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Earnings Management and Firm Performance Following Open-Market Repurchases

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  • GUOJIN GONG
  • HENOCK LOUIS
  • AMY X. SUN

Abstract

Both post-repurchase abnormal returns and "reported" improvement in operating performance are driven, at least in part, by pre-repurchase downward earnings management rather than genuine growth in profitability. The downward earnings management increases with both the percentage of the company that managers repurchase and CEO ownership. Pre-repurchase abnormal accruals are also negatively associated with future performance, with the association driven mainly by those firms that report the largest income-decreasing abnormal accruals. The study suggests that one reason firms experience post-repurchase abnormal returns is that post-repurchase realized earnings growth exceeds expectations formed on the basis of pre-repurchase deflated earnings numbers. Copyright 2008 by The American Finance Association.

Suggested Citation

  • Guojin Gong & Henock Louis & Amy X. Sun, 2008. "Earnings Management and Firm Performance Following Open-Market Repurchases," Journal of Finance, American Finance Association, vol. 63(2), pages 947-986, April.
  • Handle: RePEc:bla:jfinan:v:63:y:2008:i:2:p:947-986
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