Accelerated share repurchases: value creation or extraction

Abstract

In this paper, we examine firms’ motivation to conduct an Accelerated Share Repurchase (ASR) comparing to an OMR. ASRs have become the second most popular method of share repurchases in the US. Based on a comprehensive sample of ASR contracts, we find that the cumulative abnormal stock returns surrounding ASR announcements are positive and significantly higher than those for OMR, and ASR market reaction is positively linked to pre-repurchase stock return. The results suggest that firms use ASR to signal short-term undervaluation. We also find support for an earnings management explanation. Our findings strongly support the agency theory of free cash flow explanation for ASR comparing to OMR. The likelihood of conducting an ASR is higher for firms with a larger firm size, higher levels of cash and free cash flow, better operating performance, but a declining investment set. The use of ASR serves as a more efficient method to convey the short-term equity undervaluation and management’s commitment to return excess cash to shareholders.