An empirical analysis of accounting conservatism surrounding share repurchases
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An empirical analysis of accounting conservatism surrounding share repurchases Wilson X. B. Li1 · Tina T. He1 · Andrew Marshall2 · Gordon Y. N. Tang3 Received: 22 July 2019 / Revised: 29 September 2019 / Accepted: 13 November 2019 © Eurasia Business and Economics Society 2019
Abstract This study examines the change of the demand for accounting conservatism surrounding share repurchases for a sample of US listed firms between 2003 and 2013. We find that the extent of accounting conservatism decreases significantly post share repurchase, consistent with the view that share repurchases reduce excess cash and information asymmetry, and consequently the agency-cost demand for conservative accounting decreases. Further analysis finds this result holds only for financially unconstrained firms and firms with low or no financial distress risk, but there is no significant decrease in accounting conservatism for financially constrained firms or for firms with high financial distress risk. This suggests that share repurchases in these firms might result from other motives such as manager hubris, earnings management, or false signals to mislead investors, and thus cannot reduce the agencybased demand for accounting conservatism. Our results add further evidences to the literature on accounting conservatism and firm financial policies. Keywords Accounting conservatism · Share repurchases · Agency cost · Information asymmetry · Financial constraint · Financial distress risk
* Gordon Y. N. Tang [email protected] Wilson X. B. Li [email protected] Tina T. He [email protected] Andrew Marshall [email protected] 1
Division of Business and Management, United International College, Zhuhai, Guangdong, China
2
Department of Accounting and Finance, University of Strathclyde, 100 Cathedral Street, Glasgow G4 0LN, UK
3
Department of Finance and Decision Sciences, Hong Kong Baptist University, Kowloon Tong, Kowloon, Hong Kong
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Vol.:(0123456789)
Eurasian Business Review
JEL Classification M41 · G35
1 Introduction This paper examines accounting conservatism surrounding share repurchases in the US market. Due to the increased number of share repurchases in recent years, a number of papers have examined the motives and consequences of share repurchases (Chen and Wang 2012). Also, recent research has shown accounting conservatism has a close association with a range of managerial financial decisions. For example, seasoned equity offerings (SEO) issuers with higher conservatism experience fewer negative market reactions to SEO announcements, and firm conservatism is stable around the SEO (Kim et al. 2013). Some studies (Ahmed et al. 2002; Louis and Urcan 2015) examine the association between accounting conservatism and dividend payment, and the evidences are mixed. Recently, Lobo et al. (2019) find a negative relationship between the probability of share repurchase and conservatism, and the association is stronger in firms with high levels of free cash flows. This study further explores the relationship between shar
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