Mandatory Repurchase Disclosure and the Use of Share Repurchases as an Earnings Management Device

• In Event: Social Inquiry Models and Repurchase Disclosures

Abstract

In December 2003, the Securities and Exchange Commission (SEC) amended Rule 10b-18, which significantly enhanced the disclosure of repurchase transactions. We hypothesize and find that the enhanced disclosure of repurchase activities curtails firms’ use of repurchases as an earnings management device to meet or beat analyst forecast benchmarks (Hribar, Jenkins, and Johnson, 2006) in the high disclosure period post the amendment relative to the low disclosure period before the amendment. Moreover, the enhanced disclosure enables the market to discount earnings surprises induced by repurchases (Hribar et al., 2006) more severely in the high disclosure period relative to the low disclosure period. Overall, our findings are consistent with the SEC’s 2003 amendment having mitigated firms’ repurchase-based earnings management behavior and helped market participants detect and discount the portion of earnings surprises induced by share repurchase-based earnings management.

Authors

• Meng Huang, University of Kentucky

• Nicole Thorne Jenkins, University of Kentucky

• Hong Xie, University of Kentucky