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On-market share buybacks, exercisable share options and earnings management

Author

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  • Balasingham Balachandran
  • Keryn Chalmers
  • Janto Haman

Abstract

Chan "et al". (2006b) suggest that managers might announce a share buyback to manipulate investors' perceptions and capitalize on the positive price reaction usually associated with the announcement. The incentive to do so is greater when managers have exercisable options. Prior studies document that managers engage in upwards earnings management for opportunistic reasons related to option holdings (Bergstresser and Philippon, 2006). We examine the association between earnings management and exercisable option holdings for buyback firms to investigate if earnings management in the pre-buyback period is greater for firms with equity incentives to increase share price. Our results, using 138 buybacks over the period 1996-2003, support our prediction. We find that buyback firms with both exercisable options that are in-the-money prior to the buyback announcement as well as options that are exercised in the buyback period have higher discretionary current accruals than buyback firms with no exercisable options, unexercised options or with out-of-the-money options. Overall, our results are consistent with buyback firms with exercisable options using earnings management and buyback announcements to maximize option payoffs, and buyback firms without exercisable options signalling undervaluation. Copyright (c) The Authors.

Suggested Citation

  • Balasingham Balachandran & Keryn Chalmers & Janto Haman, 2008. "On-market share buybacks, exercisable share options and earnings management," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 48(1), pages 25-49.
  • Handle: RePEc:bla:acctfi:v:48:y:2008:i:1:p:25-49
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    References listed on IDEAS

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    Cited by:

    1. Wei Zhang & Steven F. Cahan, 2010. "Nonrecurring Accounting Transactions and Stock Option Grants," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 37(1-2), pages 93-129.
    2. Pelucio-Grecco, Marta Cristina & Geron, Cecília Moraes Santostaso & Grecco, Gerson Begas & Lima, João Paulo Cavalcante, 2014. "The effect of IFRS on earnings management in Brazilian non-financial public companies," Emerging Markets Review, Elsevier, vol. 21(C), pages 42-66.

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