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Share repurchases and accounting conservatism

Gerald J. Lobo (), Ashok Robin () and Kean Wu ()
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Gerald J. Lobo: University of Houston
Ashok Robin: Rochester Institute of Technology
Kean Wu: Rochester Institute of Technology

Review of Quantitative Finance and Accounting, 2020, vol. 54, issue 2, No 11, 699-733

Abstract: Abstract The prior literature indicates that financial policy (e.g., payout policy) as well as accounting policy (e.g., conservatism) can be used to address incentive problems in firms but finds mixed evidence. We conjecture that stock repurchases, an increasingly popular form of payout, and conservatism are potential mechanisms to counter managerial propensity to engage in overinvestment using free cash flows. Consequently, we expect a negative relation between repurchases and conservatism as well as a stronger negative relation between these two mechanisms in firms with high levels of free cash flows. We find results consistent with these expectations. By contrast, we find a weaker negative relation between repurchases and conservatism when CEO tenure is higher, which confirms that more entrenched CEOs have less incentives to solve the overinvestment problem.

Keywords: Share repurchase; Accounting conservatism; Agency problem; Corporate governance (search for similar items in EconPapers)
JEL-codes: D82 G14 G35 M41 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1007/s11156-019-00804-9

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