The Causes and Consequences of Accelerated Stock Repurchases

Abstract

We examine the choice between accelerated share repurchase (ASR) and open market repurchase (OMR) as repurchase mechanisms between 2004 and 2007. For a sample of ASRs and OMRs that actually buy shares in the announcement quarter, we find that ASR firms have lower market-to-book ratios, less cash, but greater managerial entrenchment. Prior to repurchase, ASR firms are subject to significantly more takeover rumors than OMR firms are, and this, along with entrenchment and undervaluation, affects the choice to use ASRs. ASR firms experience positive average abnormal returns both before and after the announcement. Moreover, the latent takeover probability is significantly lower for both ASR and OMR firms (when compared with pre-announcement levels), but the reduction for ASR firms is more pronounced. Our results suggest that repurchases, and especially ASRs, indeed make a firm a less attractive prospect for takeover.

Market Micrsotructure Changes Around Accelerated Share Repurchase Announcements

“…The settlement terms also compensate the firm for the opportunity cost of full prepayment for the initial shares. and Thomas 2011; Akyol, Kim, and Shekhar 2010). The specialist may also protect herself from information asymmetry related to these trades by other market participants.…”

“…I view this as an advantage for ASRs. This advantage is even more interesting considering the shorter time frame of completing the repurchase in an ASR and the empirical evidence that the choice to conduct ASRs has been linked to EPS manipulation (Marquardt, Tan, and Young 2009) and takeover avoidance (Akyol, Kim, and Shekhar 2010). This further underlines that the market participants do not see the investment bank as an informed participant in an ASR.…”

“…Michael, Oded, and Shaked (2010) find a positive abnormal return on announcement of ASRs but a negative postannouncement drift. Akyol, Kim, and Shekhar (2010) find avoiding takeover attempts to be a prominent motivation for announcing ASRs. Overall, this nascent literature finds that an ASR permits the firm to move much faster in accomplishing certain goals of a repurchase program, for example, credibly signaling undervaluation, returning cash to shareholders, adjusting capital structure, defending against an unwanted takeover attempt, avoiding dilution from the exercise of employee stock options, or managing reported EPS through changes in shares outstanding.…”

“…I aim to fill this gap. In view of the empirical evidence relating ASRs to EPS manipulations and takeover attempt rumors, (e.g., see Marquardt, Tan, and Young 2009;Akyol, Kim, and Shekhar 2010), looking at changes in microstructure measures can help us understand how market participants react to ASR announcements. Looking at changes in trading costs, liquidity, and information asymmetry can help us understand some potential costs and benefits of ASRs that have not been covered by the "lost flexibility" and "credibility and immediacy" hypotheses of Bargeron, Kulchania, and Thomas.…”

Accelerated share repurchase and other buyback programs: what neural networks can bring

“…Until the end of the 80s, share repurchases were predominantly made via fixed-price tender offers and Dutch auctions. 1 Then, in the 90s, open market repurchases (OMRs) took over and represented the vast majority of share buyback programs (see [29]). However, as reported for instance in [7], after a share repurchase announcement, a substantial number of companies usually do not commit to it.…”