to use stock repurchases because both mitigate the agency problem between a firm’s managers and its external shareholders. We find robust evidence consistent with this hypothesis. We contribute by documenting that a firm’s share repurchase decision is related to its financial reporting, i.e., financial policy interacts with disclosure policy. We also find that, while more conservative firms are less likely to repurchase, the favorable valuation consequences are greater when they do so.

Authors

• Gerald Lobo, University of Houston-Houston

• Ashok Robin, Rochester Institute of Technology

• Kean Wu, Rochester Institute of Technology