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Earnings Management and Firm Performance Following Open-Market Repurchases

  • GUOJIN GONG
  • HENOCK LOUIS
  • AMY X. SUN
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    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.

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    Article provided by American Finance Association in its journal The Journal of Finance.

    Volume (Year): 63 (2008)
    Issue (Month): 2 (04)
    Pages: 947-986

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    Handle: RePEc:bla:jfinan:v:63:y:2008:i:2:p:947-986
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